BY BENJAMIN SOKOL
Benjamin Sokol is a Master of International Relations student specializing in Energy Sector Finance and Market Reform. He previously worked for Deloitte Consulting’s International Energy Reform practice, consulting on leading practices for renewable energy project development and encouraging energy investment in Eastern Europe and Southeast Asia.
INTRODUCTION TO SOLAR POWER
In order to achieve net zero greenhouse gas emissions and mitigate the worst effects of climate change, we must electrify our energy systems. This process will not only require a complete replacement of all fossil-fuel based power generation with renewable generation, but also a major increase in the amount of electricity we currently generate. The U.S. Energy Information Administration projects that global energy demand will increase by 47% by 2050, driven by economic and population growth largely in developing countries.[1] The unlimited availability of the sun naturally makes solar power a very attractive solution to meet a proportion of any nation’s forecasted power demand. The levelized cost of solar electricity, which is the estimated revenue needed to offset the construction and operation costs of a solar farm, has come down dramatically in the last two decades. It is now highly cost competitive with coal, oil, and natural gas generation. With a reduced development cost and the introduction of generous subsidies for renewable electricity in an increasing number of power markets worldwide, more energy developers are turning to solar to both meet demand and increase their profitability.
Solar generation is uniquely versatile in its ability to be both scaled up to a traditional power plant capacity or scaled down to power a single household. The latter can be accomplished by installing a rooftop solar system which, when combined with battery storage, can meet the household’s energy needs and even generate excess power to sell back to the grid (if allowed in the local energy marketplace). This flexibility benefits both energy developers and consumers. Developers who gain permission to install and operate solar home systems gain access to typically unused and free rooftop space to generate electricity, and therefore revenue, and greatly increase locations where solar can be installed. Consumers who adopt the system benefit from backup power in the event of a natural disaster, mitigation of high energy bills caused by gas or electricity supply tightness in the local market, and reliable service in locations that suffer from weak or unreliable grid infrastructure. A rooftop solar system helps to simultaneously decarbonize households and increase overall renewable generation on the grid.
UTILITIES AND ROOFTOP SOLAR
Utility companies feel threatened by greater household adoption of these systems as they challenge the traditional industry business model. As the grid ages and fuel and grid maintenance costs increase, utilities are forced to raise energy prices to compensate, which encourages customers to build their own systems to leave the grid to avoid paying for higher energy prices. This pushes grid costs even higher for remaining customers, who have even more incentive to follow suit. Utilities are then left with a dwindling customer base in the face of rising operation and maintenance fees which can cause them financial distress. It is for this reason that many utilities, both public and private, are very reluctant to allow for independent solar energy generators to connect to the grid. If utilities are not incentivized to allow for household solar generation, they will obstruct the deployment of rooftop solar systems; utilities can simply argue to the government that their integration into the national energy mix will compromise the grid’s integrity and therefore should be banned. If we expect to achieve net-zero carbon emissions at the speed demanded by climate scientists, this barrier to greater global rooftop solar adoption must be eliminated in every local domain. With proactive planning and sufficient regulation, it is possible for utility companies to adapt to these changing business dynamics while encouraging rooftop solar deployment, as was the case for Vietnam's state-owned energy utility Viet Nam Electricity (EVN). EVN’s successful approach to regulating the Vietnamese government’s rooftop solar promotion initiative can serve as a constructive model for other utilities to follow to effectively navigate rooftop solar deployments within their jurisdiction.
THE VIETNAM CASE
Vietnam has a vertically integrated power market in which the state-owned utility, EVN, and the Ministry of Industry and Trade (MOIT) regulate and operate much of the power sector. The government allows for some limited competition in the generation market alongside EVN in the form of Independent Power Producers (IPPs). While most of the country's generation comes from EVN, IPPs accounted for 38% of Vietnam's total generation capacity in 2020.[2]Vietnam has great potential for rooftop solar power. In 2017, the government began promoting rooftop solar by introducing an incentive program for solar power development.[3] MOIT hoped that the incentive program would help reduce loads on the grid and relieve pressure on the government to invest in transmission infrastructure.[4] The decree issued by the Prime Minister regulates mechanisms for encouraging the development of rooftop solar power projects in Vietnam. It contained provisions for project funding, investment and tax incentives, preferential treatment in land acquisition, and import duty exemptions.[5] In particular, it included plans to develop a net metering program to pay people for their solar power generated in excess of their consumption and made the state (EVN) responsible for purchasing all electricity generated from rooftop solar power projects.[6]
In 2020, the Prime Minister issued a second decree related to the program that introduced a generous Feed-in Tariff (FiT) for investors with a 20-year duration to further incentivize rooftop solar construction.[7] At 94 U.S. cents per generated KWh, Vietnam’s FiT was higher than that of any other country at the time, far more than any of its regional neighbors.[8] The Prime Minister’s decrees introduced two forms of potential financial distress for EVN: EVN was now forced to pay rooftop solar producers an expensive premium for all generation greater than their consumption and simultaneously saw its electricity sales shrink during daytime hours due to the expansion of home generation. Introducing this new technology to the Vietnamese grid also created an inherent risk that if the incentive program was not properly regulated, the size of the program could actually put too much stress on the grid’s infrastructure and damage EVN’s transmission equipment. Any serious damage to the transmission system would then put enormous strain on EVN's operations and maintenance budget and only exacerbate the utility’s existing financial difficulties associated with the program.
In spite of these risks, the government continued with the implementation of the program, enabling a solar energy boom across the country. Solar capacity rose 66% to 10,000 megawatt peak (MWp) between June and December of 2020.[9] In 2021, Vietnam’s total installed solar capacity was about 19,400 MWp, of which nearly 9,300 MWp was rooftop solar power.[10] This is equivalent to about 16,500 MW in total, accounting for about 25% of the country’s total installed capacity.[11] The popularity of the program significantly raised EVN’s risk of financial distress. The total number of rooftop solar systems in Vietnam rose to 102,000 systems, representing more than 100,000 customers who EVN would now see little to no income from.[12] Total solar power generation nationwide from rooftop systems was around 1.16 billion kWh in 2020.[13] With a solar FiT of 94 U.S. cents per KWh, this cost EVN roughly $107M in tariffs. It is not surprising that by 2021, Vietnam overtook Thailand as the regional champion in solar power development.[14]
Vietnam’s Energy Mix 2019–2020
EVN’s response to the popularity of the incentive program was to curtail it. On December 26th, 2020, EVN announced that it would stop purchasing electricity from rooftop solar power projects developed after December 31st when the government’s FiT expired.[15] EVN’s primary concern was that the amount of solar energy generated, especially during midday peak sun hours, was overloading transmission lines running from the country’s central region to the north. This had begun to occur more regularly since the rollout of the program and was preventing EVN from accepting additional rooftop solar output.[16] EVN also noted that electricity demand peaking in the late afternoon when sufficient solar energy was largely unavailable led to difficulty in dispatching power across the system.[17] With the termination of the FiT at the end of December 2020, the program became much less favorable to rooftop solar projects. As a result, slightly less than 2 GW of solar capacity was installed in 2021, an 83% annual decrease from the previous year.[18]
Solar PV Annual and Cumulative Capacity in Vietnam 2015–2021
Source: RE Global
EVN's curtailment of the program provided it with the necessary time to both undertake grid stabilization measures and improve its dispatch management of solar power generated from existing rooftop systems, which improved the company’s overall financial stability. The continued dispatch of solar power also led to lower utilization of gas and oil-fired power stations that use expensive fuel imports to operate.[19] As a result, EVN saw a 6.9% increase in its operating margins and gross profit in 2020 despite the challenges posed by constrained revenue growth caused by slowing demand, lost revenue from tariff programs, and a government-mandated tariff increase freeze.[20] One of the largest global credit rating agencies, Fitch Ratings, affirmed EVN’s Long-Term Foreign-Currency Issuer Default Rating at “BB” that year with a positive outlook.[21] This rating was higher than that of any other state-owned utility in Southeast Asia in 2020.[22] Surprisingly, the huge penetration of solar rooftop systems into the power mix allowed EVN to increase the average distribution selling price that it sets in March 2019.[23] EVN’s ability to post healthy profits under these circumstances therefore reflects an effective approach to managing the expansion of the rooftop solar program, while not fully derailing or obstructing it.
EVN Consolidated Income 2016–2020
Since the curtailment of the program, EVN has proposed a number of policy improvements to streamline it. EVN submitted a memo to its Members' Council (the utility’s governing board overseen by MOIT) noting that there is currently no clear legal basis for connecting rooftop solar power systems with the national grid, or where and how they should be installed for individual power generation and consumption.[24] The lack of standards and regulation behind rooftop solar deployment puts the integrity of the grid at risk. EVN cited that its:
"lack of control over rooftop solar power may lead to difficulties in mobilizing other power sources and ensuring supply - demand balance. This is especially so in the central and southern regions, when those systems break down or are unable to meet investor demand. Therefore, it is necessary to have a legal corridor to hold users responsible for their consumption.[25]"
To create a favorable business climate for investors and help boost Vietnam’s ability to trade power with other countries in the region, EVN is seeking its Members Council's permission to urge MOIT to issue detailed regulations that govern solar power systems.[26] The utility also recommended that the Ministry of Construction release regulations on technical standards and requirements related to installing solar systems on building rooftops.[27] In 2021, EVN recommended that the FiT be restarted by the government at between $52 and $58 per MWh which is just under 50% less than the previous FiT of $83.80 per MWh.[28] This proposal would reinstate the FiT as an incentive for investors but would drastically reduce its payout cost for EVN, further improving the utility’s financial stability. EVN’s decision to improve the program rather than further curtail it highlights its belief that rooftop solar is still beneficial to the grid and the national power system.
CONCLUSION
Though the government of Vietnam introduced the solar incentive program to reduce loads on the grid, its subsequent popularity led to losses in utility customers and a simultaneous overgeneration of solar energy which increased EVN’s risk of financial distress and put the integrity of the national grid at risk. EVN’s decision to curtail the rooftop solar program rather than abolish it demonstrated its desire to better integrate the program and rooftop solar into Vietnam’s existing power system. Greater generation of domestic solar helps to offset EVN’s expensive fuel import costs which incentivizes it to keep the program running. The curtailment was effective in slowing the program’s implementation which provided time for EVN and the government to strengthen both the grid and consumer protections around solar products. These improvements have successfully strengthened the program and allowed for a more orderly rollout that does not put the grid’s integrity at risk. EVN’s success in maintaining profitability while continuing to administer and improve the program demonstrates how a utility can support rooftop solar deployment through effective planning and calls to improve regulatory oversight and benefit in the process.
REFERENCES
[1] “Global energy demand to grow 47% by 2050, with oil still top source: US EIA,” S&P Global Commodity Insights, last modified October 6, 2021, https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/100621-global-energy-demand-to-grow-47-by-2050-with-oil-still-top-source-us-eia#:~:text=14%3A20%20UTC-,Global%20energy%20demand%20to%20grow%2047%25%20by%202050%2C%20with%20oil,still%20top%20source%3A%20US%20EIA&text=Global%20energy%20demand%20and%20energy,Energy%20Information%20Administration%20said%20Oct.
[2] “Vietnam – Power Generation,” export.gov, last modified July 12, 2018, https://www.export.gov/apex/article2?id=Vietnam-Power-Generation.
[3] “VIET NAM: Prime Minister's Decision No. 11/2017/QD-TTg of 2017 on the Mechanism for Encouragement of the Development of Solar Power Projects in Vietnam,” Asia Pacific Energy, Last modified 2017, https://policy.asiapacificenergy.org/node/3446.
[4] “Promoting rooftop solar systems in Viet Nam,” Nathan Moore, GIZ, Last modified October 2021, https://www.giz.de/en/worldwide/103673.html.
[5] Asia Pacific Energy, “VIET NAM: Prime Minister's Decision No. 11/2017/QD-TTg of 2017 on the Mechanism for Encouragement of the Development of Solar Power Projects in Vietnam.”
[6] Asia Pacific Energy, “VIET NAM: Prime Minister's Decision No. 11/2017/QD-TTg of 2017 on the Mechanism for Encouragement of the Development of Solar Power Projects in Vietnam.”
[7] “VIET NAM: Decision of the Prime Minister No. 13/2020/QD-TTg of 2020 on Mechanisms to Promote the Development of Solar Power Projects in Viet Nam,” Asia Pacific Energy, last modified 2020, https://policy.asiapacificenergy.org/node/4056.
[8] “Renewable energy feed-in tariffs,” OECD.stat, Last modified September 17, 2022, https://stats.oecd.org/Index.aspx?DataSetCode=RE_FIT#.
[9] “Vietnam to cut 2021 renewable energy output,” Duc Minh, VN Express International, Last modified January 13, 2021, https://e.vnexpress.net/news/business/industries/vietnam-to-cut-2021-renewable-energy-output-4220361.html.
[10] “Rooftop solar power boom is underway with a total installed capacity reaching nearly 9,300 MWp,” Communications Department – Vietnam Electricity, EVN, Last modified January 1, 2021, https://en.evn.com.vn/d6/news/Rooftop-solar-power-boom-is-underway-with-a-total-installed-capacity-reaching-nearly-9300-MWp-66-142-2169.aspx.
[11] EVN, “Rooftop solar power boom is underway with a total installed capacity reaching nearly 9,300 MWp.”
[12] “Vietnam rooftop solar records major boom as more than 9GW installed in 2020,” Edgar Gunther, PV Tech, Last modified January 6, 2021, https://www.pv-tech.org/vietnam-rooftop-solar-records-major-boom-as-more-than-9gw-installed-in-2020/.
[13] EVN, “Rooftop solar power boom is underway with a total installed capacity reaching nearly 9,300 MWp.”
[14] “Booming solar power: single for worry or delight,” Mai Van Trung, Vietnam Investment Review, Last modified January 20, 2021, https://vir.com.vn/booming-solar-power-signal-for-worry-or-delight-82169.html.
[15] “EVN to stop buying output from new rooftop solar power projects,” Vietnam Net, Last modified December 27, 2020, https://vietnamnet.vn/en/evn-to-stop-buying-output-from-new-rooftop-solar-power-projects-700802.html.
[16] VN Express International, “Vietnam to cut 2021 renewable energy output.”
[17] EVN, “Rooftop solar power boom is underway with a total installed capacity reaching nearly 9,300 MWp.”
[18] “Streamlined policies required for continued solar power growth in Vietnam and Taiwan,” RE Global, Last modified June 8, 2022, https://reglobal.co/streamlined-policies-required-for-continued-solar-power-growth-in-vietnam-and-taiwan/.
[19] “Vietnam’s EVN Stands out with a Strong 2020 Financial Performance,” Thu Vu, Institute for Energy Economics and Financial Analysis, https://ieefa.org/wp-content/uploads/2021/07/Vietnams-EVN-Stands-Out-With-a-Strong-2020-Financial-Performance_July-2021.pdf.
[20] Institute for Energy Economics and Financial Analysis, “Vietnam’s EVN Stands out with a Strong 2020 Financial Performance.”
[21] “Fitch affirms Vietnam Electricity at ‘BB’; Outlook Positive,” Rating Action Commentary, Fitch Ratings, Last modified September 13 2021, https://www.fitchratings.com/research/corporate-finance/fitch-affirms-vietnam-electricity-at-bb-outlook-positive-13-09-2021.
[22] Fitch Ratings, “Fitch affirms Vietnam Electricity at ‘BB’; Outlook Positive.”
[23] Vietnam Investment Review, “Booming solar power: single for worry or delight.”
[24] “Mr. Duong Quang Thanh - Chairman of EVN’s Member Council answering interview on some issues related to implementing electricity retail price and market,” Communications Department – Vietnam Electricity, EVN, Last modified March 20, 2021. https://en.evn.com.vn/d6/news/Mr-Duong-Quang-Thanh-Chairman-of-EVNs-Member-Council-answering-interview-on-some-issues-related-to-implementing-electricity-retail-price-and-market-66-163-1469.aspx.
[25] EVN, “Mr. Duong Quang Thanh - Chairman of EVN’s Member Council answering interview on some issues related to implementing electricity retail price and market.”
[26] EVN, “Mr. Duong Quang Thanh - Chairman of EVN’s Member Council answering interview on some issues related to implementing electricity retail price and market.”
[27] EVN, “Mr. Duong Quang Thanh - Chairman of EVN’s Member Council answering interview on some issues related to implementing electricity retail price and market.”
[28] “Vietnam’s grid adjusts to the 2020 solar boom,” Andries Wantenaar, Rethink Technology Research, Last modified March 25 2021, https://rethinkresearch.biz/articles/vietnams-grid-adjusts-to-the-2020-solar-boom/.