|Project Rationale and Linkage to Country/Regional Strategy
MFF Tranche 1 financed the preparation for the construction of the MD1 which was completed in 2013, while Tranche 2 is for the construction and commissioning of the MD1 power plant. Viet Nam's electricity demand remains high and will continue to grow strongly in the long-term. This is mainly because of the high economic growth. For example, average annual electricity demand growth was 12.1% during 2005 2014 and electricity consumption increased from 45.6 terawatt-hours (TWh) to 128.4 TWh in the same period. This demand is mainly driven by increased consumption by the industrial and service sectors. Reliable, quality power supply is indispensable to support the economic growth, and continued industrialization and modernization of the Viet Nam.
Power generation is still dominated by hydropower, which exhibits large seasonal fluctuation. At the end of 2008, the share of hydropower generation was 37% of the total of 15.8 GW. Due to the dependence of hydropower, the system reserve margin during the dry seasons remains low. All large hydro reservoirs are multipurpose serving not only electricity generation but are equally important for irrigation purposes. The share of gas-fired power plants in the south was 37% of the installed capacities in 2008 which could supply only a part of northern Viet Nam's power demand. In 2008, Viet Nam imported about 800 MW from the People's Republic of China to make up for the deficit in the north during the dry season.
The delay in construction of proposed new generation in the Power Development Master Plan VI, has lead to a situation in which the power supply is not adequate to meet the demand. At the same time, the system reserve margin was low in 2007 and 2008. The low system reserve margin coupled with the high share of hydropower capacity in the generation mix exacerbates power shortages especially during the dry season. Thus, timely completion of MD1 power plant will help improve the power supply and demand balance for northern Viet Nam.
Power market reform has taken new impetus and following have been achieved. Establishment of: NPT in December 2008; five power corporations in February 2010; three independent GENCOs in July 2012; EPTC in December 2007. It is expected to establish competitive power market in three phases: competitive generation market by 2014; competitive wholesale market during 2015 to 2021; and competitive retail market during 2021 to 2024. Phase I was launched in July 2012 with the legal unbundling of the three GENCOs and introduction of VCGM.
In 1997, the Government established the northern socio-economic special development areas covering Ha Noi, Hai Phong, Quang Ninh, Hai Duong, and Hung Yen provinces. In 2004, it was expanded to cover Ha Tay, Bac Ninh and Vinh Phuc provinces. Being parts of the special development area, investment, business and industrial development in these provinces were particularly strong and foreign direct investment accounted for 90% in the northern region, and 30% in the total country. Hence, it was noted that reliable supply of electricity is essential for the development of the northern socio-economic special development areas. Thus, financing and timely commissioning of the Project under Tranche 2 was crucial. The Project will add 1,000 MW generating capacity to the northern power system. The Project, together with ongoing ADB-financed transmission projects will strengthen the power supply grid around the northern socio-economic special development area thus ensuring reliable supply of electricity in the whole northern region and the country.
In addition, Tranche 2 financing will allow timely completion of the common facilities that will be used also for MD2 power plant to be developed by a private sector joint venture between AES and Vinacomin under the build operate and transfer (BOT) scheme. The first unit of MD2 is planned to be commissioned in 2015.