|Project Rationale and Linkage to Country/Regional Strategy
Tranche 1 financed the preparation for the construction of the MD1, while Tranche 2 will finance the construction and commissioning of the power plant itself. Tranche 2 will in essence complete the work started by Tranche 1 to allow for the realization of the Project's expected benefits for socio-economic development in Viet Nam. The Project's rationale and justifications have been detailed in the Project's Report and Recommendation of the President to the Board of Directors and remains valid. The project supports the development of Vietnamese economy and again re-emphasizes the importance of the timely commissioning of MD1 project. This is discussed in the ensuing paragraphs.
Despite the negative impacts of the current global financial crisis, Viet Nam's electricity demand remains high and will continue to grow strongly in the long term. This is mainly because of the low base in use of electricity in the country compared to other ASEAN countries. Electricity consumption recorded 12.3% increase in 2007 and 13.2% in 2008. The first half of 2009 recorded 13% increase in electricity consumption comparing to the same period of 2008. This demand is mainly driven by increased consumption by the residential and service sectors. As the economy recovers and Viet Nam continues to industrialize and modernize its economy, electricity demand is expected to grow steadily after 2010 driven by the demand from the industry sector, which accounted for more than 50% of the electricity consumption in 2008 and is expected to account for 53% of the total electricity consumption by 2015, and 55% by 2025. Reliable, un-interrupted and high quality supply of electricity is indispensable to support the economic recovery, and continued industrialization and modernization of the Vietnamese economy.
On the supply side, power generation is still dependent on hydropower, which exhibits large seasonal fluctuation. At the end 2008, the share of hydropower capacity amounted to 37% of the total of 15,860 MW. While the dependence on hydropower has been reduced recently with the commissioning of thermal power plants, the system reserve margin during the dry seasons remains dangerously low. All large hydro reservoirs are multipurpose serving not only electricity generation but are equally important for irrigation purposes. The gas-fuelled power plants in the south (37% of the installed capacities) can supply only a part of north Viet Nam's power deficit. Viet Nam is importing 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 commissioning of new generating capacity, which was envisaged in the Master Power Development Plan VI (MPVI), 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 has diminished over the last two years. This situation is expected to continue over the next few years until new thermal generating capacities come on line. The low system reserve margin coupled with the high share of hydropower capacity in the generation mix exacerbates the power shortage 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.
The recent review by the Government Taskforce on the implementation of the MPVI revealed that among the 35 power projects under construction, 18 are behind schedule by 3 to 8 months. The remaining 17 projects are delayed more than 8 months. Also, according to the Taskforce, among the 18 projects whose constructions are planned to commence in 2009 2010, only four projects (including the ADB-financed MD1 and Song Bung 4) will meet the timeframe. Difficulties in mobilizing commercial private financing during the last two years, lengthy negotiations with build operate and transfer (BOT) developers on tariffs and provision of guarantees are among the reasons for the delays. Under such circumstances the Government considers timely construction of MD1 and Song Bung 4 very important.
Power market reform has taken new impetus pursuant to the Prime Minister Decision No. 26/2006/QD-TTg. The pilot competitive generation market with a single buyer began in January 2007. After a long preparation and internal consultation with stakeholders, the Electricity Regulatory Authority of Viet Nam proposed in December 2008 a plan to restructure the power industry and to set up a power market. The plan calls for establishment of four power generation companies, an Independent System and Market Operator, a National Power Transmission Company (NPTC) and regional/provincial distribution companies. Under the proposed market reform scheme, the four generation companies will compete to sell electricity. The Independent System and Market Operator will be in charge of operating the market and the power system. Power will be wheeled through the NPTC ensuring fair and easy access to both sellers and buyers. Regional/provincial distribution companies will buy electricity through NPTC, and will supply it to final consumers. A prerequisite for an effective operation of the competitive power market is that supply capacity must be sufficient to meet the demand at any time of the year with a required system reserve margin of 25%. Building MD1 with ADB finance is necessary to help meet this pre-requisite.
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 have been particularly strong. Foreign Direct Investment in these provinces accounted for 90% in the northern region, and 30% in the total country. Hence, reliable supply of electricity is essential for the development of the northern socio-economic special development areas to help support the national economic development and improve living standard of the population.
Thus, financing and timely commissioning of the Project under Tranche 2 will be crucial in helping EVN to meet the demand growth and scheduled capacity addition. The Project will help reduce the power shortage and eventually ensure reliable supply of electricity in the northern region, including particularly Ha Noi, Hai Phong, Hai Duong, Hung Yen, Quang Ninh, Bac Ninh and Vinh Phuc provinces. 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 not only there, but also in the whole northern region and the country.
In addition, Tranche 2's financing will allow timely completion of the common facilities that will be used also for MD2 power plant (see para. 22 below) to be developed by a private sector joint venture between AES and Vinacomine under the build operate and transfer (BOT) scheme. Negotiation of the buying/selling electricity tariff is getting close to mutual agreement. It is anticipated that by December 2009 the Government and the joint venture will sign BOT contract, power purchase agreement (PPA), fuel supply agreement and Government guarantee undertakings. The first unit of MD2 is planned to be commissioned in 2015.