Viet Nam: Electricity Transmission Pricing Review in the Context of Power Sector Restructuring

Sovereign Project | 42039-032

ERAV requested ADB to provide support in developing and implementing a more cost-reflective network-pricing regime. The Electricity Transmission Pricing Review entails (i) a detailed study of electricity transmission pricing arrangements, (ii) recommendations in improving the current transmission pricing methodology, standards, and procedures in accordance with the establishment of a competitive power generation and wholesale market, and (iii) support in determining transmission pricing components for effective implementation of the transmission methodology.

Project Name Electricity Transmission Pricing Review in the Context of Power Sector Restructuring
Project Number 42039-032
Country / Economy Viet Nam
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8302-VIE: Electricity Transmission Pricing Review in the Context of Power Sector Restructuring in Viet Nam
Technical Assistance Special Fund US$ 800,000.00
TA 8302-VIE: Electricity Transmission Pricing Review in the Context of Power Sector Restructuring (Supplementary)
Technical Assistance Special Fund US$ 225,000.00
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Sector / Subsector

Energy / Energy sector development and institutional reform

Gender Equity and Mainstreaming No gender elements

ERAV requested ADB to provide support in developing and implementing a more cost-reflective network-pricing regime. The Electricity Transmission Pricing Review entails (i) a detailed study of electricity transmission pricing arrangements, (ii) recommendations in improving the current transmission pricing methodology, standards, and procedures in accordance with the establishment of a competitive power generation and wholesale market, and (iii) support in determining transmission pricing components for effective implementation of the transmission methodology.

A set of practical and implementable proposals for electricity transmission pricing arrangements, as well as support in effectively determining various transmission pricing components is to be developed with the objective that electricity transmission charges (i) will be more cost-reflective; (ii) promote socioeconomic growth; (iii) provide fairness to all users of the network and be related to the utilization of the network; (iv) support efficient use of electricity, operation of and investment in the network, so that costs are minimized in the long run; and (v) be transparent.

In undertaking the analysis and developing proposals, recommendations and tools, the related aspects outlined in this section should be considered. The Terms of Reference provide details on the scope of the Review (Appendix 2). The Review is divided into three outputs:

i) Review and Assessment of Electricity Transmission Pricing Arrangements

The review and assessment of electricity transmission pricing arrangements will involve a comprehensive review of Viet Nam's current transmission pricing methodology, available data, tools, and procedures in determining the various transmission tariff components, the arrangements for transmission pricing reviews and adjustment mechanisms.

ii) Identification of Solutions for Improving Transmission Pricing Arrangements

The Review will consider comparison with transmission pricing regimes, procedures, and assessment mechanisms across up to 5 international jurisdictions and will provide recommendations on potential suitability to improve Viet Nam's transmission pricing methodology, procedures, and assessment mechanisms also in the context of increased regional power trade.

iii) Determination of Transmission Pricing Components for Effective Implementation

The determination of transmission pricing components will involve comprehensive support in gathering required data, developing standards, updating and if required, developing data management systems and models, procedures and mechanisms to set and implement transmission pricing in a transparent manner. It will also include appropriate on-the-job training to ERAV staff in sustainably setting, reviewing and adjusting transmission prices.

Project Rationale and Linkage to Country/Regional Strategy

Since enacting the Electricity Law in 2005, Viet Nam has demonstrated strong commitment to creating a competitive power market and broadening ownership in the sector. The key objectives of unbundling Viet Nam's power sector are (i) improving efficiency through competition, (ii) minimizing costs to consumers, and (iii) increasing financing and managerial resources from outside the state-operated system to meet the sector's investment requirements. A road map approved in 2006 describes the reform process spanning about 20 years and to be implemented in three phases: (i) creating competition in generation activities by allowing power plants to sell electricity to a single buyer (2009-2014); (ii) introducing a competitive wholesale market for bulk sale to distribution companies (2015-2022); (iii) establishing a competitive retail market (commencing in 2023).

As of 2012, the key organizations in Viet Nam's power sector are Directorate General of Energy (DGE), under the Ministry of Industry and Trade (MOIT), Electricity Regulatory Authority of Viet Nam (ERAV), under MOIT, and Vietnam Electricity (EVN). DGE guides the development of the power sector and is responsible for overall energy planning and policy. ERAV is the country's regulatory agency, responsible for establishing the power market, power planning, tariff regulation and licensing. EVN, the country's national power utility, is a vertically integrated holding company responsible for the whole chain of electricity production, transmission, and distribution.

Restructuring of the electricity sector was initiated with the establishment of EVN as a holding company in 2006. The National Load Dispatch Center and the Electric Power Trading Company, the country's single buyer, were established under EVN. The National Power Transmission Corporation (NPT) was established in 2008 as a company wholly owned by EVN. NPT is responsible for investment in and the management and operation of 500 kilovolt (kV) and 220 kV transmission lines and associated substations. NPT consists of three power project management boards (PPMBs) that implement investment projects undertaken by NPT. The Northern, Central, Southern, Hanoi and Ho Chi Minh power corporations, established in 2010 and currently wholly owned by EVN, are responsible for the distribution network. In June 2012, decisions were issued to group EVN owned power generators and to establish three power generation companies wholly owned by EVN. The generation companies will be mainly responsible for undertaking investments in, and managing the operation of, assigned electricity-generating projects. In addition, several state-owned enterprises are involved in independent power generation projects, notably the oil and gas company PetroVietNam and the mining company Vinacomin and the role of independent power producers is increasing rapidly. During 2011-2020, 46% of new power-generating capacity is planned as coming from foreign and domestic private sector entities. Equitization of EVN's power generation and distribution companies is in process. However, the government specified that the national transmission network and large hydro and nuclear power-generation projects that are of high socioeconomic importance for national defense and security will not be privatized.

Implementing the reform process cannot be done through unbundling alone. It will require formulating and implementing new regulations, updating existing regulations that reform pricing and other mechanisms to allow for developing an efficient, financially viable, operationally sustainable and reliable power market infrastructure.

In 2010, Circular 14 Specifying the Methodology for Transmission Pricing was issued, which implements the processes and procedures for development, issuance and regulation of wheeling charges. In January 2012, Circular 14 was amended mainly to align the review and application time frame of the transmission charge with NPT's fiscal year from 1 January to 31 December (previously the application time frame was 1 March to 28 February). The current transmission pricing methodology follows the principle of marginal cost pricing under the constraint of a revenue or rate of return approach. The methodology does not reflect (i) time and geographical differences, (ii) connection costs, (iii) capacity charges, and (iv) treatment of network congestions. Currently the transmission tariff is charged 100% to distributors and no charge applies to generators. Furthermore, effective implementation of the regulation is limited as ERAV lacks the required data and data management systems to effectively determine the various components comprising the transmission tariff. Hence, current transmission tariffs do not accurately reflect the cost of supply which consequently undermines the financial sustainability of the power transmission company, NPT.

Although affordability and public welfare must be considered at Viet Nam's stage of development, the government recognizes that changes in power market prices are inevitable to strengthen the financial capacity of power sector entities and allow these entities to implement the large investment requirements (investment needs for Viet Nam's transmission network upgrade and expansion are estimated at $8 billion during 2011-2020). Transmission charges were increased by 14.3% in March 2011 to D77.5/kWh and by 7.5% in December 2011 to D83.3/kWh. Furthermore, in line with Viet Nam's power reform process to gradually establish a competitive power generation and wholesale market, the current transmission tariff structure needs to be reviewed and improved to be more consistent with the country's power sector developments by ensuring non-discriminatory access to and use of the transmission networks.

Recognizing the need to overcome current constraints in the power sector, the government approved on 27 July 2011 the National Power Development Master Plan (PDMP) VII. With PDMP VII, the government laid out a detailed road map and reform framework that emphasizes, amongst other aspects, on strengthening the financial capacity and operational performance of the country's power sector entities. Furthermore, through the facility undertakings of ADB's multitranche financing facility Power Transmission Investment Program, the government ensured to set and implement transmission charges so that NPT can progressively achieve the financial performance objectives of a (i) debt-service-coverage ratio of 1.5; (ii) self-financing ratio of 25%; and (iii) debt-to-equity ratio of 75:25 by 2015 and maintain them thereafter.

ADB's country partnership strategy, 2012-2015 supports the government's aim to achieve continuous (i) inclusive economic growth, (ii) environmentally sustainable growth, and (iii) regional integration. Coupled with sustained growth in electricity demand, it will require ADB's continuous engagement and long-term commitment in the energy sector with both loans and technical assistance. As Viet Nam is close to 100% electrified and the private sector is increasingly involved in power generation, ADB Southeast Asia Department will continue to focus its assistance on transmission, one of its areas of strength as identified in the energy sector Assessment, Strategy and Roadmap for Viet Nam.

ADB's Power Transmission Investment Program, using the multitranche financing facility, provides NPT with critical financing support in expanding and upgrading the country's transmission network in line with the objectives and time frame of the PDMP VII. By providing assistance in developing and implementing an improved cost-reflective transmission pricing regime, the proposed TA will effectively complement ADB's infrastructure financing support. The proposed TA is strategically aligned with the government's road map and reform framework laid out in PDMP VII which includes financial capacity strengthening of Viet Nam's power sector entities.

Impact Efficient operation of a competitive power generation and wholesale electricity market in Viet Nam
Project Outcome
Description of Outcome Implemented cost-reflective, transparent transmission pricing regime
Progress Toward Outcome The project supported the completion of reports which had comprehensively reviewed and assessed the current electricity transmission pricing arrangements which is a step closer towards implementing a cost-reflective and transparent transmission pricing regime.
Implementation Progress
Description of Project Outputs

1. Review and assessment of transmission pricing arrangements

2. Solutions to improve transmission pricing arrangements

3. Determination of pricing components for effective implementation of transmission pricing

Status of Implementation Progress (Outputs, Activities, and Issues)

Transmission pricing arrangements were incorporated in the Final Report and two draft circulars.

Suggestions for improvement on transmission pricing arrangements have been incorporated in the Final Report and two draft circulars.

The calculation mechanisms for standards and transmission charge components forms part of the Final Report and two draft circulars.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design The project was designed based on extensive stakeholder communication and consultation, especially with the Electricity Regulatory Authority of Viet Nam.
During Project Implementation The project will be implemented in close consultation with all the key organizations in Viet Nam's power sector. An Inception Workshop on electricity transmission pricing review assessment of current arrangements undertaken in June 2014 was participated by various stakeholders whose comments and suggestions were incorporated in the final IR. A Midterm Workshop was completed on October 2014. In August 2015, the TA team confirmed with the government (ERAV) the revised project schedule following the extension of TA completion date from 18 May 2015 to 31 December 2016. Meetings have been held with relevant government agencies to exchange views on the best transmission pricing regime arrangement. The Final Workshop was conducted on 6 October 2016 to close the assignment and provide the basis for the generation of the final report.
Business Opportunities
Consulting Services A consulting firm was engaged for the project to render services from 17 February 2014 to 31 October 2016.
Responsible ADB Officer Lee, Hyunjung
Responsible ADB Department Southeast Asia Department
Responsible ADB Division Energy Division, SERD
Executing Agencies
Ministry of Industry and Trade
54 Hai Ba Trung St.
Hanoi, Viet Nam
Concept Clearance 05 Nov 2012
Fact Finding -
Approval 11 Dec 2012
Last Review Mission -
Last PDS Update 27 Mar 2017

TA 8302-VIE

Approval Signing Date Effectivity Date Closing
Original Revised Actual
11 Dec 2012 13 Nov 2013 13 Nov 2013 31 Dec 2014 31 Dec 2016 02 May 2017
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
1,025,000.00 0.00 0.00 0.00 0.00 0.00 1,025,000.00 17 Jun 2022 896,250.00

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