49196-002: Market-Oriented Power Sector Reform Program, Subprogram 1 | Asian Development Bank

Viet Nam: Market-Oriented Power Sector Reform Program, Subprogram 1

Sovereign (Public) Project | 49196-002 Status: Proposed

The government of Vietnam began a series of reforms in 2004 towards a competitive electricity market, power sector unbundling and restructuring, and market-based tariffs. However, reform results started to appear only recently with the Vietnam competitive generation market (VCGM) established as a single buyer model in 2012. Fundamental issue remain, however, resulting in deteriorating power sector sustainability due to constraints related to dominant public sector-led development, and from below-cost electricity tariffs. To address these issues, ADB has supported the government in further reform actions to develop the VCGM into the Vietnam wholesale electricity market (VWEM) as a multi-buyer model, to be followed by retail market development. This assistance is through the Market-oriented Power Sector Reform Program (MPSRP).

Project Details

Project Officer
Lee, Hyunjung Southeast Asia Department Request for information
Country
  • Viet Nam
Modality
  • Loan
Sector
  • Energy
 
Project Name Market-Oriented Power Sector Reform Program, Subprogram 1
Project Number 49196-002
Country Viet Nam
Project Status Proposed
Project Type / Modality of Assistance Loan
Source of Funding / Amount
Loan: Market-Oriented Power Sector Reform Program
Ordinary capital resources US$ 170.00 million
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Private sector development
Sector / Subsector

Energy / Energy sector development and institutional reform

Gender Equity and Mainstreaming No gender elements
Description

The government of Vietnam began a series of reforms in 2004 towards a competitive electricity market, power sector unbundling and restructuring, and market-based tariffs. However, reform results started to appear only recently with the Vietnam competitive generation market (VCGM) established as a single buyer model in 2012. Fundamental issue remain, however, resulting in deteriorating power sector sustainability due to constraints related to dominant public sector-led development, and from below-cost electricity tariffs. To address these issues, ADB has supported the government in further reform actions to develop the VCGM into the Vietnam wholesale electricity market (VWEM) as a multi-buyer model, to be followed by retail market development. This assistance is through the Market-oriented Power Sector Reform Program (MPSRP).

The MPSRP is a multi-donor supported program between ADB, World Bank, and KfW and will consist of three subprograms during 2017 2020. This reform for developing the VWEM will require reduction of state-led sector operations, more private sector participation, and cost-reflective tariff development, and thereby is intended to increase the efficiency of power system operations and promote increased investment including for renewable energy. The program compliments a separate multi-donor climate change mitigation policy operation that includes feed-in tariffs and other policy measures to promote renewable energy and energy efficiency. This way, this program helps support Viet Nam's efforts to meet its greenhouse gas emissions reduction targets. The MPSRP aims to achieve the following outputs: (i) a policy and operating framework established for VWEM and private sector participation; (ii) a restructured power sector including EVN's generation corporations' equitization and independent system and market operator establishment; (iii) cost-reflective and performance-based tariff reforms; and (iv) quality of service and demand side response increased.

Project Rationale and Linkage to Country/Regional Strategy

The electricity demand in Viet Nam is expected to rise continuously at an average annual growth of 9% in the next 15 years. Meeting demand and raising requisite financing is, therefore, a key challenge. The public sector primarily state-owned Vietnam Electricity (EVN) has supported rapid power system expansion, but the government recognizes that the state-owned monopoly must end to reduce inefficiencies and reliance on public financing. The revised PDP VII estimated investment needs of about $188 billion during 2016 2030, including $150 billion to create new generation capacity. Of this amount, 65% is expected to come from the private sector and the rest from the EVN. This implies annual private investment of $6 billion, an amount unprecedented for Viet Nam. If this investment is not made, the adequacy of power supply is in danger.

At present, Viet Nam's power sector development is constrained by limited competition, inefficient state-led operations, below-cost electricity tariffs, and a lack of demand-side regulation. Only about 50% of generation capacity is participating in the VCGM, which does not optimize the use of all generation assets. Non-EVN generation projects mostly originate through unsolicited proposals, and therefore, they are slow, inefficient, and prone to delays or cancellations. EVN is effectively a monopoly in the whole electricity supply: it generates more than 60% of Viet Nam's power, constraining competition; and its transmission and distribution functions are unbundled only within EVN's holding company structure. Although retail tariffs have recently risen, they are still lower than costs and therefore, weaken the sector's viability, discourage investment, and stimulate excess demand. Delays in modernizing infrastructure and a lack of regulations to reduce peak demand lead to inefficient energy supply and usage. Therefore, it is critical to provide the support to the government to address such fundamental issues through policy operation with the MPSRP in cooperation with other development partners. The power sector reform is a long-term evolutionary process and a well-coordinated and phased joint development partners' support is critical to leverage on the implementation of essential and hard reforms.

The energy sector has been a priority sector in ADB''s Viet Nam Country Program and ADB has been providing loans (around $2.5 billion) and TAs (around $33 million) to the government to develop and expand power system infrastructure covering generation, transmission and distribution, and to prepare and implement power sector reform programs. In particular, since the late 1990s, ADB and the World Bank have closely coordinated energy sector assistance and carried out joint broader policy dialogues, which led to key milestones such as Electricity Law promulgation in 2004, power market roadmap development in 2006, and VCGM inauguration in 2012. ADB has also assisted the government in (i) improving transmission pricing, (ii) addressing some shortfalls of VCGM such as water valuation, (iii) improving ERAV's regulatory capacity, and (iv) developing capacity of prospect VWEM market participants.

Impact Adequacy and quality of power supply improved
Outcome VWEM operationalized
Outputs

VWEM's policy and operating framework completed

Power sector restructured

Electricity tariff framework reformed

Quality of service and demand side response increased

Geographical Location
Safeguard Categories
Environment C
Involuntary Resettlement C
Indigenous Peoples C
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design
During Project Implementation
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
Timetable
Concept Clearance 07 Oct 2016
Fact Finding 10 Oct 2016 to 13 Oct 2016
MRM 15 Mar 2018
Approval -
Last Review Mission -
Last PDS Update 27 Sep 2017

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