Green Growth By : Oliver Massmann

Relevant Ministries: Ministry of Industry and Trade (MOIT), Ministry of Planning and Investment (MPI), Ministry of Finance (MOF), Ministry of Natural Resources and Environment (MONRE)

Overview

Green Growth is a key pillar of Vietnam’s sustainable development strategy for 2011 – 2020 and aims to ensure efficient and sustainable economic growth.

In 2014 we have witnessed further strengthening of the framework for Green Growth. On central government level, support mechanisms and action plans have been promulgated and roles and activities of government agencies have been defined.

As active participant in the development of the Green Growth Strategy, we acknowledge the cost to implement this strategy are huge. The Government’s Green Growth Action Plan alone requires up to 30 billion USD until 2050[1]. With the proper incentives and regulatory framework, European investors can finance and build projects that use reliable European technologies and expertise, including renewable energy, waste and water management and in the construction sector.

However, at present European investors observe barriers when implementing projects. A key barrier is the lack of guidelines for investors on obtaining incentives specified in the promotional policies of the government. For example, how specific tax incentives or feed-in-tariffs can be applied for and obtained. In many cases the government is already working on detailed guidance. For those cases, we recommend to provide more updates about the progress or timeline for publication of those documents.

Development of Renewable Energy

Relevant Ministries: Ministry of Industry and Trade (MOIT), Ministry of Planning and Investment (MPI), Ministry of Finance (MOF)

Issue description

In 2014 we have seen the approval[2] of support mechanisms for waste-to-energy and biomass power. Both documents contain an encouraging set of measures to promote investment in power generation from these resources. We are also pleased to learn that the Ministry of Industry and Trade (MOIT) is reviewing the feed-in tariff for wind power and expects to issue the new feed-in tariff this year[3].

Additional legislation passed this year, including a steady progress towards a competitive power market[4], further strengthens the framework for development of renewable energy. Good

examples of public-private cooperation has also gained more traction, such as the solar water heater promotion program that is implemented by Electricity of Vietnam (EVN) in cooperation with private manufacturers of the same[5].

Potential gains/concerns for Vietnam

Vietnam is in the position of having excellent potential for development of renewable energy generation, but at the same time one of the lowest power prices in the region[6].

Country Power price

(U S cents/kWh) Year

Australia 22 - 46.56 2013 China 7.5 -10.7 2013 Viet Nam 7.0 2013 Germany 31.41 2012 India 8 .0 - 12.0 2012 Indonesia 8.75 2012 Japan 20 - 24 2012 Malaysia 7.09 - 14.76 2012 Philippines 30.46 2012

Table 1 – comparison of power prices of selected countries (UNDP, 2014).

We acknowledge that the retail power price has been adjusted upwards in recent years. Within this context, we can make specific recommendations that will allow comprehensive growth of application of renewable energy in Vietnam, that do not always require raising the price of electricity to consumers.

Specific recommendations for the development of Renewable Energy in Vietnam

1. Implementing solar based energy solution, such as solar water heaters and solar panels allows commercial building owners and industrial users to save more than 60%[7]. However, the high investment cost have so far held back substantial adoption of these technologies.

A robust support mechanism, in particular tax incentives during purchase or operation of solar energy solutions is expected to greatly benefit the sector. One suggested tax incentive is to allow the full cost of solar power and thermal installations to be claimed against taxable profits in the year of installation of the power equipment.

Capital investment costs are currently claimed against taxes by way of depreciation over the lifetime of the asset, on a schedule determined by the government depending on the asset type, typically 20 years for solar power equipment. Accelerating the tax benefit to the first year of operation would provide corporate power users with an incentive to switch to own generation of power, reducing the pressure on the grid system and helping balance energy demand against available supply.

This would also further increase the attractiveness of Vietnam to manufacturing and service industries and remove one of the significant risks identified by foreign investors, being the reliability of future energy supply and the potential for significant increases in unit power costs

from the grid supply. This could be further extended to other clean tech and renewable energy investments.

2. Allowing and regulating decentralized energy supply, such as the ability of energy producers to sell directly to off-takers[8] or concepts such as Energy Service Companies (ESCOs) are additional measures that can support development of renewable energy to locations where it is most needed. ESCO models may also help to avoid environmental impacts, e.g. locally available biomass resources for energy generation. Regulation to protect ESCOs, including the risk of non-payment by off-taker and ownership of ESCO’s equipment installed in the facilities of the end-user can help to attract more investment in these models.

3. A Feasible Wind Power Feed-In-Tariff

4. Having the highest potential for wind power in the region, Vietnam has received much attention from international investors and many projects have been registered. However, project implementation is hampered by the current feed-in tariff of 7.8 USD cents/kWh. As a result, most wind power developers fail to secure financing, because the current tariff is not bankable. In our view, a feed-in tariff of at least 10.4 US cents/kWh is required to reach the target of 1000 MW of wind power by 2020 set forth in Master Plan VII[9].

5. Clear and fair Standard Power Purchase Agreements

Project developers need more guidance to apply the incentives specified in the wind, biomass and waste-to-energy support mechanisms to their projects. In particular, project developers are unsure about the process of securing feed-in-tariffs and off-take agreements, which are essential for the feasibility and funding of the projects. We recommend that the Ministry of Industry and Trade promptly issues clear and fair standard power purchase agreements for biomass and waste-to-energy projects stipulated in Decisions No. 31 and No. 24[10], so that currently pending projects can proceed.

6. Project Finance for Green Field Renewable Energy Projects

It is currently challenging for developers to finance renewable energy projects. Financing is often provided by a small number of lenders that have limited resources and apply rigorous applicability criteria. The cost of such finance and the perceived risk in the off-take agreement with EVN is a significant barrier to the development of new investment in the power generation sector, notably biomass, waste-to-energy and wind projects.

The government can play a critical role by facilitating or creating project finance specialist lenders in Vietnam that have the following capabilities:

- Mandated to only finance green-field renewable energy projects that generate power by utilizing wind, biomass, biogas, waste to energy and geothermal resources.

- Able to lend in VND or United States Dollars.

- Interest Rates that are below market interest rates for similar high risk finance in developing countries.

- Partial Risk Sharing with a major multinational donor, which would allow the lending institution to accept the risk level in project finance where they may have little practical experience (first loss to the donor of 20% of risk for example).

- Loan Repayment is guaranteed by the Ministry of Finance should EVN fail to meet its obligations under the power purchase agreement.

7. Pre-Packaged Renewable Energy Auctions – Wind Power

Considering the historic growth in operating wind farms in it unlikely that the target of 1000 MW of wind power by 2020 will be met, despite the efforts of MOIT, GIZ, Provincial Committees, EVN and other agencies. Our recommendation is to develop pre-packaged wind sites, which could be offered to qualified bidders. The same practice has yielded great results in other Asian countries and sparked the development of geothermal projects in Indonesia.

A pre-packaged wind project consists of the following prerequisites:

- Business Investment License and appropriate land lease or ownership documentation for the project area

- Wind Data for a minimum of 1 year duration and on the project site at a professional international quality standard

- Initial Assessment of the land affected with an estimate of land clearance and compensation costs and timescale to completion from the PPC

- Grid Impact Study in the regional and project specific level

- Provisions for transmission line to the appropriate grid junction point (e.g. transmission line completed or preliminary design completed).

To ensure efficiency of construction and operation are maximized and provide the best value power generation to EVN from the available renewable resources, qualified bidders should meet a minimum level of financial, technical and management capabilities. In addition, bids could be based on the Power Purchase Agreement Price and lowest costs bids from pre-qualified bidders would be given strong preference.

Energy Efficiency

Issue description:

Energy Efficiency has a vital role to play in the context of energy security and environmental sustainability. Lighting accounts for 19% of all electricity consumed globally and this ratio is even higher in Vietnam, where up to 25% of electricity used for lighting. It is estimated that 80% of buildings use out-of-date lighting technology. In addition, almost current public lighting systems in Vietnam are conventional and inefficient. Energy-efficiency with new innovative and sustainable lighting solutions can significantly reduce environmental impact and contribute to energy savings in cost.

However, there is a slow adoption of new innovative technology due to a lack of energy management policies and preferential tariffs, inefficient public investment, etc. The current issue of new lighting technology, LED importation has difficulty in high and improper taxation, which prevents consumers from using these sustainable lighting solutions.

Institute of Strategy and Policy on Natural Resources and Environment under the Ministry of Natural Resources and Environment in collaboration with Vietnam Journalists Association co-organized a writing contest on "phase-out of incandescent light bulbs". Currently in Vietnam, incandescent light bulbs are common used in households, especially in rural areas. There have been a number of recommendations for governments to encourage consumers to choose more energy-efficient products with new technology such as LED.

Potential gains/concerns for Vietnam:

Energy efficient lighting is an opportunity for Vietnam and will equally benefit its population as well as its future competitiveness. Driving the switch to sustainable lighting solutions such as LED lighting technology can result in significant savings in cost and can bring new life to many local identities.

LED technology, which is very different from traditional hot cathode lamps, can bring Vietnam many benefits in terms of its eco-friendliness: Semi-conductor based-source of light, Energy Saving, and Green-without mercury and lead.

In 2013, Vietnam consumed 127,84 billion KWh (EVN). Lighting accounts for 25% in the electricity consumption in Vietnam (UNDP) as 31.96 billion KWh. LED could help to save up to 50% of the energy consumption (15.98 billion KWh). Following the 2008 emission factor used to calculate CO2 per kWh electricity consumption which is as 0,5764 tCO2/MWh, it could be saved 9,210,872 metric tons Cos emission.

The current LED importation has difficulty in taxation with tax rate 25% (form E with HS code: 8539.31.90). In consultation of other countries like Thailand, the Philippines & Indonesia, LED lamps have been imported with tax rate 0% (form E with HS code: 8543. 70.90). This will prevent Vietnamese consumers from approaching this sustainable lighting solutions and from accelerating the country’s green growth agenda.

Recommendations/guide for implementation:

With the concern about the prevalence of low quality electrical products that do not meet safety standards, we recommend and encourage the government of Vietnam to establish more stringent import controls and market surveillance mechanisms. Relevant agencies and institutions can speed up the development of lighting standards that recognize the advantages of LED technology and move fast on this issue.

The national and local governments should become early adopters of LED technology through procurement leadership, as part of their energy efficiency, industry development or urban refurbishment programs. Taking such a role model function by introducing a customer-facing labeling framework to encourage consumers to choose more energy-efficient products also

makes sense from a budget point of view as the switch to LED lighting has provided up to 50% cost savings.

We ask for authorities’ consideration and acceptance of suggested revised tariff classification and tax rate for LED importation, to further accelerate adoption of sustainable lighting solutions.

Sustainable buildings

Issue and potential gains/concerns for Vietnam

Buildings are and will be the largest consumers of electricity. The rapid development of the middle class and its associated lifestyle which includes air conditioning will account for more than 50% of the energy consumption growth in every main city of Vietnam. Acting on building design can reduce this growth, not only for tomorrow but also for the next 25 years of a building’s lifetime.

The recent pickup of the real estate market is a chance to take. It offers a tangible opportunity to act on the design of future buildings, to limit the growth of energy demand. The Energy Efficiency Building Code (EEBC) 2013 of Ministry of Construction (MOC) is a positive move but its application is challenged by the lack of enforcement.

Recommendations

Our recommendation is based on four actions:

• Educate building designers to sustainable building design

• Integrate sustainability work at concept stage of building design

• Implement reward/punish electricity price policy

• Create showcases

Education:

Europe has a worldwide leading position in the field of sustainable buildings and human comfort. This know-how can be shared with Vietnamese counterparts, adapted to the Vietnamese market, climate and spread to the community. It includes building related faculties in the field of architecture, urbanism, mechanical and civil engineering such as: Institute of Tropical Architecture (ITA) from Hanoi Architecture University, Vietnam National Institute of Architecture (VIAR), Vietnam Institute for Urban and Rural Planning (VIUP), Vietnam Association of Civil Engineering Environment (VACEE), etc.

Integrated building design:

The building design methodology is outdated in Vietnam. A sustainable building cannot be designed after a building has been approved by the authorities or by the client. Architects, engineers and the client should work in team from the first day in order to optimize the design at concept stage. The ideal and most economical results are not obtained by efficient machines, but

by buildings that do not need those. Buildings that produce little spoiled water will need little water treatment afterward. Buildings that do not need much energy will not need much outside energy, whether it is renewable or not. Such integrated building optimization has a double positive impact on green growth.

Supportive electricity price policy:

EVN should impose to new commercial and residential building owners a tariff scheme that reward low energy consumption buildings with lower prices and impose higher prices to high consumption buildings. The policy shall be established on benchmarks based on climatic environment, type of building usage, quality grade and occupation. It will create a bottom up and large scale movement that will naturally put more interests to sustainable building design.

Showcase:

Nothing better than to show. The priority for EEBCs should be put on the construction in every main city of a (near to ) zero energy building that does not consume much electricity, does not cost more than average and offers the same of better comfort level.

Public-Private Partnerships

Relevant Ministries: Ministry of Industry and Trade (MOIT), Ministry of Planning and Investment (MPI), Ministry of Finance (MOF), Ministry of Justice (MOJ), Ministry of Construction (MOC), State Bank of Vietnam (SBV)

Issue and potential gains for Vietnam:

Vietnam’s public budget alone cannot meet its need for infrastructure development. Foreign private investors are interested in contributing to the development of Vietnam’s infrastructure, including in renewable energy and waste and water treatment sectors. Vietnam’s Government is working to improve the legal framework for public-private partnerships (PPP). A new PPP Decree is expected to be completed by the end of 2014, which will replace existing BOT (Build-Operate-Transfer etc.) regulations and become the key legislation for all such projects.

Under the latest draft decree, PPP projects can enjoy investment guarantees and incentives with regard to taxation and land use fees. Investors and lenders will welcome guarantees and incentives, as they can reduce risks and lower the project’s costs. Compared to current regulations, the proportion of the state's contribution in PPP projects is no longer fixed. Such flexibility can help projects that would have been stalled due to State budget constraints.

Public-private partnerships should provide win-win conditions for all partners involved. Many potential projects in the past have not proceeded to completion as public stakeholders demanded conditions, which were not feasible for private investors. Private investors are willing to provide funding and technology and to transfer the infrastructure projects themselves after a period to recover the initial costs and to gain reasonable profits. The State can gain ownership of infrastructure at low or no costs to the public budget. In our view, Vietnam has more to gain than to lose from an attractive environment for foreign investment for PPPs.

A few comments and recommendations:

1. More clarity on the selection of PPP projects

The government maintain lists of PPP-eligible projects. Private investors can propose additional projects to be added the lists. Infrastructure investors often conduct extensive feasibility studies, before they decide to propose to the government. However, the current draft PPP decree envisions that investors should first propose the project and then conduct the feasibility study, while the project would be added to the list and be open for tender from other investors. If another investor is selected to implement the project, the original proposing investor would lose out. This will have a chilling effect, even though the decree offers reimbursement for feasibility study costs. We recommend that especially bilaterally negotiated PPP projects are exempted from being tendered out after one party has proposed it and conducted adequate feasibility work.

2. More flexibility with regard to contracting parties

The latest draft PPP decree provides that only the State agency and the investor can be contracting parties. PPP projects generally involve a multitude of private stakeholders joining a special purpose company (or “Project Enterprise” in the decree). We recommend that at least the Project Enterprises should also be able to become contracting parties, as is standard international practice, to reduce the potential risks for individual investors.

3. Unlimited “step-in right” holders

A party who steps into the shoes of a non-performing party can see to have the projects completed that would otherwise be stalled due to the non-performance of one of the contracting parties. Under the current draft, only lenders or its appointed competent organizations are permitted to have step-in rights. PPP projects can last decades, and the risk that contracting parties may have to withdraw is proportionally high. We recommend that PPP regulations permit a variety and combination of step-in right holders for the maximum protection of the projects their completion.

4. More flexibility in choosing a dispute resolution venue

The lasted draft PPP decree requires that dispute between the contracting parties involving the State to be settled by Vietnamese courts or arbitration in Vietnam. This adds to the foreign party’s risks, as potential disputes may not be adjudicated impartially, as the State obviously has “home advantage” in Vietnam. While understanding that Vietnam would like to avoid costly litigation abroad, we recommend that the parties can agree to a more neutral venue, even outside of Vietnam.

5. Educating and providing incentives to involved State authorities

Besides the PPP regulations with regard to the projects themselves, in the past, local State officials often lacked the understanding and motivation to help implement to projects. We acknowledge that this goal is highly aspirational, but recommend that such State officials are

educated and incentivized, so that the public and private stakeholders can actually collaborate as partners.

In conclusion, private partners will welcome predictability in the implementation of the regulations. On the other hand, enough flexibility is required to tailor projects according to their needs. The socio-economic gains for Vietnam could be substantial and invaluable.

Should you have any question, please contact Uomassmann@duanemorris.comU;