Power price hike still not enough to spur investment

The retail price of electricity in Vietnam officially increased 15.3 percent from March 1, 2011, but even this rise is not enough to spur investment for the power sector, said Mr Hoang Quoc Vuong, Deputy Minister of Industry and Trade. The selling of power at lower price than production cost will discourage investors.

Hard to attract investment

According to the Ministry of Industry and Trade, this rise in electricity prices was mainly aimed to cover higher input costs (like higher coal and gas prices) and reduce current losses incurred by power generators, rather than to raise funds for grid investments.

Specifically, the increase in electricity price is calculated based on factors affecting electricity output cost, like a 5 percent rise in coal price and foreign exchange rate (power companies have to pay an additional VND1,400 for one dollar paid to banks and VND3,000 paid on free market). Profit for the Electricity of Vietnam Group (EVN) is zero from this augmentation.

Also, other additional costs EVN incurred in the previous years have not been added to electricity prices in 2011; thus, these costs have not been recovered. Specifically, unrecovered costs include operation and maintenance (O&M) costs and generation costs at Ca Mau power plants in 2008 and 2009; remaining costs of building low voltage networks in rural areas; environmental charges for hydropower plants in 2011; borrowing costs for the purchase of oil for electric generation in the dry season in 2011; costs arising from high-priced electric generation in 2010; costs accrued from exchange rate changes as of December 31, 2010, and financial support for generating electricity for poor households. Total accrued costs which are excluded from electricity prices in 2011 amount to dozens of trillions of Vietnamese dong.

Thus, the Government decided to raise electricity prices, only partially compensating the additional costs borne by the electricity industry and EVN in particular. Indeed, power companies still suffer losses after this hike, as the government wants to limit the impact of electricity price rises on economic growth and social life.

According to economists, to ensure long-term stable power supply, the pricing mechanism needs to be adjusted in order to help generators to recover their investment capital.

Deputy Minister Hoang Quoc Vuong said electricity prices this year are not high enough to attract investors in power production because selling prices are still lower than costs.

Measuring power price hike impacts

With an increase of VND164 for each kWh of electricity, or a rise of 15.3 percent, the impact on production activities, living standards and economic development have been minimized. The new power price is estimated to add 0.46 percent to CPI this year.

With a rise of 12 percent, manufacturing companies expect to see an increase of 0.01-1.33 percent in production costs. Producers of steel, cement and fibre will see a rise of 0.38-1.33 percent in production costs. Producers of tobacco, beer and packaging will have to pay 0.01 – 0.46 percent more in production costs.

A family is estimated to pay VND32,000 – 52,000 more for electricity expenses. Producers of consumer goods like food, cloth and petroleum products are not affected much by the change in electricity price.

Deputy Minister Hoang Quoc Vuong said the 2011 electricity price hike is a step toward the market-oriented pricing roadmap for the electricity industry, making it an attractive investment channel for investors to build power plants, thus ensuring sufficient supply, stable transmission, distribution and operation of the grid system. In addition, the pricing system will ensure rational prices for different groups of users, with Government support for the poor.

The new pricing is built on principles that it must not cause significant impacts on prices [of other goods] and ensure social security, particularly for poor and low-income households. Or in other words, the State still subsidises this group of users. New power prices are transparently applied to all users and exclude cross-compensation for users.

Power shortage to be eased in 2011

Currently, the national power supply system is facing challenges and difficulties like unstable operation of newly operated coal-fired power plants in the northern region, the incident of a 240-MW steam turbine in Phu My 3 power plant on January 23, 2011, the discharge of nearly 3 billion cubic metres of water for farming activities in the 2010 – 2011 winter spring crop.

These problems will affect the power supply from March till June 2011. The total electricity generated and imported for the national grid system is estimated to reach 38.04 billion kWh, which basically satisfies growth of below 15 percent in power consumption in the reporting period.

According to EVN, the total power demand for production activities is estimated at 117.63 billion kWh in 2011, up 17.63 percent from 2010 (100.1 billion kWh), of which the demand in the dry season (in the first six months) will be 56.14 billion kWh, up 18.3 percent year on year, and the amount required in the last six months will be 61.49 billion kWh, up 16.8 percent on year.

To boost the power supply in the dry season in 2011, the Ministry of Industry and Trade will continue instructing the Electricity of Vietnam to keep an eye on power generating sources to ensure the best supply and operation of the system in the coming time. – VCCI

Tags: Vietnam electricity prices, Vietnam energy