Vietnam may delay higher power price amid Asia’s worst inflation

Vietnam, battling Asia’s highest inflation rate, may put off increases in electricity prices even as the country faces “chronic” power shortages.

Vietnam Electricity, the state-run monopoly and largest power provider in the country, won’t request higher rates when new regulations allowing quarterly adjustments in retail prices come into effect today, Dang Hoang An, the Hanoi-based deputy general director, said in an interview yesterday. While an increase is “very necessary,” the company known as EVN is waiting for government instructions, he said.

“Closing the gap between generation cost and retail electricity prices is a necessary step for EVN to carry out the necessary investment for maintaining the existing grid and develop generation capacity faster than consumption,” said Olivier Jacquet, chairman of the European Chamber of Commerce’s Energy and Infrastructure Committee.

Subsidies have helped keep Vietnam’s electricity prices the lowest among members in the Association of Southeast Asian Nations, or Asean. Now it’s struggling to generate enough power to fuel its growing manufacturing industry, narrow a trade deficit, and tame Southeast Asia’s fastest inflation. China will raise electricity costs for non-residential users this month as it seeks to prevent a shortage forecast to be its worst ever. Malaysia has also announced increases this month.

Power shortages

“Chronic” power shortages are slowing growth in Vietnam’s agriculture, industry and services industries, according to the World Bank. To meet demand, the country needs to more than double installed generation capacity to 39 gigawatts by 2020 from about 16 gigawatts at the end of 2008, it said. Under the current system, the retail prices that Vietnam Electricity is allowed to charge are set by the government and are often below the cost to generate power.

The European Chamber of Commerce’s Energy and Infrastructure Committee estimates that Vietnam’s overall electricity shortage is about 10 percent of existing capacity. At 6 cents a kilowatt hour, Vietnam has the lowest average electricity price in Asean, according to EuroCham. Prices are less than half those in neighboring Laos, Cambodia or Thailand.

Prices would have to rise 62 percent to stem EVN’s losses, according to online newswire VnExpress. It cited Vietnam’s Finance Minister Vu Van Ninh on Feb. 24.

EVN said Feb. 16 that it was selling power at 30 percent to 40 percent less than production cost, according to a statement on the government’s website. The utility recently struggled to pay power suppliers, said Dinh The Phuc, deputy head of the Electricity Regulatory Authority of Vietnam, or ERAV, at a briefing in Hanoi May 18.

‘Massive political issue’

Further rises in power prices are likely to be politically sensitive as the government tries to tackle inflation. A record 15 percent increase in power prices in March contributed to consumer prices rising 20 percent in May from a year earlier. Vietnam’s inflation rate is the highest among 14 Asian economies tracked by Bloomberg.

“Electricity prices are a massive political issue,” said Giles Cooper, a partner at law firm Duane Morris in Hanoi who has advised on power-plant projects in Vietnam. “The last few months people have been pretty unhappy with inflation and the dong depreciation, and they’re already looking at significant rises in electricity prices and other utilities.”

Vietnam will need to build power plants with total capacity of more than 50,000 megawatts through 2020, according to an estimate given by Pham Hung, deputy director of the energy department of the Ministry of Industry and Trade at a May 3 meeting of the Asian Development Bank in Hanoi. The government will propose policies to encourage investors to help build more power plants, he added.

Private investment

“You cannot attract private investment in electricity generation if you don’t increase the retail price,” Nguyen Xuan Thanh, a Ho Chi Minh City-based economist with the Vietnam Program at the Harvard Kennedy School, said by telephone. “You need to offer a better wholesale price to the independent power producers. You can only do that if you adjust the retail prices.”

EVN warned earlier this year that the country could face rolling blackouts as low water levels at hydroelectricity reservoirs limit power output.

“There are a number of industries that, because of this unreliability of power, have had to price in their own generators,” said Hank Tomlinson, chairman of the American Chamber of Commerce in Hanoi. “The cost of that power is drastically higher than EVN’s, which shows companies are willing to pay more for electricity if they’ve got the confidence in it being there.”

Generation competition

Vietnam plans to embark July 1 on the first phase of a 13- year plan for a competitive electricity market. Under a six-month pilot project, generators will compete against each other to sell power to a central purchasing company, according to the Ministry of Industry and Trade. The market is slated to start operations next year.

The attempt to introduce a competitive generation market may be premature, according to Duane Morris’ Cooper.

“I think they need more time to get that right before they can start to move into a competitive environment,” he said. “Given the need for power in this country and their lack of familiarity with a competitive electricity market, I think it’s too soon for them to be moving into that.”

The Ministry of Industry and Trade aims to complete the pilot’s legal framework and other outstanding procedures by June 20, it said May 18. A ministry official said the pilot program is the first stage toward a competitive market and could not guarantee an instant remedy to the country’s power problems.

“Many countries have faced failure so we shouldn’t be too optimistic that once we have a competitive power market, that will solve all the problems we face today,” Hoang Quoc Vuong, deputy minister of industry and trade, said at the May 18 briefing.- Bloomberg

Tags: Vietnam electricity, Vietnam energy, Vietnam power shortage