Vietnam power outages risk investment price increases loom

Rolling electricity outages in Vietnam may deter foreign manufacturers from using the country as an export base, prompting the government to increase prices to boost investment in power plants.

Vietnam may raise the cost of average household electricity by a record 15% next month, Vietnam News reported yesterday. Prime Minister Nguyen Tan Dung said last week factories and other major energy consumers must cut power use by at least 1%, the state-run newspaper reported.

Severe power cuts “would make it very difficult for me to explain to the board that we want to stay here and want to develop the company here,” Boy Schallert, managing director of Aalborg Industries A/S, said by telephone, adding that the company has no imminent plans to leave the country. “We hope we will be fine this year, but we fear the worst.”

Pricing is the biggest impediment to foreign investment in power plants as state-run Electricity of Vietnam, known as EVN, currently sells electricity at a loss, according to the European Chamber of Commerce in Vietnam. Blackouts are set to affect some of the country’s 91 million people today, Vietnam News reported Feb. 10.

Aalborg, a Copenhagen-based manufacturer of marine and industrial boilers, has “been warned that we would see heavier power cuts this year because the situation is even worse,” said Schallert, based in Hai Phong, a coastal city in northern Vietnam.

‘Serious Problem’

The electricity price that EVN offers to investors is about a third of the average amount paid in Thailand and Cambodia, making many energy projects commercially unviable, Matthias Duehn, the European chamber’s executive director, said by telephone.

“If the energy price is not adjusted it becomes a serious problem for Vietnam in the medium and long run,” he said. “The power cuts affect Vietnam’s competitiveness and may direct investment elsewhere.”

A steady electricity supply is among the top concerns of Japanese investors, said Susumu Sato, deputy director of research at the Japan External Trade Organization in Hanoi. Foreign direct investment into Vietnam fell in 2009 to $6.9 billion, the first drop in three years, according to the Asian Development Bank.

“Some companies experienced power cuts twice a week” in 2010, Sato said in an interview. “It was very difficult to operate in June and July. This year, Japanese companies are very concerned.”

Shortfall

EVN said last month it faces a shortfall of 3 billion kilowatt-hours during this year’s dry season. Vietnam depends on hydropower for about 37% of its electricity, followed by gas at 36% and coal at 16%, according to statistics from the Association of the Electricity Supply Industry of East Asia and the Western Pacific.

The government is working to ensure sufficient power supply, Hoang Quoc Vuong, deputy minister of Industry and Trade, said by telephone yesterday.

Policy makers “know the price has to be increased and that the shortage of power is economically harmful,” Pham Nguyet Anh, senior energy specialist at the World Bank in Hanoi, said in an interview.

The average household electricity bill is about 1,000 dong (5 cents) per kilowatt hour, Vietnam News said. That compares with 6.1 cents in Indonesia and 9.4 cents in Thailand, according to data from the Energy Information Administration.

Inflation Worries

Vietnam has struggled to control inflation as it seeks to expand Southeast Asia’s sixth-biggest economy by as much as 8% per year until 2020. Consumer prices increased 12.17% last month from a year earlier, according to the statistics office.

The State Bank of Vietnam has raised interest rates only once since the start of 2010, lagging behind counterparts from Malaysia to Thailand. Vietnam devalued the dong for the fourth time in 15 months last week.

Dung has urged officials to both “stabilize” the economy by tackling inflation and to support growth by taking steps to lower lending rates at commercial banks.

While an electricity price rise of 15% would boost inflation by a few tenths of a%age point, it may lead to more price increases following the dong devaluation and high global commodity prices, said Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore.

“You don’t want to get too many of these moves that individually aren’t that large, but once they are taken all together start to feed on themselves,” Hildebrandt said.

‘Wrath’

Vietnam’s government last year announced plans to build as many as 13 nuclear power plants with a capacity of 16,000 megawatts over the next two decades. That attracted interest across the globe from companies including Moscow-based Rosatom Corp. and China’s Guangdong Nuclear Power Group Co.

Nuclear projects will run into the same pricing issues, said Mark Hutchinson, a senior director at energy consulting company IHS CERA, based in Cambridge, Massachusetts. Any politician that boosts electricity prices steeply is “not going to be in office for very long,” he said.

“Some of these projects are going to get signed, but not enough,” Hutchinson said. “They would rather suffer blackouts that potentially hurt economic development rather than face the wrath of the populace.” – Bloomberg

Tags: Vietnam electricity, Vietnam energy, Vietnam power shortage