To attract investment in power development

Electricity, as a critical commodity and the “input of all inputs”, plays an essential role in economic and social development and in ensuring national security. Recognizing this, the Vietnamese Government has consistently emphasized that “electricity must be ensured under all circumstances.” It has issued decisive directives, focusing on promoting investment and diversifying resources in electricity production, supply, and distribution, to encourage long-term investments in the power sector.

However, despite the advantages in attracting investment, significant challenges remain. The most pressing issues are the unreasonable electricity pricing structure and calculation methods, which remain below market rates despite being subject to fluctuating and high input costs like coal, oil, and gas.

With low-cost electricity sources nearly exhausted, Vietnam’s National Power Development Plan VIII (PDP8) focuses on developing gas-fired and offshore wind power, which are costly and require substantial capital. Electricity of Vietnam (EVN) has made efforts to reduce costs, but the current pricing system limits the sector’s ability to invest in further development, making it difficult to attract both domestic and foreign investment.

The key challenge is finding solutions to attract investment, particularly regarding policies, pricing structures, and implementing a market-based pricing system for electricity.

Challenges in electricity pricing

At a recent seminar on “Breakthroughs to Attract Investment in the Power Sector”, National Assembly (NA) delegate  Phan Duc Hieu, a Standing Member of the NA’s Economic Committee, emphasized the significant role of the power sector in economic development, social welfare, and the well-being of the population. He noted that the power sector is not only crucial in Vietnam but also essential in every country.

Over the past 20 years, the domestic power sector has enhanced its capacity and contributed positively to economic growth and social stability. Over the last five years, Vietnam’s electricity access index, one of the key indicators for assessing the quality of the business environment in terms of attracting investment, has shown remarkable improvement. This progress has been widely recognized.

However, there are still several issues and limitations that need to be addressed. Mr. Hieu highlighted four key challenges: slow policy changes; lack of consistency in implementing strong reforms in the wholesale electricity market while delaying reforms in retail electricity; legal uncertainties that cause investor concerns; and insufficient market mechanisms in electricity development.

Mr. Nguyen Tien Thoa, former Director of the Department of Price Management at the Ministry of Finance, added that there are significant issues with electricity pricing in Vietnam. The overarching issue is that electricity prices have not been set according to market mechanisms. Currently, all input costs for electricity production, such as coal, gas, and oil, as well as exchange rates, follow market trends, but output prices do not reflect these cost fluctuations. Adjustments to prices are sometimes delayed or inaccurately calculated, failing to cover the full cost of electricity production and business. As a result, the electricity sector faces significant challenges.

“We must fundamentally reform electricity pricing,” he emphasized. “We need to ensure that prices are calculated correctly and sufficiently to cover costs while also encouraging investment, ensuring social welfare, maintaining energy security, and controlling inflation. Balancing these often conflicting objectives is challenging, and we cannot always achieve all of our goals. Therefore, the role of electricity pricing must be carefully considered.”

Electricity prices should be determined based on market principles and must be transparent. The Politburo, the government, and the NA have all stressed the need for transparency in electricity pricing and the removal of all barriers. It is important to note that the electricity market should not be completely deregulated; the State must still act as regulator and certain areas must remain under State control where private participation is limited. “We must acknowledge this reality,” Mr. Thoa believes. “Consumers are primarily concerned with having a reliable electricity supply. I agree that the Law on Electricity needs to be revised and that fundamental pricing reforms are necessary.”

Additionally, there are still issues with the current cross-subsidization mechanism in electricity pricing, which has been prolonged, and the roadmap for resolving these issues remains unclear. Cross-subsidization occurs among residential electricity consumers, where higher consumption subsidizes lower consumption levels, and between residential and production electricity prices to some extent. Production prices are naturally lower because low-voltage electricity consumption is more expensive, but there is still some cross-subsidization between residential and production electricity. The cross-subsidization mechanism between regions is also problematic, as electricity in island communes and districts often costs VND7,000-9,000 ($0.28-$0.36) per kWh, but it is sold for VND1,000-2,000 ($0.04-$0.08) per kWh, meaning that certain regions subsidize other regions.

Accurate pricing to promote investment

Associate Professor Bui Xuan Hoi, an energy economics expert, believes Vietnam’s electricity pricing system tries to achieve too many objectives, unlike other countries where these aspects are more distinctly separated. It is essential to differentiate between public service activities and market-driven operations, as this would bring transparency to the electricity sector and encourage economic participation, thereby supporting national energy security.

Mr. Hoi offers two assessments to forecast electricity prices. First, despite all efforts, the current energy structure cannot disregard the essential role of base load power sources like coal and gas. Even with the integration of renewable energy, base load power remains vital. Given the rising costs of input fuels, the price of electricity supply will undoubtedly increase. The ongoing geopolitical tensions make it unrealistic to expect input prices to decrease soon; instead, they are likely to stabilize at a higher, new level, which we must accept.

Second, as Vietnam aims for net-zero emissions by 2050, and with other countries also striving for clean energy, it is important to recognize that clean energy does not come cheaply. Solar power can generate electricity for a maximum of four hours a day, and wind power is unreliable, so it is unrealistic to expect these sources to be inexpensive. “In summary, due to global geopolitical fluctuations and energy transition trends, electricity supply costs will inevitably rise,” Mr. Hoi added.

Investment concerns and recommendations

From the perspective of an investor in electricity sources as well as a production unit, Mr. Nguyen Dinh Tuan, Director of the Son Dong Thermal Power Company at the Vietnam National Coal and Mineral Industries Holding Corporation (Vinacomin), expressed concern that if electricity prices aren’t calculated accurately and comprehensively, the power sector and energy companies could face cash flow imbalances, making reinvestment challenging. He suggested that price adjustments be linked across the entire chain, from input fuel costs to electricity prices.

For coal-fired power, which is tied to fuel prices and the net-zero transition, a flexible adjustment mechanism is needed. Additionally, a reliable transmission system is crucial to balance power sources across regions and times. Finally, the mechanism for buying and selling electricity is a challenge that must be resolved to attract more investment into the sector.

Looking at the bigger picture, electricity pricing isn’t just a concern for the power sector; it has broader implications for the economy’s operation and restructuring. When electricity prices are managed properly and reasonably, they can encourage green production transitions and energy efficiency, and attract investment in power generation, fostering a circular, green economy in line with net-zero goals.

To achieve this, Mr. Hieu recommended four key actions: accurately and comprehensively calculating electricity pricing while amending the Law on Electricity; clearly separating policy objectives to avoid “distorting” electricity prices; promoting market principles and increasing competition at all stages of the power sector; and ensuring the pricing framework encourages efficient electricity use.

Mr. Hoi pointed out that the power sector must grow every year, especially in developing countries like Vietnam. If electricity prices are set below production costs, the sector will suffer losses, and the government will lose capital. Conversely, profitability in the sector allows for reinvestment and expansion. The PDP8 is ambitious, but continuing with current pricing practices will make its implementation difficult.

Mr. Thoa also highlighted the ongoing presence of administrative barriers, such as the 17 procedures in the old Law on Electricity related to power investment. All such barriers must be eliminated to move towards more market-oriented practices.

Thus, electricity pricing and investment in the power sector are closely interconnected and mutually reinforcing. Unreasonable pricing not only limits the sector’s ability to invest and grow but also fails to pressure companies to innovate or improve energy efficiency.

On the other hand, accurate and comprehensive pricing would provide substantial resources for reinvestment and expansion in the sector, while also promoting efficient and rational electricity use. Therefore, ensuring accurate and comprehensive pricing is crucial for the sustainable development of both the power sector and the broader economy, as well as for achieving social objectives.