Solar Energy Development in Vietnam: Still Risky Business

Truong Ky

16:44 26/07/2016


Vietnam has a lot of potential to develop solar energy sources to supply the national power grid. However, such investment poses significant risks for developers and there are major changes Vietnam has to make in order to attract more investors.

Solar Energy Development in Vietnam: Still Risky Business

The massive dip in solar panel production costs in recent years is consumers' joy but an investors' outcry.

According to the Solar Energy Expert Survey Vietnam 2016 published by Eurocham, Vietnam has potential to develop solar energy (91% of Vietnam’s solar irradiation was considered “Good” or “Very Good”) despite being in a very competitive region (Southeast and South Asia).

However, regulatory impediments, low profitability and power buyer credit risk still prove challenging for further development.

Solar experts from Southeast Asia expressed a key concern in developing solar energy in Vietnam is the need of more involvement of the private sector.

According to the survey, 71% of experts agreed that public sector’s sponsored project can crowd out the private sector, while 85% believed that private sector projects are too expensive to develop than private sector's ones.

Another pressing concern raised by experts is the need to change Vietnamese tariffs system for power provider. Specifically, the feed-in tariff needs to increase from 14 USD cents/kWh to 17 USD cents/kWh.

Feed-in tariff is a policy aiming to accelerate investment in renewable energy sources which is solar energy in this case. The purpose of feed-in tariff is to provide cost-based compensation to renewable energy producers, providing price certainty and long-term contracts that will help finance these types of projects.

Despite such impediments, solar energy develop in Vietnam still proves to be lucrative enough for investors who are willing to bear the risk.

A billion-dollar solar energy project was announced weeks ago by JA Solar (China). The Chinese investor aims to rent 88 hectares in the Quang Chau Industrial Zone (Bac Giang Province) to build a solar energy farm. According to JA Solar, the first phase of the project will cost 300 million USD.

The billion-dollar project appears to be a big step toward greener energy for Vietnam, given the scale of the project. However, JA Solar is not the first player to try to enter the solar energy playground.

Many investors have come before with big budget projects but they quickly withdrew only months after initial investments.

Back in 2011, First Solar announced a 1,2 billion USD solar energy project in Vietnam but eventually closed down all operations mere eight months later.

Other failed investments include a 50 million USD project by Boway (China) in 2014; a 300 million USD project by Worldtech and Global Sphere (UAE) in 2013; a 390 million USD project by IC Energy in 2011, etc.

These projects faced complications indicated by “imbalance between supply and demand”, as quoted by the media. Much of this imbalance lies in the cost of installing solar panels. According to the International Renewable Energy Agency (IRENA), costs of solar energy panels have reduced 89% since 2010, and will continue to reduce up to 59% more in the next 10 years.

A lower production cost means lower price for consumers and lower profit for producers. This complication is pretty much the reason why First Solar left Vietnam back in 2011.

Despite all that, global demand for solar energy is going to keep soaring. IRENA forecasts the solar energy industry will expand much more in the next 15 years, with demand expected to jump from 2% to 13% in 2030.

Thus, the rise of solar energy use will be very lucrative to producers who can optimize lower costs and apply economy of scale in production. The success on JA Solar’s recent investment relies heavily on this ability to manage costs to make a profit for its own.

For Vietnam, attracting more big-budget solar energy projects like JA Solar requires a consolidated effort of all stakeholders in the clean energy industry to minimize risk for the private sector.

The government should also raise the feed-in tariff in an attempt to make investments like this more attractive for developers. The trade-off for this is higher energy price off-grid for users at first, but economy of scale will lower the price eventually.

Competition for this type of investment is intense in Southeast Asia. The Philippines and Thailand are considered to be more attractive than Vietnam because of a more favorable return versus risk ratio.

Therefore, Vietnam should recognize this caveat and lead the charge to a clear and direct approach to develop Vietnam’s solar energy market and promote the private sector to have better access and standing in the market.

Only then will Vietnam have a competitive edge over neighboring countries in solar energy development, avoid massive investment failures that only hurts Vietnam’s portfolio and be able to provide the people with a reasonably priced renewable energy source.