Experts recommend ways to attract investors during energy crunch
Experts at the Asian Development Bank have recommended various measures to improve the investment environment for private domestic and international investors in the energy sector to avoid the threat to energy security created by inadequate infrastructure due to low private investment.
In their working paper, called “Avoiding energy insecurity by promoting private investment – the case of the Vietnamese power sector,” two experts stated that with its high demand for energy, particularly electricity, Vietnam is a capital-hungry country for the power sector.
Given the new position of public finance, though official development assistance and preferential loans were previously a major source of energy investment, they have reduced significantly.
“The country will see a threat to energy security if sufficient capital for infrastructure and new energy, such as renewable energy (RE), cannot be raised,” remarked the experts.
Injecting capital into the energy sector will enhance electricity security by reducing the increasing reliance on imports with a lack of energy generation diversification, while simultaneously unlocking the potential for RE deployment in the country.
“Energy insecurity is an apparent threat to the Vietnamese economy without the timely involvement of the private sector, as forecasts indicate that this type of capital will account for 75% of the capital required in the power sector until 2030,” stressed the experts.
Among the barriers that are hindering the participation of the private sector, noneconomic ones, including legal or regulatory obstacles with a low level of certainty and issues concerning grid access for private projects, are the most pressing.
Instability and inconsistency in the energy policy, with weakness in power purchase agreement (PPA) terms regarding the State-owned Vietnam Electricity (EVN), make the investment decision tougher and costly.
The first recommendation is to address the noneconomic barriers. “Rather than just focusing on the financial incentives, such as the feed-in-tariff, which has become the agenda in the country with a debate related to the rate and how to distribute it, addressing the noneconomic concerns is more important,” stated the authors.
They explained that an energy sector policy that encourages the involvement of the private sector should aim to shift incentives to value medium- and long-term planning by enabling countries to take advantage of the carbon financing available from well-developed countries in this field.
For the sake of private investment acceleration, increasing the creditworthiness and financial health of EVN as the sole buyer in a PPA is vital, and it will create a healthy and positive image of the offtaker in PPA contracts that directly affects the confidence and profitability evaluation of the investor.
Moreover, the country should form a competitive energy market more quickly by speeding up the reform and restructuring of the energy market.
“The functionality of the wholesale and retail electricity market, to which the Government is committed, is fundamental for the long-term investment consideration of the private sector, particularly the foreign one,” the experts noted.
A functional, transparent and competitive market will enable investors to forecast electricity prices better in the future, so it is the key to decision making for PPA contracts, according to the experts.
The second recommendation is to consider employing an innovative contract, such as a direct power purchase agreement. This type of contract allows private electricity buyers and sellers to sign an agreement directly for electricity transactions.
Meanwhile, the third recommendation is to improve the functionality of the domestic financial market. To attract more private sector involvement in energy development, particularly RE, the Government should use key facets to enhance the function of the domestic financial market.
These include developing the domestic bond market as a basis for long-term lending and a stepping stone to green bond issuance and strengthening the capacity of financial and banking institutions in funding RE energy projects that require long-term loan access and expertise in power sector credit appraisal.
Other solutions include utilizing the spillover effect of the energy supply in the form of a tax return to the private sector.
The Government often regulates electricity tariffs, which makes it difficult for private financial institutions, such as pension funds or insurance companies, to finance energy projects.
Hence, it is necessary to utilize the spillover effects originally created by energy supplies and refund the tax revenues to the investors in energy projects.
The establishment of a credit guarantee scheme is also needed to reduce the risk of investment in energy projects, especially renewable energy projects, to incentivize private investment.