PLAN TO DEREGULATE VIETNAM'S POWER SECTOR LAGS DESPITE

UNCLAS SECTION 01 OF 02 HANOI 000211

DEPT FOR EAP/MLS AND EEB
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO

SIPDIS

E.O. 12958: N/A
TAGS: EAID ECON ENRG TRGY VM
SUBJECT: PLAN TO DEREGULATE VIETNAM'S POWER SECTOR LAGS DESPITE
SUPPLY SHORTAGES

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1. (U) Summary: The Government of Vietnam (GVN) raised retail
electricity rates by an average of around 9 percent from March 1 to
reflect higher costs of power generation and encourage private
investment in Vietnam's underfunded power sector. Vietnam expects
electricity demand to rise sharply over the medium term. Meeting
this demand will pose a serious challenge to the GVN, which is
studying a plan to liberalize Vietnam's antiquated and
state-subsidized power sector, a proposal that is opposed by the
state-run utility monopoly. Increasing the level of private
investment could prove difficult since foreign energy company
officials say the new tariff is not high enough to permit profitable
power generation, and current investors report ongoing barriers to
entry. End summary.

GVN INCREASES RETAIL TARIFF DESPITE RECESSION
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2. (U) Starting March 1, the GVN increased the average retail price
of electricity from VND 860/kWh (5 cents/kWh) to VND 948.5/kWh (5.56
cents/kWh),an increase of 8.92 percent. The new rate ranges from
VND 435 to 1900/kWh for industrial users and VND 600 to 1790/kWh for
residential customers. The government will continue to subsidize up
to 40 percent of the cost of electricity for poor and low-income
earners who use less than 50 kWh per month. The long-awaited rate
increase, which the government announced in 2008 and then postponed
as inflation soared to a high of 28 percent last year, comes as
Vietnam's economy has slumped due to the global recession.


3. (U) While some have criticized the rate increase, saying it would
exacerbate Vietnam's plummeting economic conditions, the government
asserted that a 10 percent or less increase would not negatively
affect the economy. Pham Manh Thang, the Director General of
Vietnam's Electricity Regulatory Agency (ERAV) said the former price
was based on economic data from 2005 and did not reflect inflation.
Deputy Prime Minister Hoang Trung Hai also defended the decision,
saying, "the increase is inevitable and may have even come too
late." Vice Minister of Industry and Trade (MOIT) Vu Huu Hao said
the price increase was needed to raise investment in Vietnam's
underfunded electricity sector.

THE DEREGULATION CHALLENGE
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4. (U) State-owned utility company Electricity of Vietnam (EVN)
currently accounts for more than 70 percent of Vietnam's power
generation, 100 percent of transmission and 95 percent of
distribution. MOIT, which exercises a regulatory role over
Vietnam's power sector, recently proposed to end EVN's public
monopoly by unbundling the utility company's generation,
transmission and distribution activities, and divesting the company
of its 17 power plants. Those plants, plus any plants that come
online through 2015 would be consolidated into five or six
independent, state-owned power companies, three of which EVN would
still control. Under the plan, none of the new power companies
would be allowed to generate more than 25 percent of Vietnam's
national capacity. MOIT says the proposal is in-line with the GVN's
three-phase deregulation roadmap, approved in 2006, whereby a
competitive electricity generation market would emerge by 2014, and
wholesale and retail markets by 2022.


5. (U) EVN, unhappy with the proposal, complained in a letter to the
government (that was subsequently released to the press) that
deregulation would be "inappropriate," endanger EVN's status as a
strong, state-owned economic group and put national energy security
at risk. EVN Deputy Director General Dinh Quang Tri said unbundling
companies from EVN before the new ventures had a chance to establish
financial credibility and management skills would jeopardize
critical new power projects. EVN, he said, was the only company in
Vietnam capable of operating the power plants at a competitive
cost.

UNTANGLING THE POWER LINES
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6. (U) Even if deregulation wins government approval, increasing the
level of private investment in Vietnam's power sector could prove
difficult. Current and potential investors report ongoing barriers
to entry in the sector, citing in particular the overly complicated
and ambiguous investment procedures. Dang Thi Hoang Yen, Chairwoman
of the Tan Tao Group, a local IPP developing a power project,
complained that investors must fulfill a litany of complicated
administrative procedures and win approval from multiple ministries
and agencies, even for projects already approved by the Prime
Minister.


7. (U) Low profitability is a second barrier. A recent report by

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the United Nations Conference on Trade and Development (UNCTAD)
noted that few foreign investors have been willing to invest in
Vietnam's power sector due to the lower than average electricity
tariff. In 2008, EVN purchased electricity from IPPs at 8-15 cents
per kWh and sold it to consumers at a government-set rate of 5 cents
per kWh. EVN was forced to make up these losses through its
profitable telecom and banking arms.


8. (U) Representatives from the American Chamber of Commerce in
Hanoi's Energy Committee said Vietnam's electricity tariff remains
below rates in neighboring countries even after the latest price
increase and could make it difficult to ensure profitability and
attract IPPs. The low tariff invariably leads to protracted
negotiations. Dinh La Thang, Chairman of state-run PetroVietnam
(PVN),said it took his company two years merely to negotiate an
electricity price for the 1,500 MW Ca Mau 1 and Ca Mau 2 gas-fired
power plants operated by PVN. Similarly, it took U.S. power company
AES nearly two years to negotiate a tariff price for AES's proposed
1,200 MW Mong Duong 2 power plant.


9. (U) Despite the barriers, Vietnam's power sector holds promise
for persistent investors. When EVN refused to take on 13
electricity projects last year, citing a lack of funding, several
local enterprises, including state-run PetroVietnam, Vinacomin and
six foreign companies, stepped forward to bid on the projects. As
the projects were already listed in the Electricity Master Plan, the
investors were not required to win approval for these ventures. In
November 2008, Deputy Prime Minister Hoang Trung Hai (who oversees
Vietnam's the energy sector) reallocated several coal-fired projects
to IPPs, including Malaysia's Janakusa, and additional opportunities
should be expected as the sector undergoes further deregulation.

MEANWHILE, EXPECT MORE BLACKOUTS
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10. (U) Even as the government mulls deregulation, Vietnam will
continue to suffer a deficit of electricity, even more so during the
dry season given the country's significant dependence on hydropower.
EVN has committed, however, to minimize disruptions in 2009. "This
is a serious issue that we need to deal with," said Vice Minister of
Planning and Investment Cao Viet Sinh. "If power projects fail to
meet the deadline, Vietnam's economic development will be severely
impacted in the years ahead." Observers point out that EVN may
succeed in minimizing blackouts not due to improved capacity and
efficiency, but merely due to decreasing demand and slumping
industrial production in 2009.


11. (U) Under its most recent plan, EVN expects electricity growth
rates to grow sharply over the medium-term due to industrial
expansion and increasing demand for consumer electrical products.
Vietnam generated 73.7 billion KWh of electricity in 2008 and plans
to provide the grid with around 83.2 billion kWh in 2009, of which
EVN will generate around 70 percent. IPPs, foreign-invested BOT
projects (build-operate-transfer) and electricity purchases from
China will fill the remaining 30 percent.


12. (U) Comment: Investors will participate in Vietnam's power
sector only if the electricity industry's structural, legal and
regulatory frameworks are in place. Competitive electricity prices
and long-term commercial terms also must be ensured. Given the
expected high demand for electricity in Vietnam over the next decade
and the country's limited success in attracting private investment
in the power sector to date, Post will continue to urge the GVN to
expedite plans for sector liberalization, since it would provide
opportunities for U.S. firms.

MICHALAK