Hanoi, 19/09/2014 Ingmar Stelter, Program Manager Werner Kossmann, Chief Technical Advisor GIZ Viet Nam Energy Support Program Energy Sector Development Partners Coordination

1. Seite 1
Support Mechanisms for RE
Development in Viet Nam
Hanoi, 19/09/2014
Ingmar Stelter, Program Manager
Werner Kossmann, Chief Technical Advisor
GIZ Viet Nam Energy Support Program

2. Seite 2
Technical Cooperation in Viet Nam

3. National Strategy
PDP VII objectives on RE: Increase in electricity produced from RE sources
2020 2030
5.6% 9.4%
500 MW
1000 MW
2000 MW
6200 MW
2700 MW
Biomass Wind Biomass Wind
5620 MW
Other RE
Other RE
Planned Installed Capacity
Other RE: Biogas, Waste-to-Energy, Solar PV/ST, SHP etc.
Source: PDP 7
19.09.2014 Energy Sector Development Partners Coordination Page 3

4. Barriers for RE Development in Viet Nam
Lack of national
(comprehensive) law
for RE
Low electricity price
Limited data
availability (and poor
data quality)
Limited capacities on
central and provincial
level
Difficult access to
information
Limited access to
financing (equity &
loans)
Complex and unclear
procedures for RE
investments
19.09.2014 Energy Sector Development Partners Coordination Page 4

5. Existing Support Mechanisms for RE – I/II
SHP Wind Power
Decision 18/2008/QD-TTg (18.07.2008)
• In 2014: 2.7 – 3.2 US-Cents/kWh (depending on
season and daytime)
• Avoided-Cost-Tariff, varied by year
• Calculated annually based on 1 kWh electricity
avoided from the most expensive power plant
connected to the national grid
• Duration of PPA: 20 Years
Decision 37/2011/QD-TTg (29.06.2011)
• Feed-in-Tariff for Wind Power
• Tariff: 7,8 US-Cents/kWh (6.8+1)
• Duration of PPA: 20 Years
• GIZ-supported; currently under revision
19.09.2014 Energy Sector Development Partners Coordination Page 5

6. Existing Support Mechanisms for RE – II/II
Biomass Solid Waste
Decision 24/2014/QD-TTg (29.06.2014)
• FiT for electricity from CHP-Biomass
Power: 5.8 US-Cents/kWh
• Avoided-Cost Tariff for electricity from
other Biomass plants
• Annually calculated based on the avoided
cost for 1 kWh electricity from imported
coal
• Duration of PPA: 20 Years
• GIZ-supported
Decision: 31/2014/QD-TTg (05.05.2014)
• Feed-in-Tariff for electricity from MSW
• Incineration: 10.05 US-Cents/kWh
• Landfill-Gas: 7.28 US-Cents/kWh
• Duration of PPA: 20 Years
• GIZ-supported
19.09.2014 Energy Sector Development Partners Coordination Page 6

7. Additional Incentive Mechanisms for RE
• Corporate income tax
• Years 1-4: tax exemption
• Years 5-13: 50% tax reduction
• Import tax (goods, machinery etc.)
• Varying levels of import tax, depending on type of imported goods
• Exemption on goods forming fixed assets, which cannot be
produced locally
• Waiving of land use/lease fees
• Land is provided for free as part of the licensing agreement
 These are substantial financial incentives for project developers.
 However, in a situation of financial stress, tax incentives cannot
cushion liquidity problems as there are no tax payments to be made.
19.09.2014 Energy Sector Development Partners Coordination Page 7

8. Revision of the support mechanism for wind – I/III
• Methodology:
• Qualitative: interviews, questionnaires, assessment of exist. framework
• Quantitative: wind data, pre-/feasibility studies, international comparison
• General findings/recommendations (excerpt):
• FiT payment system should be a one-stop-shop (not VNEPF+FiT)
• Government guarantee for payments
• Better wind speed measurements and improved standards are required
• Enforce standard agreements for network connection and power
purchase
19.09.2014 Energy Sector Development Partners Coordination Page 8

9. Revision of the support mechanism for wind – II/III
• Basis for analysis:
• PDP target: 1GW wind power by 2020 (currently: ca. 50MW)
• Assumptions for CapEx, O&M, Capacity Factor: based on P/FS,
questionnaires, international experience
• Required investment and assumed investor structure:
• 1GW by 2020 = ca. US$ 2.1 billion over the next 6 years
• At average debt level of 70% => US$ 630m equity and 1.47b debt
• This investment level cannot (should not) be reached with public
investment only.
• Assumed investor types: highly-subsidized, strategic, fully commercial
19.09.2014 Energy Sector Development Partners Coordination Page 9

10. Revision of the support mechanism for wind – III/III
• FiT calculation:
• All three investor types must be targeted with the FiT
• Assumed IRR: 10% (international experience)
• Basis for FiT calculation: Levelized cost of electricity (LEC)
• Also included: additional incentives like tax breaks etc.
• Result:
• Proposed FiT for on-shore installations: US-cents 10.4 / kWh
• Proposed funding scheme: Tariff-funded, i.e. through a levy on the
electricity price: for 1GW by 2020 => less than 5VND/kWh
19.09.2014 Energy Sector Development Partners Coordination Page 10

11. Bioenergy technologies applicable in Vietnam
Biomass
- Sugarcane bagasse
- Rice straw/husk
- Timber waste
Biogas
- Animal manure
- Industrial wastewater
- HDPE covered lagoon
Municipal Solid Waste
- Incineration
- Landfill Gas
19.09.2014 Energy Sector Development Partners Coordination Page 11

12. FiT for non-CHP biomass power (avoided cost tariff)
Government opted for the avoided cost tariff based on imported coal as
reference price for biomass
Reason to apply an avoided cost tariff based on imported coal:
• Coal thermal power plant has the highest share in power mix
• Avoid electricity generated from these plants
• Biomass power plants as substitution to provide base load in the system
Problem:
• Annually calculated and issued
• Fluctuating coal prices
• Inflexible in combination with 20 years PPA
19.09.2014 Energy Sector Development Partners Coordination Page 12

13. Comparison of regulated prices with proposed levels for
Bioenergy
Technology Proposed
purchasing price
(US-Cents/kWh)
Regulated level (US-Cents/
kWh)
Sugarcane bagasse 5.6 5.8
Rice husk 7.34
Avoided cost based
tariff
Rice straw 10.79
Timber waste 8.77
SW - Landfill gas 7.28 7.28
SW – Incineration 10.05 10.05
19.09.2014 Energy Sector Development Partners Coordination Page 13

14. Thank you for your attention!!
Werner Kossmann Ingmar Stelter
werner.Kossmann@giz.de ingmar.stelter@giz.de
04 39 41 26 05 - 15 04 39 34 49 51 - 114
19.09.2014 Energy Sector Development Partners Coordination Page 14

15. Backup: Installed capacity of electricity sources (2013)
Source Capacity (MW) Rate (%)
Big hydropower 13,260 43.21
Coal thermo-electric 7,116 23.19
Gas thermo-electric 7,446 2.97
Oil thermo-electric 912 0.22
RE
Small hydropower (≤ 30MW) 1,670 5.44
Wind 52 0.18
Biomass 150 0.49
Biogas/MSW 4 0.01
Solar PV 4 0.01
Total 30,684
Share of RE:
6.13%
Source: GDE 2014
19.09.2014 Energy Sector Development Partners Coordination Page 15

16. Backup: Electricity production (2013)
Source Output (GWh) Rate (%)
Big hydropower 56,943 40.51
Coal thermo-electric 26.843 20.93
Gas thermo-electric 42,650 33.26
Oil thermo-electric 95 0.07
Others 249 0.19
Exported 1,337 1.04
Diesel 7 -
Small hydropower 4,989 3.89
Wind 62 est. 0,05
Bioenergy (Biomass, -gas,
47 est. 0,04
MSW)
Solar PV
Total 128,228
Share of RE:
3.98%
Source: GDE 2014
19.09.2014 Energy Sector Development Partners Coordination Page 16

17. 5.2 FiT calculations
The following assumptions result from the analysis of the
feasibility studies and questionnaires
• Average CapEx: 2.0 USD Mio. /MW
• Average O&M cost 35,000 USD / MW per year
• Average capacity factor: 30%
This is in line with international experience!
19.09.2014 Energy Sector Development Partners Coordination Page 17

18. 5.2 FiT calculations; international benchmark: CapEx
19.09.2014 Energy Sector Development Partners Coordination Page 18

19. 5.2 FiT calculations; international benchmark: OpEx
19.09.2014 Energy Sector Development Partners Coordination Page 19

20. 5.2 FiT calculations; international benchmark: Capacity
Factor
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21. 5.2 FiT calculations
• Levelized Electricity Cost (LEC) as basis of analysis
• LEC is function of CapEx, discounted OM (OpEx) and total electricity
production (Capacity factor)
• LEC(푰푹푹) =
푪풂풑푬풙+푷푽푶풑푬풙(푰푹푹)
푷푽푬풍풆풄(푰푹푹)
• There is a direct relationship between internal rate of return (IRR) and
LEC
• According to intl. experience, investors typically demand a project
IRR of 10%, resulting in an LEC of US Cent 10.4
19.09.2014 Energy Sector Development Partners Coordination Page 21

22. 5.2 FiT calculations
Sensitivities derived from feasibility studies and questionnaires
Scenario CapEx [million USD/MW] O&M [T USD/MW*year] Capacity Factor
Base
2.00 35.00 30.0%
case
CapEx+ 2.25 35.00 30.0%
CapEx- 1.65 35.00 30.0%
O&M+ 2.00 45.00 30.0%
O&M- 2.00 25.00 30.0%
Capacity+ 2.00 35.00 35.0%
Capacity- 2.00 35.00 25.0%
19.09.2014 Energy Sector Development Partners Coordination Page 22

23. 5.2 FiT calculations
Scenario LEC
Base Case 10.39
CapEx+ 11.51
CapEx- 8.83
O&M+ 10.80
O&M- 9.98
Capacity+ 8.91
Capacity- 12.47
Min. value 8.83
Max. value 12.47
19.09.2014 Energy Sector Development Partners Coordination Page 23

24. 5.3 Financing properties for developing the national
wind power market
a. Target installation of 1 GW till 2020 requires investment amount of
about USD 2.1 billion over six years.
b. At average debt level of 70% this translates into:
• USD 630 million equity and
• USD 1,470 million debt
19.09.2014 Energy Sector Development Partners Coordination Page 24

25. 5.4 Developing the national wind power market by
targeting diverse investor types
Market is assumed to be developed by mixture of three investor types
i. Highly subsidized investors like ODAs: access debt funding at
interest rates of 1%-2% and demand single digit project IRRs. These
early movers may provide funding of one third of target capacity and
lay foundation of wind development by boosting synergy effects
ii. Strategic investors: like turbine manufactures, large industry
enterprises and sovereign wealth funds: access pools of debt funding
in the range of 6% and accept projects IRRs of about 10%.
iii. Fully commercial investors: have to resort to local loans at interest
rates of 10% and above and demand two digit project IRRs. They
require additional incentives like tax breaks.
19.09.2014 Energy Sector Development Partners Coordination Page 25

26. 5.5 Additional regulatory incentives have been
considered and quantified at calculated FiT-level
Tax effects:
a. Reduced corporate tax contributes by 0.3 US Cent/kWh to FiT
b. Exemption from import tax e.g., 10% tax break corresponds to FiT
surplus of 0.7-1.0 US Cent/kWh
19.09.2014 Energy Sector Development Partners Coordination Page 26

27. 5.6 FiT funding for 1 GW target installation
Funding requirements for 1GW by 2020 at US 10.4Cent/kWh
Description 2016 2020 2021 2030
FIT 10,4 10,4 9,4 9,4
ttl Energy Sold TWh 158 243 273 545
Wind Energy generated GWh 0 2628 4021 16556
Average System Cost 7,7 8,8 9,28 10
TTL Cost demand for funding Mio USD 0 42 46 -73
Levy per kWh in VND 0 3,7 3,5 -2,8
19.09.2014 Energy Sector Development Partners Coordination Page 27

28. 5.6 FiT funding for 1 GW target installation (cont.)
Funding sources of FiT for 1 GW target installation
Tariff funded Tax funded
Advantage Disadvantage Advantage Disadvantage
• Transparency
of subsidies
• Independent
of budgetary
needs
Requires “fair”
allocation of
costs of
customer
segments
• Independent
of electricity
prices for
customers
• More
flexibility
with
adjustments
Potential
regular disputes
with MoF over
budget
availability, and
thus
uncertainties for
investors
19.09.2014 Energy Sector Development Partners Coordination Page 28

29. Levelized costs for Bioenergy based power plants
Technology Levelized costs in US-Cents/kWh
Base (~ 10% IRR) Low (~ 8% IRR) High (~ 12% IRR)
Biomass Power Plant
Sugarcane bagasse 5.6 5.15 5.85
Rice husk 7.34 6.87 7.84
Rice straw 10.79 10.35 11.27
Timber waste 8.77 8.35 9.22
Biogas Power Plant
Animal manure 7.72 7.11 8.36
Industrial wastewater 12.29 11.20 13.31
HDPE covered lagoon 6.12 5.69 6.57
SW Power Plant
Landfill gas 7.28 6.65 7.95
Incineration 10.05 8.8 11.39
19.09.2014 Energy Sector Development Partners Coordination Page 29