Vietnam will now allow high-energy-consuming factories to purchase electricity directly from wind and solar power producers. This move helps large companies meet their climate goals and alleviates the burden on the country’s overtaxed grid.
Vietnam's Energy Game-Changer
Earlier this month, the government approved a decree permitting Direct Power Purchase Agreements (DPPAs). This decree removes the previous regulation that required all power consumers to rely solely on the state-owned utility, Vietnam Electricity (EVN), and its subsidiaries. These entities distribute electricity at government-fixed rates.
This policy change in Vietnam mirrors a broader trend across Southeast Asia, where centralized electricity markets are gradually being liberalized. DPPAs are gaining momentum regionally.
Kyeongho Lee, head of Asia Pacific Power Research at Wood Mackenzie, highlights that power generation under such agreements rose from 15 gigawatts in 2021 to 26 gigawatts in 2023. Significant growth in India, Australia, and Taiwan accounts for over 80% of the total capacity under contract.
Vietnam's decision to allow DPPAs addresses a critical concern for foreign investors, potentially making the country a more attractive alternative to China for supply chain diversification. Foreign investors, crucial to Vietnam's rise as a major exporter, had long advocated for this change.
Powering Up: What's Next for Vietnam?
"The DPPA will dramatically alter this status quo," commented Giles Cooper, a partner at the international law firm Allens in Hanoi, specializing in energy policy. Without this change, it was "difficult, if not impossible" for companies to fulfill their commitments to move away from fossil fuels. With more countries taxing carbon emissions, companies that can demonstrate their factories use clean energy can gain a "considerable competitive advantage," said Cooper, who contributed to drafting the law.
To understand how the policy will be implemented, let’s explore the two main models for DPPAs in Vietnam:
- Direct Wire Model: Large electricity consumers can connect to a nearby renewable power plant through a direct transmission line, purchasing electricity at an agreed rate, ensuring it is entirely clean energy without EVN involvement.
- Virtual Model: For factories unable to build a nearby solar or wind farm, companies can purchase clean power "virtually." They buy energy from EVN, which sources it from the solar or wind farm, with the buyer covering any cost differences between the government rate and the agreed purchasing rate.
While the DPPA framework offers promising opportunities, its successful execution faces several challenges, primarily Vietnam’s aging electrical grid infrastructure. The country estimates it needs $15 billion to upgrade its grid, which has lagged behind the rapid expansion of clean power generation.
Tech Giants Plug into Green Grid
Several major multinational corporations have shown keen interest in this new policy, viewing it as vital for meeting their global sustainability commitments.
According to a survey by Vietnam's Ministry of Industry and Trade, about 20 large companies are interested in buying clean energy directly from producers, with a total demand estimated at nearly 1 gigawatt of energy.
Apple Inc., which shifted some manufacturing from China to Vietnam, praised the reform as a vital step towards a cleaner grid. Bessma Aljarbou, head of Apple's Supplier Carbon Solutions, said the plan offers suppliers a chance to support Vietnam’s carbon neutrality goal by 2050 and align with Apple’s 2030 carbon neutrality goal.
To understand the potential impact of DPPAs, consider Vietnam’s recent energy landscape and its transition challenges. Between 2015-2023, Vietnam's solar and wind power use increased tenfold to 13% of total electricity generation. However, this clean energy growth has slowed due to policy hurdles and political uncertainty.
Meanwhile, the use of polluting fossil fuels, which had been declining, rose to 53.6% of total power generation in 2023 from 49.7% the previous year, according to data from U.K.-based energy think tank Ember.
Powering Up: What's Next for Vietnam?
The new directive could help reverse this trend by providing guarantees for energy producers, ensuring purchasers for specific wind and solar projects. Dinita Setyawati, Senior Electricity Policy Analyst for Southeast Asia at Ember, noted that the law could unlock significant interest in building solar or wind farms in Vietnam.
The introduction of DPPAs marks a significant shift in Vietnam’s energy policy. By providing more certainty for renewable energy projects and enabling major corporations to meet their sustainability goals, this mechanism could play a crucial role in accelerating Vietnam’s transition to cleaner energy sources.
However, the success of this initiative will largely depend on how effectively the country addresses its infrastructure challenges and balances the interests of all stakeholders in its rapidly evolving energy sector.