Is Competition Always the Answer? A Case Study of Vietnam’s Power Sector

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Since 2001, the Vietnamese government has acknowledged the need to increase generation capacity in the electricity sector. With unprecedentedly growing demand of 14% per annum, the electricity industry, however, commonly fails to deliver, especially during peak hours and dry seasons. It is reported that ‘in the whole country there were 3,000 blackout incidents due to system overloading during the first 7 months of 2008’, equivalent to ’14 blackouts a day’ (Nguyen and Dapice, 2010). As a way to mitigate this chronic electricity shortage, the industry’s biggest player, Electricity Vietnam (EVN) has to buy in all that is produced domestically and import from neighbouring countries such as Laos and China. Yet, not only cannot EVN satisfy its primary objective of ensuring a secure electricity supply, but it also suffers significant annual financial losses of hundreds of million dollars. EVN claims that too low average pricing of electricity is the cause of this loss. In addition, audit reports reveal that EVN’s diversification policy had caused further losses.

The inefficiency in infrastructure investment and inadequacy in organizational management have caused anger amongst the public, creating an extremely negative attitude towards the traditional monopoly structure of the electricity sector. Utilising a popular measure, policy makers therefore choose to apply the ‘marketisation’ or liberalization model that is, in theory, similar to the liberalization model that has been implemented in the UK and EU since the 1990s. The main reasons behind the policy are: 1) to assist the government in infrastructure investment; 2) to expose EVN to competitive forces through encouraging private and foreign investment which would force it to improve its financial and operational performance; and 3) to provide affordable and stably-priced electricity. These 3 major objectives are thought to be the outcomes of introducing competition to the traditional monopolistic market structure. This causal link is, however, usually assumed rather than discussed and tested.

Actors in the Electricity Sector: Government and Policy-making
Under the Electricity Law of 2004 and the Prime Minister’s decision in 2005, the sector is moving towards a competitive generation market (with a single buyer), a fully competitive wholesale market and a competitive retail market. However, the liberalisation process of Vietnam’s electricity sector has been slow and painful. The master plan for sector reform has been written and rewritten several times. However, there are critical contradictions between the co-existing policies. First, in 2007, the Prime Minister declared that due to national security, the Vietnamese government needs to hold 100% ownership in the electricity transmission lines and large generation companies, and at least 50% ownership in medium-size generation companies. The state-owned companies will take up major positions in the sector. EVN is destined to be the single buyer, while PetroVietnam (gas-fired) and Vinacomin (coal-fired) have monopoly control of key fuels for thermal power generation. The structure leaves the market that is open to entry too small or too unattractive for foreign and large domestic private companies. The decision effectively closes the door to a proper liberalised sector as laid out by the Electricity Law.

Second, there is contradiction between the establishment of a competitive generation market as outlined by the Electricity Law and the signing of dollar-pegged Power Purchase Agreements (PPAs) between EVN and foreign power producers. Under such PPAs, these producers do not face any competition even when the generation market is open. In Europe, it has been ruled that PPAs are incompatible with liberalised markets. These contradictions in government policy undermine regulatory stability and worries foreign and private investors. This incoherence of sector policies makes investment even more risky in a business environment, which is already seen as high-risk.

International Agencies and Policy-pushing
Erdogdu (2011), who examined the electric power sector liberalization in 63 countries, from 1982 to 2009, shows that despite economic differences, a number of developing countries are progressing towards complete reform at a similar pace to developed countries. The key reason for this is that they are more inclined to accept World Bank loans in order to expand their capacity, and liberalization of the electric power sector is one of the conditionalities of such loans (Hall et al. 2009). A similar process can be observed in Vietnam. So far, the World Bank has made 16 loans to the energy sector in Vietnam, of which only 23% are for infrastructure purposes, while 77% is for sector reform (authors’ calculations based on World Bank data). The latest loan for a reform project, worth $200 million, was approved by the Bank in March 2012. The project especially targeted ‘electricity tariff reform’ and ‘development of a competitive power market and subsidy reduction’ (The World Bank Group-Program Document, 2012). The pressure on the Ministry of Industry and Trade (MOIT), the main recipient of World Bank loans, is therefore high, so that policy-makers are highly influenced by the constant background noise from the World Bank. Even though the Bank gives important assistance to the country for development projects, its policies and decisions are still controlled by major donors such as the US, UK and France, whose economic interests are built into these projects. It is not certain that the new policy proposal is also in the economic interests of Vietnam.

Competition and the Issue of Inefficiency
Bad managerial practices should be considered as one valid cause for the inefficiency of EVN and the bad image of state-owned companies in the public’s eyes. Another issue of inefficiency in the sector is the quality of the transmission system. The report by the Electricity Regulation Authority of Vietnam forecasted that in 2012, the electricity industry would be able to meet national demand. However, in major urban cities, there were still blackouts as a result of system overloading, which was designed for only 77% of the current generation capacity.

From 2001 to 2011, electricity supply grew in parallel with electricity consumption per capita. In 2012, there was a surge in power production but little change to actual electricity consumption (Figure 1). While system losses decreases consistently, the annual technical loss averaging 12% of output is still too high. In a World Bank’s report from 2011, Vietnam only ranks at 88 out of 125 countries on quality of electricity supply (based on system losses). Thus any efforts in increasing generation would be inadequate without properly maintaining and upgrading the transmission system.

Figure 1: Changes in Electricity Consumption, Production and System Losses in Vietnam from 2001 to 2012jenny.pngSources: Consumption per capita and T&D losses data from World Bank Data Archive, Electricity Production data from Enerdata Yearbook, Calculation by Author

Since the beginning 2012, the government has tried to combat the issue of operational inefficiency by changing the organizational structure of EVN to avoid unprofitable businesses and lack of investment incentives. To avoid financial loss, it also increased the price. In response to public anger at the waste of taxpayers’ money on inappropriate investment, EVN’s Chairman was removed from his position. His bad managerial practices include losses in business diversification and significant overdue debts with PetroVietnam and Vinacomin. Possible cases of corruption are not yet revealed or officially judged. Any efforts in creating competition and improving efficiency will be wasted if the roots of the problems are ignored, such as bad management of the corporation, inadequacy in infrastructure investment and alleged corruption.

The number of participating generators increased from 29 to 77 in the first year after the creation of Competitive Generation Market (CGM) in 2012. However, the increasing number of generators does not necessarily signal the increasing competitiveness of the wholesale market as the sector is dominated by SOEs. In addition, from 2020, with two nuclear plants in operation, the share of generating capacity by nuclear is expected to increase from 1.5% in 2020, to 6% in 2025 to 20-25% by 2050 (World Nuclear Association, 2012). And as expected from the Prime Minister’s decision in 2007, these nuclear plants will be state-owned. The future structure of the market is almost pre-determined, hence making it unattractive for private investors.

The Issue of Affordability
In 2011 the Prime Minister agreed to adjust the electricity price on the basis of actual costs, resulting in gradual price increases until the average prices would truly reflect the costs. Within one year of the Prime Minister’s decision, the price increased by 15.28%. EVN estimated that the 2012 price was around 62% less than the market price, for some inputs like gas, less than the production costs and was at an unsustainable low level compared to other countries. Yet, there are three other factors that will continue to push up the price of electricity in the short and medium term.

Firstly, there is the annual increase in base salaries. The base salary increased by 26% in early 2012 to make up for inflation in 2011 of 25% and by 13.6% in 2011 to make up for inflation of 11.75% in 2010 (calculations based on General Statistics Office of Vietnam, 2012). Input costs will increase and so will the electricity price. Secondly, the international price of oil, coal and gas inputs to electricity generation is likely to continue to rise, and the devaluation of the Vietnamese Dong will make these price rises even greater. Thirdly, the operation of new nuclear power plants in 2020, in contrast to what many people believe, will not reduce the price, because of the huge debt incurred in its construction will have to be paid off through the electricity price (World Nuclear Association, 2012).

Therefore, the retail price, if decided by the market mechanism, will sharply increase in the future – and it will constantly fluctuate under pressure of changes in input prices and the exchange rate. The clearest consequence of such increases is a continuous rise in living costs, which will hit poorest families the hardest. It will also increase costs for companies and so possibly have a negative effect on GDP.

The increase in the electricity price after the Prime Minister’s decision in 2011 shows that the government wants the sector to be able to finance itself. When the government budget is tightened and subsidies are re-allocated, negative economic and social impacts are likely to incur, hence offsetting the marginal financial gain by the withdrawal of subsidies. Simply, raising prices does not constitute an improvement in the economic situation.

The root causes of the sector’s issues need to be addressed thoroughly, as foreign and private investors do not have incentives to invest without government support. The leader in power market liberalisation – The UK government – has now embarked on reversing the its liberalization process, bringing the wholesale market back to central planning. While competition is commonly believed to be the product of liberalization and the driving force of an efficient market structure, the case of Vietnam illustrates that liberalization does not necessarily foster competition, and competition alone is not the only answer to the sector’s issues.

Works Cited

Jenny Tue Anh Nguyen is a visiting Post-Doctoral Fellow at the Center for International Development, Harvard Kennedy School.

Photo: Street Wires in Hanoi, Vietnam. By Mike Hauser.

4 thoughts on “Is Competition Always the Answer? A Case Study of Vietnam’s Power Sector

  1. Dear Tue Anh,
    Your analysis is really impressive to me and thanks for this comprehensive commentary. However, I think some points need to be updated, for example:
    (1). “In addition, from 2020, with two nuclear plants in operation, the share of generating capacity by nuclear is expected to increase from 1.5% in 2020, to 6% in 2025 to 20-25% by 2050 (World Nuclear Association, 2012). And as expected from the Prime Minister’s decision in 2007, these nuclear plants will be state-owned. The future structure of the market is almost pre-determined, hence making it unattractive for private investors”. Actually, the National Assembly approved on the 21st November 2016 (http://vnexpress.net/tin-tuc/thoi-su/hon-90-dai-bieu-quoc-hoi-tan-thanh-dung-du-an-dien-hat-nhan-3502801.html). I have a commentary on Tuoi Tre Weekend Magazine about this nuclear phase out here: http://cuoituan.tuoitre.vn/tin/van-de-su-kien/20161122/co-hoi-nao-cho-nang-luong-tai-tao/1220641.html
    (2). “The Issue of Affordability”: It is interesting to know that the retail tariff keeps unchanged from 2015 until now, with the average tariff around 0.076 US$/kWh. So I would suggest this session to cover from 2011 to the end of 2016 in order to reflect the affordability you wanted to highlight.
    The sentence “Thirdly, the operation of new nuclear power plants in 2020, in contrast to what many people believe, will not reduce the price, because of the huge debt incurred in its construction will have to be paid off through the electricity price” in this session may need to be updated because of (1) above.
    Anyway, I really enjoy reading your article and pleased to learn from you.
    All the best,
    Anh Thi

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  2. Thanks for your comments. The blog post was an abbreviated (briefly updated) version of a published article from 2013 so I am aware of its shortcomings. I agree that:
    1. It is wise that the Vietnamese government decided to phase out nuclear power. However, with or without these nuclear power plants, the market structure is basically pre-determined and foreseeably remains unchanged.

    2. In terms of affordability, I have a book chapter coming on affordability of electricity and relation to ownership types in the EU which could pave the way for a future article on affordability of electricity in Vietnam.

    3. The ‘debt’ carried by construction of nuclear power plants could have been major. However, with or without it, the debt being born by the power sector is already increasing the tariffs. I have a paper on the opportunity costs of market liberalisation in Vietnam Power Sector which could complement this claim.

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  3. Sorry, I meant the complete sentence I wanted to say is “Actually, the National Assembly approved on the 21st November 2016 to stop development of the two planned nuclear power plants in Vietnam”

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  4. Hi Tue Anh, you are totally right. All points you figured out are critical energy issues of the country. I have other commentaries to share with you:
    (1).Retail electricity tariff problem::http://cuoituan.tuoitre.vn/tin/van-de-su-kien/20151005/dau-chi-la-co-cau-bieu-gia/980188.html
    (2). Power planning problem because of heavy dependence on coal-fired power: http://tuoitre.vn/tin/tuoi-tre-cuoi-tuan/van-de-su-kien/chuyen-de/20150703/mau-thuan-ve-tam-nhin/771531.html
    Cheers,
    Anh Thi

    Like

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