Expert: Increase electricity prices at a cost-effective level to attract investment

Mr. Nguyen Xuan Thanh said that electricity prices need to fully account for production costs if we want to have a green economic transition and increase renewable energy.

This comment was made by Mr. Nguyen Xuan Thanh, Lecturer at Fulbright School of Public Policy and Management Vietnam, at the plenary session of the Vietnam Economic Forum 2023 on the afternoon of September 19.

According to Mr. Thanh, more and more new energy sources are entering the power system, and these are more expensive than the average cost and current electricity price. It is estimated that if the cost of renewable energy is 5-7 cents per kWh, plus transmission, the retail price needs to increase to 10-12 cents per kWh (including retail and distribution costs). Meanwhile, the average retail price of electricity is currently 1,920.37 VND per kWh (equivalent to about 8 cents). That is, electricity prices need to be updated, fully calculating new and arising production costs.

"Of course, increasing electricity prices will lead to negative reactions in society, but there will be no green transformation. It is impossible to develop renewable energy without a roadmap to increase electricity prices at a level attractive enough for investment," said a lecturer at Fulbright School.

Vietnam is moving towards a green economy, so according to Fulbright lecturer, one of the policy priorities is to resolutely implement the roadmap for increasing electricity prices and energy prices in the direction of calculating full economic and social costs. This is to limit, or at least not give preferential treatment to economic sectors that are intensive in electricity and force businesses to innovate technical and technological solutions in production, increasing energy efficiency.

Mr. Nguyen Xuan Thanh, Lecturer at Fulbright School of Public Policy and Management Vietnam, spoke at the Vietnam Economic Forum 2023 on the afternoon of September 19. Photo: Hoang Phong — Mr. Nguyen Xuan Thanh, Lecturer at Fulbright School of Public Policy and Management Vietnam, spoke at the Vietnam Economic Forum 2023 on the afternoon of September 19. Photo: *Hoang Phong*

Currently, the average retail electricity price is adjusted according to Decision 24/2017 when there are fluctuations in production input parameters (generation, transmission, retail distribution, ancillary services). Most recently, the average retail electricity price increased by 3% on May 4, to VND1,920.37 per kWh.

In the recent audit report sent to the National Assembly on the implementation of resolutions from the beginning of the term, the Economic Committee also commented that retail electricity prices have not kept up with the reality of market development, do not promptly reflect input fuel costs, as well as the scarcity of electricity supply and demand. Accordingly, the legal framework for participating in the competitive wholesale electricity market has not been completed. Renewable power plants built according to the "FIT price" mindset face many risks when participating in bidding in the competitive electricity market.

On the other hand, the electricity price policy also revealed shortcomings, such as not separating the costs of electricity distribution prices, system operation and control fees... This raises the need to legalize the electricity price adjustment mechanism, according to the National Assembly's review agency.

Associate Professor Dr. Tran Dinh Thien, former Director of the Vietnam Economic Institute, also expressed the view that it is necessary to shift electricity prices to operate according to market prices, similar to the rapid application of market price mechanisms for rice.

He analyzed that maintaining low electricity prices in a "subsidized" manner is the main cause of tension between supply and demand, even conflicts in life. Because this encourages consumption of cheap electricity, which means low-tech production while discouraging investment in developing power sources.

"The market price logic of electricity is applied in the context of the world moving to a new energy era, containing the trend of making Vietnam a country with a global energy position," he shared.

Another priority for the green economic transition, according to Mr. Nguyen Xuan Thanh, is to strengthen the power grid to transmit renewable electricity from production to consumption. The grid also needs to be invested in a "smart" way to be able to respond flexibly to fluctuations in supply and demand.

In fact, the Power Plan VIII provides calculations to optimize investment resources in transmission, but experts believe that if we are too frugal in investing in power transmission, it will lead to regional imbalances in electricity, creating a short-term energy crisis.

Regulators also need to speed up power price bidding for renewable energy producers, he added. Since solar and wind (as well as hydro) have low or near-zero operating costs, with the remaining costs being mostly fixed, these sources have a natural advantage in participating in power price bidding compared to coal or gas sources (which cannot bid below fuel costs without making losses).

“Renewable power producers always want off-take contracts, but they will also be satisfied with a public and transparent electricity price bidding mechanism managed by an independent dispatch center,” he said.

While a price auction mechanism has not been established, the alternative is a long-term offtake contract at a fixed price with terms similar to those for fossil energy projects. This solution would make it easier for renewable energy projects to access bank loans as well as international loans with lower costs and longer terms. However, this type of contract would increase the burden on the State because the risk of power capacity reduction would be transferred from wind and solar projects to the power purchaser.

Finally, the Government needs to have a clear approval roadmap for new power projects, especially those using fossil fuels; and a plan to handle renewable power projects that have been licensed but have missed the preferential FIT price deadline.

Mr. Minh

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