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Challenges to be faced by LNG investors in Vietnam

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LNG Industry,

LNG suppliers and gas power developers looking at making Vietnam an essential LNG market should not expect to replicate the success of renewable energy seen recently in the country, finds a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).

Author Thu Vu, Energy Finance Analyst with IEEFA, warns that unresolved regulatory and market obstacles domestically pose serious challenges that will separate enthusiastic project sponsors from the finish line.

Over the past year, Vietnam has quickly emerged as one of the most promising LNG importing markets in Asia. The global supply glut coupled with favourable conditions on the ground have motivated investors – both domestic and global – to pin their hopes on the rapid scale up of Vietnam’s LNG-to-power sector.

According to the report, interested investors vary by origin, background and expertise in the field. They range from unconventional to established US developers, to leading Japanese and South Korean energy companies, as well as state-owned enterprises and emerging domestic energy companies, all with serious ambitions.

“The resultant market frenzy is like nothing Vietnam’s power system has ever seen,” says Vu.

IEEFA’s research, based on public information as of December, indicates that at least 30 projects with implied capacity of nearly 93 GW of LNG-fuelled power capacity have been proposed by investors and local authorities.

“While much of the reporting has created the impression that the proposed projects are sailing through the approvals process, the situation on the ground is much more complicated,” Vu notes.

Vu’s report examines the complexity of LNG-to-power projects and the current environment for the proposed new LNG developments in Vietnam.

“LNG-to-power infrastructure projects are complex projects. They are multi-stage development projects with numerous moving parts and multiple risks—involving upstream, downstream, counterparty, and construction interests.”

From the pool of projects on the drawing board, only nine projects with 17.6 GW in combined capacity have been formally approved for the current power master plan (PDP7R). None of them has finalised power purchase agreements (PPA) with the state utility Electricity of Vietnam (EVN).

“Significant planning and implementation delays are very likely considering how the updated regulatory environment seems incompatible with the contractual demands of developers who insist on utilising older legal models governing either build-operate-transfer (BOT) or independent power projects (IPP).”

Vietnam recently enacted new legislation with a direct impact on large-scale power projects. The Public-Private Partnership Law and Investment Law, both effective from 1 January 2021, have rolled back certain government concessions that had been regarded as essential to international lenders.

Vu suggests that traditionally rigid financial structures used to finance LNG-to-power assets will shape PPA discussions in the months and years to come. For those projects that have reached the negotiation table with EVN, the most difficult part of the process has only just begun.

“Analysts should manage their expectations very carefully before placing big bets on Vietnam’s near-term LNG pathway.”

Vietnamese regulators are planning to quadruple the current gas-fired power capacity to 28 GW in 2030. According to the author, however, “the high-level policy commitment to establish and scale up a reliable LNG-to-power market does not necessarily translate into prompt concessions, especially as Vietnam navigates its post-COVID recovery and amid the growing interest in the domestic energy market.”

Market players will also be paying close attention to how senior decision-makers address decisions that will determine the affordability of LNG and shape the economic impact of Vietnam’s pivot to gas. Regulators are aware of the cost implications of LNG-fired power plants, according to the report.

“While the general consensus is that the incremental cost curves of solar, wind power and battery storage are downward sloping far into the future, the same cannot be said of LNG and LNG-fired power.”

Asian LNG spot prices have soared in recent months, providing a reminder that LNG prices will almost certainly trend higher and experience continued volatility as the market seeks a new post-COVID equilibrium, finds a recent IEEFA research.

“Similar to coal, gas-fired power compares unfavourably to renewable energy. In a global environment where LNG price volatility is the norm, perhaps, the better way forward for Vietnam is to channel investments to cheaper solar and wind power, battery storage solutions and grid balancing projects,” writes Vu.

The full report can be read on the IEEFA website.

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