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IEEFA Update: Finding the right fit for LNG in Vietnam’s energy landscape

September 17, 2021
Thu Vu

The stars appeared to have aligned spectacularly for a rush to create demand for liquefied natural gas (LNG) in Vietnam’s growing energy market.

The government’s determined pivot away from polluting coal, a pressing need to find cleaner baseload-like alternatives, and the perception that gas-fired power systems are the perfect complement to the expanding yet intermittent renewable energy fleet, have helped position imported LNG as Vietnam’s future fossil fuel of choice as domestic gas reserves deplete.

Like other countries, advocates have bombarded Vietnamese senior officials with the “clean transition fuel” narrative. Most of the time, these are traditional energy players trying to find a home for their surplus gas by encouraging the development of new LNG markets.

Vietnam has responded by putting in place plans to have 18 gigawatts (GW) of LNG-based power capacity, or 13% of the system, by 2030, according to the draft Power Development Master Plan for 2021-2030 (PDP8). As a result, annual LNG imports are expected to hit 10 million tonnes by 2030, from zero today.

Annual LNG imports are expected to hit 10 million tonnes by 2030, from zero today

Industry players from across the domestic and global LNG value chain have welcomed the government’s initiative with great enthusiasm. At a scale unseen before, multibillion dollar projects have been proposed across Vietnam’s coastline, with each project sponsor hoping to secure a spot in the upcoming PDP8.

A tight race has emerged among domestic state-owned energy companies, private corporations, and regional utilities from traditional LNG importing markets, including Japan, South Korea, and Thailand. Investors from the United States, both global energy majors and some less experienced businesses, have also been prominent in the mix.

Taken together, the pipeline of LNG-to-power projects initiated by investors to date has surpassed 100GW in size, outpacing by far the government’s plans.

Despite the outpouring of interest, market insiders are conscious of the fact that enabling top-level policies and clear signs of local market backing are only the first stepping stones to the development of Vietnam’s LNG-to-power sector. The slow progress of the more advanced-stage projects is proof that much remains to be done until project sponsors and Vietnamese regulators can reach an alignment on risk sharing and mitigation.

Perhaps the most critical building block for the market will be the agreement on initial gas offtake and power purchase agreements (PPAs).

The pipeline of LNG-to-power projects initiated by investors to date has surpassed 100GW in size

Notably, no maiden LNG-to-power project has yet concluded a PPA with the state utility Electricity of Vietnam (EVN). To date, the financial guarantees demanded by the sponsors to ensure project viability appear out of step with what the government is now willing to offer.

On the one hand, almost two decades of successful partnerships with overseas sponsors and credit institutions in a series of coal and gas power projects provide a good track record for Vietnamese regulators to leverage.

On the other hand, the rapid build-out of solar and wind power capacity in the past couple of years required very limited government involvement and risk-taking. These factors have reinforced the government’s thinking on the minimal role it may take in protecting power projects from standard market risks going forward.

Vietnam’s LNG-to-power projects could face years of development ahead. Still, over the next 12-18 months, market analysts and investors would be best served by monitoring progress on the key market building blocks that will define Vietnam’s LNG future.

PDP8 issuance to instate market order

Over the past year, the development and delayed passage of PDP8 have effectively extended the project development timeframe for LNG investors eager to scour the country and announce ambitious proposals, resulting in a chaotic picture and an inflated project pipeline.

The issuance of PDP8, expected by the end of this year, will end this competition. It will narrow the list of LNG-to-power projects eligible for development in the next ten years and shift the market focus from site selection to the sponsor selection phase.

A new era of partnership forging is then likely to commence as investors look for the synergies needed to form the optimal consortium to bid for a limited number of projects.

Renewable energy ambition to set the boundary for LNG

PDP8 issuance will also uncover Vietnam’s ambition for renewable energy development in the next decade, which will influence the space left for LNG, and define the future role of gas power plants in the system (i.e., baseload, mid-merit, or peaking).

Vietnam’s LNG-to-power projects could face years of development ahead

Vietnam has vast untapped solar rooftop potential and one of the region’s best offshore wind resources, which global developers and financiers are equally keen to tap.

PDP8’s stance on renewable energy and storage solutions will indirectly set the terms for pipeline LNG-to-power projects. As recent data shows, a transition is already underway in Vietnam’s generation mix, with incumbent coal and gas-fired power stations registering lower utilization rates as solar power dispatch grows.

The real price tag of LNG

The Vietnamese regulators’ work on LNG price discovery is also likely to encourage more realistic negotiations over the next 12-24 months, as more projects advance to the discussion stage with EVN, the single power offtaker.

The set of conditions attached to the electricity price will ultimately define affordability and reliability, and the operational and financial flexibility of the new LNG-to-power stations.

Disclosures so far by high-profile sponsors such as AES Corporation (in Son My 2 project) and EDF (Son My 1) suggest that in addition to the selling price ranging between USD0.089-0.097/kWh, experienced project sponsors are asking for financial guarantees and high capacity factors.

These lock-in requirements, which the big players and their banks prefer, will effectively disable EVN from adapting to more cost-competitive technology options in the pipeline, including innovative new renewables and storage solutions.

Gas policies of the major partners

In the meantime, politics will remain a factor.

Several backers of LNG-to-power projects in Vietnam have leveraged support from former president Donald Trump’s administration for the U.S. LNG industry to build credibility for their projects, promising the availability of U.S. public money to finance the projects.

Vietnam has vast untapped solar rooftop potential and one of the region’s best offshore wind resources

President Biden’s upcoming new policy guidance on overseas fossil fuel financing is likely to change this dynamic. Analysts do not yet know if the Biden administration will opt for an outright exclusion of gas projects or subject them to more stringent eligibility criteria.

Either way, project sponsors who were heavily dependent on the backing of the U.S. International Development Finance Corporation and Export-Import Bank to support their financing efforts may struggle to make a case for their projects if they must compete on more commercial terms.

Simultaneously, Japan’s draft new energy plan, which targets a 50% reduction in LNG-fired power generation by 2030, could incentivize more Japanese investment in Vietnam’s import terminals and gas power stations, a demand-creation endeavor for their surplus LNG.

Thu Vu is an Energy Finance Analyst at IEEFA.

This commentary first appeared in Petrominonline.

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