HANOI, Vietnam (AP) — Vietnam will allow power-hungry factories to buy electricity from wind and solar generators, helping big companies like Samsung Electronics meet their climate goals and easing pressure on the country’s overstretched power grid.
The government decree allowing Direct Power Purchase Agreements (DPPAs) was approved earlier this month. It lifts a regulation that requires all electricity consumers to rely solely on state-owned Vietnam Electricity (EVN) and its subsidiaries, which distribute electricity at government-set rates.
Foreign investors, who are crucial to Vietnam’s rise as a major exporter, demanded such a change.
“The DPPA will dramatically change this status quo,” said Giles Cooper, a partner at the international law firm Allens in Hanoi, who specialises in energy policy.
Without such a change, it would be “difficult, if not impossible” for companies to meet their commitments to phase out reliance on fossil fuels. As more countries impose taxes on carbon pollution, companies that can show their factories use clean energy could have a “significant competitive advantage” in some markets, said Cooper, who helped draft the law.
This loosening of the Communist Party-ruled state’s grip on electricity sales has been in the works since 2019. In most of Southeast Asia, electricity markets are generally centralized. But DPPAs to allow companies to buy power directly from power producers are on the rise, said Kyeongho Lee, head of Asia Pacific Power Research at Wood Mackenzie.
According to Lee, the amount of electricity generated through such agreements has increased from 15 gigawatts in 2021 to 26 gigawatts in 2023. The growth is concentrated in India, Australia and Taiwan, which together account for more than 80% of the total capacity under contract.
Vietnam’s move comes in response to investor concerns about access to stable, clean energy, a priority for a country seen as a promising alternative for companies seeking to diversify their supply chains away from China.
Analysts expect that market liberalisation will also stimulate the construction of new solar and wind farms, as it will create a market for clean electricity.
According to a survey by the Vietnamese Ministry of Industry and Trade, about 20 large companies are interested in buying clean energy directly from producers. The total demand is estimated at almost 1 gigawatt of energy.
Vietnam’s largest foreign investor, Samsung, was among the first to begin working with the government to introduce this mechanism. The company aims to convert all of its sites to renewable energy by 2027, and Vietnam is the world’s largest mobile phone manufacturing base, accounting for more than half of all production.
The South Korean multinational company said in an email to The Associated Press that it welcomed the approval of the “historic decree.”
The factories switched to renewable energy in 2022 by purchasing renewable energy credits. “Now, with the DPPA mechanism, we have more options to purchase renewable energy and look forward to working with the Vietnamese government to further develop and implement PPAs,” the company said.
Apple Inc., which has moved some of its production from China to Vietnam after persistent disturbances in production during the COVID-19 pandemic also welcomed the reform as an “important step towards a cleaner electricity grid.”
Bessma Aljarbou, Apple’s head of Supplier Carbon Solutions, said in a statement that the plan offers suppliers a “meaningful opportunity” to support Vietnam’s goal of becoming carbon neutral by 2050 while also achieving its own goal of becoming carbon neutral by 2030.
The success of DPPAs will depend on how quickly Vietnam can modernize its shaky electricity grid, as many countries are doing. places in the worldhas failed to keep pace with the rapid growth of clean energy generation. Vietnam says it needs $15 billion to boost it.
This could be a hurdle for factories where it is impossible to build a solar or wind farm nearby, meaning that companies can only buy clean energy ‘virtually’, by purchasing the energy from the state-owned company EVN, which would buy the energy from the solar or wind farm, with the buyer making up any difference in cost between the government rate and the rate agreed in the purchase agreement.
“In this model, there is no direct connection between the consumer and the generator. In fact, they can be hundreds of miles apart,” Cooper explains, adding that while the company still buys electricity from the state-owned utility, it now has contractual proof of renewable energy use.
The new directive has two mechanisms that allow factories to buy renewable energy directly. The first is the so-called direct wire model, where a few large electricity consumers can be connected to a nearby renewable energy plant via a direct transmission line. They can then buy the electricity at an agreed rate. This ensures that the electricity will be completely clean energy without the intervention of EVN.
Vietnam has increased its use of solar and wind energy tenfold between 2015-2023, with energy from such clean sources now accounting for around 13% of total electricity generation. But the clean energy boom has been stalled in recent months by policy hurdles such as the removal of attractive long-term contracts for clean energy producers or the lack of protection for losses incurred when solar or wind energy is not used to balance the grid. These were further exacerbated by political uncertainty due to an anti-corruption campaign.
Meanwhile, the use of polluting fossil fuels, which has been declining for some time, has risen from 49.7% the year before to 53.6% of total electricity generation in 2023, data from British energy think tank Ember shows.
The new guidance could help reverse this trend by making it easier for power producers, as it guarantees that there will be buyers for specific wind and solar projects, said Dinita Setyawati, senior electricity policy analyst for Southeast Asia at Ember. “So there are more certainties from a business perspective,” she said.
She added that the law could “unleash” a lot of interest in Vietnam to build solar or wind farms.
“If this plan is successful, we can expect to see more renewable energy capacity installed,” she said.
