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Understanding Vietnam’s Power Sector and the Potential for Phasing Out Large Hydro
Presented by Grainne Ryder, Probe International
Oxfam Mekong Initiatives Partners Forum
Phnom Penh, Cambodia
October 31 – November 3, 2002

Last week I travelled along the Se San river, a large Mekong tributary that flows from Vietnam’s central highlands through northeast Cambodia’s Ratanakiri and Stung Treng provinces. There I met with local citizens groups (NGOs) and several leaders of riverside villages that have suffered loss of life, property, and sources of food and income due to construction and operation of Vietnam’s Yali Falls dam, roughly 80 kilometres from the Cambodia-Vietnam border.

[Show map of the Se San River basin in northeast Cambodia: Cambodia Bird News, Wildlife Conservation Society, June 9, 2002, page 9; Also see Map on Existing Hydropower Projects in the Mekong River Basin, MRC Hydropower Development Strategy, Mekong River Commission, October 2001, page 82.]

I will not go into details today about the damages and losses incurred by local people as NGOs (CRES in Vietnam, NTFP and SEPA in Cambodia) have already produced several reports documenting this. Also, some of the affected villagers will be in Phnom Penh at the end of November to attend a forum designed to raise these issues with the Cambodian government and propose ways of resolving the ongoing problems caused by Vietnam’s Yali Falls dam. Probe International and other international NGOs will also be at that forum to support the affected communities by arguing for remedial action and accountability from the dam owner, the state-owned Electricity of Vietnam Corporation, and its Western government-funded international sponsors, including the World Bank, the Asian Development Bank, and the Mekong River Commission. My premise for analysis of Vietnam’s hydro rationale is one no doubt shared by many of you who have travelled along the Se San and other Mekong tributaries: the free-flowing rivers of this region, with their wealth of fish and nutrient-rich silt, and their seasonal fluctuations upon which rice farming and dry season cropping depend, are fundamentally too valuable for farming and fishing communities, for local water supply and transportation, and to their future prospects for economic development; to degrade and destroy their natural wealth in exchange for highly uncertain and often exaggerated hydropower benefits.

Given the damages that construction and operation of Vietnam’s Yali Falls dam have inflicted upon downstream communities in Cambodia to date, and the additional threats posed by a second dam downstream of Yali Falls (now under construction) and plans for yet a third dam, I will argue today that Vietnam should immediately halt construction of its second dam, Se San 3, shelve its plans for a third dam, until all problems related to Yali Falls have been resolved to the satisfaction of Se San communities. I will argue that there is no valid economic and technical justification for Se San. Vietnam could pursue better options for generating electricity that do not threaten or victimize riparian communities and rivers in Cambodia and Vietnam.

To this end, Probe International believes that Vietnam’s international sponsors have a responsibility to ensure that their client-government and client-utility take immediate action to eliminate the hydro threat to downstream communities in Cambodia or face suspension of aid disbursements to Vietnam’s power sector. Governments in this region and their international sponsors must recognize that the people whose livelihoods and economic future are threatened by hydro development are entitled to say “no” to that development and to demand that the authorities responsible for expanding electricity supply do so without victimizing riparian communities.

An introduction to Vietnam’s power sector. . .

First some basics about Vietnam’s power sector:

· Electricity of Vietnam is the state-owned and state-run electric utility responsible for electricity investment, generation, transmission, and distribution. Under EVN are five regional distribution companies and the power companies of Hanoi and Ho Chi Minh.

· EVN currently produces about 30 billion kWh of power annually from an installed capacity of 7,000 MW. Its distribution networks reaches all the provinces but about 40 percent of households are still have no basic service.

· The electricity department of Vietnam’s Ministry of Industry regulates Electricity of Vietnam (EVN). Electricity rates are set and approved by the Prime Minister upon the recommendation of the Ministry of Industry.

· EVN currently relies on hydro dams for about 60 percent of capacity. The newly-completed 720-MWYali Falls dam is the second largest hydro plant after the 1,920 MW Hoa Binh dam.

· There are two main markets for electricity, one in the Hanoi-Hai Phong area and a larger one in the Ho Chi Min city area. These two markets are about 1,700 kilometres apart and are connected by one 500kv transmission line. Completed in 1994, the north-south line was initially designed to carry a surplus of hydropower in the north to the capacity starved south. However, rapid demand growth in the north has meant that power from the south is now being sent to the north during off-peak times in the dry season when hydro reservoirs are at their lowest.

· In central Vietnam, estimates of current electricity demand totals only about one-tenth the country’s total peak demand and could easily be supplied by local generators and small hydro.

· 80 percent of Vietnam’s population lives in rural areas but only half of rural households have access to electricity from the national grid.

· Vietnam’s heavy dependence on hydropower means that during the dry season the country’s firm (reliable) power capacity is much lower than the system’s installed capacity.

· Vietnam is increasing its reliance on coal and gas-fired plants, for example, the Phu My gas-fired power complex in Ba Ria Vung Tau, which includes plans for five power stations for a total of 3600 MW) and the Pha Lai coal-fired plants.

· Vietnam has vast coal reserves, the state corporation Vinacoal employs 80,000 workers (twice as many as needed), and has not enough customers. The Ministry of Industry has therefore instructed EVN and Vinacoal to build more coal plants to keep coal miners employed.

· Vietnam has vast gas reserves. The Bach Ho pipeline is now delivering gas to the Phu My power complex. BP is building a second pipeline are other gas fields are waiting to be developed once onshore gas markets are better developed.

· Rural Distribution – Because EVN lacks the financing to meet the needs of rural communities, local governments, agricultural cooperatives and wealthy farmers have been investing in poles and power lines to buy power from EVN and resell to individual households. These distributors buy power for VND 350/ kWh and resell for VND 1000/kWh or more, despite a National Assembly-approved ceiling of VND 700/kWh.

· Electricity Expansion – EVN plans to build 22 hydro plants in the central region by 2020, as well as a string of thermal plants. Energy analysts have argued that Vietnam is over-investing in too many oversized plants and, in particular, that the hydro dams could be shelved and the construction teams used for rural road-building and electrification instead.

· The current master plan number five calls for an expansion of electricity production from 45-50 billion kWh by 2005 to 160-200 billion kWh by 2020. For the period 2001 to 2005, the Plan lists 12 EVN-managed plants, three BOT-financed plants using foreign capital, and four IPPs with local finance to be commissioned.

EVN-owned Power Plants

Power Plant	Type of plant	Capacity (MW)	Commissioning Year	Current Status
Phu My 1	Combined cycle gas	1090	2001	Operational at near full capacity
Pha Lai 2	Coal	600	2001	300MW on line but still using diesel
Yaly FallsSe San 3	Hydro	720	2001	Full operational capacityUnder construction
Ham Thuan Da Mi	Hydro	475	2001	Initial operations but low capacity
Ba Ria Steam Add-on 360-2	Gas	56	2002	Under construction
Phu My 2-1 steam add-on	Gas	143	2003	Operational
Phu My 4	Combined cycle gas	450	2002-2003	In planning
Phu My 2-1 extension steam add-on	Gas	140	2003	In planning
Uong Bi Extension	Coal	300	2004-2005	In planning
O Mon	Oil – gas	600	2004-2005	Infrastructure work to begin; Japanese ODA confirmed
Dai Ninh	Hydro	300	2005	In planning
Rao Quan	Hydro	70	2005	In planning

Source: Mekong Research, 2002

Build-Operate-Transfer Financed Power Plants

Power Plant	Type of plant	Capacity (MW)	Commissioning Year	Current Status
Can Don	Hydro	72	2003	Under construction
Phu My 3	Gas	720	2003-2004	Under construction
Phu My 2-2	Gas	720	2004	PPA/BOT license completed

“Independent” Power Plants (Selling Electricity To State Utility – EVN)

Power Plant	Type of plant	Capacity (MW)	Commissioning Year	Current Status
Na Duong	Coal	100	2003-2004	Under construction
Cao Ngan	Coal	100	2003-2004	Initial construction
Ca Mau	Combined cycle gas	720	2005-2006	In planning
Cam Pha	Coal	300	2004-2005	In planning

· The price negotiated with EVN by four build-operate-transfer power projects are shown as follows:

Build-Operate-Transfer Plants

Project	Owner	Size (MW)	Current status	Price / kWh	Term (years)
Wartsila	Wartsila ND (Finland)	110	Stalled	7 cents / kWh (negotiated in 1997)
Phu My 3	BP (Great Britain)	720	Under construction	4.04 cents / kWh
Phu My 2-2	EdF/Tokyo Power (France and Japan)	720	Finalized and seeking financing	4 cents / kWh
Na Duong	Vinacoal	110	Under construction	VND620 / kWh (4.1 cents)
Can Don	Song Da Corporation	70	Under construction	4.5 cents/kWh

Source: Mekong Research, 2002

· Tariffs are now about 6 cents per kilowatt-hour and will go up to 7 cents per kilowatt-hour as recommended by World Bank and Asian Development Bank, as part of their power sector reform and structural adjustment financing.

· Government Guarantees and Undertakings package passed by National Assembly to ensure that government will cover risk of EVN default or bankruptcy, to ensure that IPPs get paid. Without government guarantees, private investors will not invest in large-scale power plants in Vietnam (financial/political risk transferred to public sector).

· Private investment in power generation – Master Plan Number Five calls for 20 percent of new supply to be private power; no cap on locally-invested generation

· Expansion of thermal plants does not mean a move away from hydropower; new hydro will be operated for peak power and backup, with thermal for baseload. Multipurpose dams will be given priority.

· By 2005, EVN expects to have enough thermal capacity online to use its hydro dams in the highlands for peaking and backup. This is a costly and inefficient strategy, experts argue, because it will require excess capacity to back up hydro in the dry season, and thermal plants may be idle in the rainy season.

· Plan also encourages investment in small-scale systems for remote and moutnainous regions where grid is not extended

· Vietnam will seek funds from ODA and other private sources for electricity expansion over the next 20 years.

Understanding EVN’s rationale for more large hydro dams

Building Hoa Binh and other multipurpose hydro dams made a lot of financial sense for EVN in the past because the capital costs were carried by the former Soviet Union, therefore the financial viability of its hydro schemes were irrelevant to the utility and to ratepayers. EVN claims the total cost of Hoa Binh was about US$2 billion but the utility carries only $100 million on its books. Similarly, Yali Falls cost about US$ billion to build but this cost was covered by the Soviet Union, Ukraine, government bonds and budgetary allocations from the central government financed by deficit spending, not by EVN customers.

Without having to account for the cost of capital, EVN only had to compute running costs (basic maintenance, salaries of staff) and fuel, which is considered free as it is water. The average cost to EVN was therefore much less than one US cent per kilowatt-hour.

By comparison, the cost of natural gas or coal power is about five cents per kilowatt-hour, and about 10 to 15 cents per kWh for diesel.

In terms of capital costs, hydro is the most expensive option for Vietnam to pursue.

Typical Costs and Construction Periods for Generation

Type	Cost per kWh	Construction period
Hydropower*	$1,000 – $1,700	3 – 10 years
Coal-fired	$900 – $1,200	36 months
Combined cycle gas	$600 – $700	18 months
Single cycle gas	$300 – $350	12 months

*includes interest costs charged during construction Source: Harvard Institute for International Development, 1999

Hydro dams also take longer to build. Coal is the next most costly while gas is the least costly in terms of capital and is the fastest way of expanding capacity.

But now with the development of Vietnam’s offshore gas fields, there is huge potential and interest from the private sector to invest in gas-fired power plants. The main obstacle, however, is EVN: it wants to dictate where investments in made and favours large-scale gas plants for baseload, with hydro dams serving as peaking plants.

Hydro benefits exaggerated, costs underestimated. . . the flawed economics of Se San hydro project

A study commissioned by Probe International in 2000 found that the Se San dam now under construction is wildly uneconomic. The actual cost of the 260-MW Se San dam could be US$600 to US$ 720 million compared to official estimates of US$205 to US$217 million. The value of Se San 3 has also been overvalued by disregarding the concept of firm or reliable power: annual power production at Se San has been overestimated by as much as 367 percent! With the Yali Falls dam in place, lack of outflow from it during the dry season may mean that Se San 3 produces little or zero power during the dry season. (Review of the Se San 3 Hydropower Project Feasibility Study, prepared by US-based Foresight Associates for Probe International, October 16, 2000.)

Vietnam has better more cost-effective generating options. . .

A better strategy for expanding electricity supply would be to allow smaller-scale investments in gas-fired plants (single turbine and combined cycle) and investments in renewable energy to expand service in rural areas. But if EVN continues to attract ODA for dams, and is not required to carry capital costs on its books, politicians do not have to take politically difficult steps to dismantle EVN as a self-regulated monopoly. And as long as the government agrees to guarantee large-scale IPPs selling power to EVN, there is little incentive for private investors to promote smaller-scale plants and decentralized investment decision-making.

Advantages of Gas-Fired Power Plants vs Large Hydro

The dam-building industry has recognized that the abundance of natural gas and the private sector’s willingness to invest in high-efficiency combined cycle gas-fired plants as the biggest threat to the future of dam building in the Mekong region. Natural gas is recognized by energy experts worldwide as the best available fuel source for phasing out dependence on dirtier and more hazardous power plants, improving efficiency (ie generating more using less fuel and with less waste) as well as being compatible with other decentralized investments in renewables. Environmental and development NGOs advocating a phase out of hydro or other publicly unacceptable means of power generation should therefore become familiar with the advantages of gas-fired combined cycle plants.

Less Capital Cost, Faster Construction – Gas-fired turbines can be added in stages and take the last time to install. A 50-100 MW plant can be installed in less than one year. Even the larger gas-fired plants are cheaper and faster to build. For example, the 720-megawatt Phu My 3 plant is expected to cost US$ 420 million and take two years to build. The Yali Falls dam cost US$ 1 billion and took eight years to build.

Eliminates the Need for Long Distance Transmission – Gas-fired plants have low emissions and can be built where power is needed thus eliminating the need for costly long-distance transmission lines. (Yet ODA funds are going to expansion of the central grid to promote investment in large-scale hydro and other plants; it is not clear how these costs will be reflected on EVN’s books or the central government’s.)

Reliability – Private power companies and consumers demanding a high degree of reliability prefer gas-fired plants to any other type of power plant – private companies will guarantee performance and rely on a gas distribution network (private sector willing to invest here also). Unlike hydro dams, they do not depend on the vagaries of rainfall. Vietnam suffers power shortages in the dry season due to its dependence on hydro dams. In the dry season of 1998, Hoa Binh dam was barely producing and most of the country’s hydro reservoirs were dead (ie reservoir below turbine intake levels). Yali Falls has a 30 percent chance that it will not be able to produce power in the dry season, according to pre-feasibility documents. Because hydro dams often cannot produce, EVN has to have backup plants, thus overinvestment in system capacity.

Flexibility – Gas turbine and combined cycle plants come in a wide range of sizes, with high fuel efficiency and performance specifications, and can be easily ramped up or down depending upon the customers’ needs, hooked up to the grid or operated independently of the grid. Combined cycle plants in particular are ideally suited to customers with large power and heating needs because they can be designed to produce electricity and use waste heat for industrial applications ie pharmaceutical companies, sugar refineries, agricultural processing, electronics manufacturers, university campuses, hotels, hospitals, rural cooperatives etc. The smallest gas turbine units on the market today are relatively unobtrusive, clean, and quiet, and can therefore be installed, for example, on office building or hotel rooftops or within a factory compound.

Phasing Out Large Hydro (and Other Large-Scale Plants)

The private sector is ready to invest in smaller-scale generation and renewables, especially now that the financial crisis in Asia and a string of failed large-scale IPP projects have revealed the enormous financial risk and uncertainty in building large plants to meet uncertain demand, and in a region facing growing environmental opposition to dams, but also to coal-fired pollution, and centrally-dictated and subsidized industrial investments.

Traditional financiers of large hydro dams, including the World Bank and the Asian Development Bank, have slowed down financing for large dams, and are providing loans for renewable energy programs and strengthening local distribution companies.

For example, the World Bank recently approved a US$225 million loan (System Efficiency Improvement Equitization and Renewables Project) which is aimed at reducing peak load on the central system, improving local distribution, expanding service to about 10,000 rural households using community-based renewable hybrid power plants, and developing rules for renewable power providers.

Whether this initiative will help slow down EVN’s hydro development plans and ease its monopoly grip on electricity investments, or simply drive EVN and the central government further into debt without results, warrants independent monitoring and scrutiny.

As the World Alliance for Decentralized Energy notes: “Decentralized energy systems are no longer limited by technology or cost.” Rather, they are kept from the market by outdated energy policies and rules that keep monopolies such as EVN in place, shut out competitors, place unnecessary financial burden on the public sector, and cause needless displacement of people and environmental damage.

Decentralized energy systems – private investment to meet the needs of a particular market or set of customers – can improve fuel efficiency, reduce costs, emit less pollution, minimize the need for expensive transmission lines, deliver higher quality power and offer consumers more control and choice over the type and level of service they need.

In Vietnam, where private distributors have already started operating because of the failure of the state monopoly to provide service, private entrepreuners using local capital could enter the power generation business given a new set of rules and standards, and a regulatory authority established to ensure that ratepayers are getting service at a fair price. Here, EVN’s international sponsors, the World Bank and the Asian Development Bank, have an obligation to ensure that this transition happens.

Vietnam’s steps toward decentralized and affordable electricity generating options

More than 100 foreign and local companies have approached EVN in recent years to begin discussions on power plant investments, which indicates the huge potential for private sector investment, and one that could reduce the need for large-scale hydro and thermal plants provided the rules were set to favour the cleanest and cheapest sources, and encouraged direct contracts between producers and customers rather than selling to EVN.

Due to the unreliability of Vietnam’s central grid, some large power consumers have already invested in their own generators. Morning Star Cement and the La Nga sugar refinery, for example, have their own generators and have been allowed to sell excess power to EVN during times of power shortages. A 1995 EVN survey found that there are nearly 90 industrial users of electricity that require more than 1,000 kWh per day – thus ideally suited to buying from small producers nearby or installing their own plants thereby reducing the need for large-scale expansion. Many hotels and office buildings already have their own generators (though using diesel is expensive, they would likely shift to gas once a distribution network is in place).

Small Hydro, Wind, Solar…

400 small hydro stations are serving more than one million people; there are more than 100,000 family-owned micro hydro units, mostly in northern mountainous regions, according to data from Vietnam’s Hydropower Centre and the Research Centre for Thermal Equipment and Renewable Energy. Over 800 wind generators have been installed in over 40 provinces and town; largest number along the south-central coast.

The problem remains, however, that EVN regards these smaller-scale investments and producers as supplemental to the expansion of the central grid and conventional power plants. New rules are needed that would phase out EVN as an owner and investor in power plants and allow decentralized investment and competition between large-scale and small-scale producers bidding to supply the grid or direct to customers.

What can citizens groups do to speed the transition to sustainable and affordable energy options?

· Campaign for an end to ODA for large hydro and government-guarantees for conventional power plants. (ODA-driven power sector investment has been a financial and environmental disaster in developing countries; state utilities are broke, millions are without basic service, public funds are squandered on subsidizing large consumers and power producers, and millions more have been displaced or otherwise impoverished by large dams, coal plants.) Investors must take the risk and they will do so provided there is a clearly defined and enforced regulatory framework, private capital for billion-dollar power plants would disappear and the private sector would move rapidly to less risky investments in smaller-scale generation schemes.)

· Demand an open and acountable power sector. This includes close monitoring and phaseout of power sector reform loans from the World Bank and the Asian Development Bank, open review of EVN finances and the true cost of its services and expansion plans, full internalization of costs related to hydro dams etc., and an open and participatory process to set new rules and promote new private investment in cleaner, cheaper generating options for all types of customers and levels of service.

· Educate ourselves about the advances in technologies and services in the region and elsewhere that are rendering large hydro and conventional thermal plants (as well as nuclear) obsolete and unnecessary.

· Build alliances in the fledgling electricity regulatory bodies in the region and advocate new policies and rules to shift to decentralized energy systems. After decades of self-regulated monopolies, secret deals with private power producers, and prices and investment decisions driven by patronage and central planning, rather than customer needs and technological innovation – the shift to a rules- and rights-based energy system will require public pressure and political leadership.

End.

Note: Much of the information about Vietnam’s Power Sector is based on a 2002 draft report commissioned by Probe International and prepared by the Vietnam-based consultancy, Mekong Sources. This report is due to be completed in November 2002.