The report prepared by Grainne Ryder, a power sector and foreign aid
analyst with Canada’s Energy Probe Research Foundation, argues that
large hydro dams is neither cheap nor reliable, compared to other
generating options.

Vietnam’s second largest hydro scheme, the 720-megawatt Yali Falls dam,
took eight years to build and cost a whopping one billion US dollars,
not including the cost of building transmission lines to deliver its
output to distant markets.

Compare Yali to the gas-fired plant that British Petroleum is building
outside Ho Chi Minh City: for less than half the capital cost, the Phu
My 3 station will have an equivalent generating capacity and will be
completed in just two years.

By 2004, Phu My 3 will be profitably delivering power to EVN for about
4 US cents per kilowatt-hour. Yali, on the other hand, would need to
sell its output for at least six to eight US cents per kilowatt-hour in
order to be commercially viable.

Dam building proponents are aware that large hydro in the Mekong region
is uncompetitive given the abundance of natural gas and the
introduction of super-efficient combined cycle plants in Thailand. The
four-country Mekong River Commission has acknowledged that the private
sector favours less-risky projects that can provide a faster return on
their investment. “Most hydropower projects will have handicaps
compared to fossil fuelled thermal plants, particularly to gas fired
combined cycle plants,” according to the commission’s 2001 hydropower
development strategy.

Apart from the high capital cost of dams, unreliable performance is
another downside. Unlike with other fuel suppliers, dam owners cannot
sign a contract with the climate. Their output – and revenue stream —
depends on highly variable river flows and the vagaries of rainfall.
The drought of 1998 drove this point home in Vietnam where reservoirs
dried up and the country’s largest hydro dam was operating at about 10
percent of its design capacity.

Yali Falls and other dams on the Se San River are equally risky
ventures. According to official estimates, there’s a 30 percent chance
that Yali Falls will not produce power in the dry season. And if Yali
isn’t releasing water, production at downstream dams will also be
crippled. The 270-MW Se San 3 dam, now under construction, is a case in
point. A recent study showed that its planners overestimated the dam’s
ability to provide reliable power in the dry season by almost 400
percent.

Yet EVN still favours large hydro dams as the cheapest way to expand
supply. Why? Because the utility does not properly account for the
capital costs of its dams and transmission lines, nor are the actual
costs reflected in the country’s electricity rates.

The Soviet-built Hoa Binh dam, for example, cost about US$2 billion but
only about US$100 million of this is reflected on EVN’s books.
Similarly, Yali Falls was paid for by Russia, the Ukraine, and out of
central government funds.

By discounting capital costs, EVN calculates the average cost of hydro
as less than one US cent per kilowatt-hour compared to five US cents
for coal or gas, and about 10 to 15 cents for diesel (on average,
Vietnamese consumers pay about 6 US cents per kilowatt-hour for
electricity).

The unreliability of dams has prompted the government to promote a
rapid expansion of coal- and large-scale gas-fired plants. By 2005, EVN
expects to have enough thermal capacity added to the system so that its
hydro dams would be operated mainly for peak periods and as backup.
From a system point of view, the report notes, this encourages
over-investment in generating capacity and leads to higher system costs
and financial risk for the government. If there is not enough water at
Yali Falls, for example, EVN still needs to have backup capacity, which
means building thermal plants that will be idle for much of the year
and therefore not recovering costs.

EVN has another serious problem, common to electricity monopolies the
world over. As the sole buyer of electricity, when EVN agrees to buy
power from another producer, whether state-owned or foreign-invested,
it assumes the market risk on behalf of the producers. This effectively
encourages investors to over-build because their revenues are
guaranteed by EVN. If EVN’s demand forecasts are wrong, EVN or the
central government still have to pay the power producers.

A less-risky expansion strategy, Ryder argues, would be to encourage
smaller-scale and hence less-risky investments in gas-fired combined
cycle plants and renewable energy systems. Allowing large consumers and
local distributors to install power plants for meeting local needs
would eliminate the rationale for larger and more environmentally
damaging power projects. Building power plants where power is needed
would also reduce the need for costly long-distance transmission lines
and give consumers greater control and choice in electricity services.

Decentralized power systems are no longer limited by technology or
cost, Ryder argues, but by outdated energy policies and subsidies
favouring expansion of large hydro dams and conventional large-scale
power plants.

With more than 30 million people lacking basic electricity service, and
half of all rural households without electricity, Ryder argues that
Vietnam is ripe for investment in decentralized power systems that are
less financially risky and can be quickly installed wherever power is
needed, without expensive transmission lines.

Already more than one million people get their electricity from
mini-hydro systems and several research institutes are working to
expand wind and solar electricity facilities.

Vietnam currently has 100 private distributors who could mobilize local
capital potentially and finance and build smaller-scale power plants
using local capital.

Such a shift will require legislative and policy changes, the report
concludes. Vietnam urgently requires a new regulatory authority,
separate from EVN, which can license power producers, enforce
standards, and ensure prices are fair to investors and consumers. A key
obstacle to such reforms, however, is EVN itself.

“The problem boils down to this,” says Ryder. “EVN has always built
large hydro dams and it intends to keep on building them, even if that
means depriving consumers of better and less environmentally damaging
generating options. The public needs to point out a better path.”