Mekong Utility Watch

Rethinking Japanese ODA in Vietnam’s electricity industry

Grainne Ryder
Mekong Forum, Vol. 5, No. 2
July 1, 2003

To meet Vietnam’s surging demand for electricity service, EVN wants to build 22 additional large hydro dams in the next decade or so, six of which are slated for the Se
San River. But are big hydro dams the best option?
Seven years after operators of Vietnam’s Yali Falls hydro dam unleashed the first of many life-threatening floods on
downstream Cambodia, thousands of affected villagers are still waiting for those responsible to provide compensation or begin talks on mitigating damages.

Since the first flood releases drowned dozens of people and swept away people’s livestock, boats, and fishing gear, the Se San River (a large Mekong tributary shared by Vietnam and Cambodia) has become hazardous and unpredictable. Fish catches have dropped off
since the 720-megawatt dam was built. The rapid daily fluctuations in water levels make it difficult for people to grow crops on its banks and fish along its shores. In all, researchers estimate that 50,000 people in northeast Cambodia have experienced some damage to property or economic losses due to the Yali Falls dam.

Speaking at a recent gathering of affected communities, Lan Tit, a Tampuan minority leader, appealed to the authorities “to bring the people’s voice to central government, to international organizations, and to the two countries of Cambodia and Vietnam, to reduce the suffering caused by the unusual flooding and less fish in the river.”

But that appeal has had little influence on the dam’s owner, the state-owned Electricity of Vietnam Corporation, whose top financier happens to be Japan Bank for International Cooperation. In fact, EVN is on a dam building spree.

Electricity of Vietnam, by the way, is responsible for electricity investment, generation, transmission, and distribution in Vietnam. Under EVN are five regional distribution companies and the power companies serving Hanoi and Ho Chi Minh.

Not only does EVN have monopoly privileges, it is the recipient of billions of dollars worth of aid subsidies from Japan and other Western donor governments. Even more worrisome, it operates unhindered by legislation that would, for instance, force it to take financial
responsibility for the real costs of damages caused by its hydro dam operations.

To meet the country’s surging demand for electricity service, EVN wants to build 22 additional large hydro dams in the next decade or so, six of which are slated for the Se San River.

Japanese companies are already lining up for dam building contracts. One of nine hydro projects scheduled to start construction this year is the US$440 million Dai Ninh hydro dam. Japan Bank for International Cooperation is financing it and Japanese companies, Hazama and a Japanese-Vietnamese joint venture, the Kajima-Kumagai-Gumi-Song Da
Corporation, are building it. With an installed generating capacity of 300 megawatts (MW), Dai Ninh will displace thousands of people in the Central Highlands.

EVN is also expecting Japan to help finance its most costly and controversial hydro scheme ever, the 2400-MW Son La dam in Vietnam’s mountainous northwest. Approved by Vietnam’s National Assembly last December, Son La would flood 90,000 subsistence farmers off their land.

Expected to take 7 years and $US2.5 billion to build, EVN is looking to JBIC and other aid-donor institutions to finance at least one-third of the dam’s US$2.5 billion pricetag.

Certainly, Vietnam needs the power. EVN’s current generating capacity is just 8,000 megawatts, or about one-third that of neighbouring Thailand, a country with 20 million fewer people. There are more than 30 million people lacking basic electricity service, including half of all rural households. And electricity demand is growing by roughly 12
percent annually, compared to an average of 4 to 6 percent growth Asia-wide. For most of the last decade, EVN has struggled to keep pace with electricity demand. Power blackouts were common, particularly during the 1990s when new generating capacity was not being added fast enough to the system to keep up with demand.

But are more big hydro dams the best option? Many energy experts in Asia now argue no, that Vietnam is already too reliant on hydro dams that are unreliable in the dry season just when power is needed the most. The drought of 1998 highlighted this problem of over reliance on big hydro: the country’s largest hydro reservoir, Hoa Binh, dropped to
its lowest levels and could barely generate 10 percent of its installed capacity. Similarly at the country’s second largest hydro facility, Yali Falls, there is a 30 percent chance that it will not have enough water to produce power in the dry season.

With about half the country’s power supply currently generated at eight hydro plants, the problem becomes acute every dry season when reservoirs are low. In the southern city of Ho Chi Minh, for example, which consumes about one-quarter of the country’s total power supply, there were 110 power outages reported last dry season due to overloaded
transformer substations, the result of a 20 percent jump in power consumption. To get around the problem of unreliable hydro, EVN expects to have enough thermal (gas or coal-fired) capacity online by 2005 so that it can then use its new hydro dams in the central highlands for peaking and backup. Two major new additions coming online next year are the Phu My 2.2 and Phu My 3 gas-fired plants in Ba Ria Vung Tau
province. Both will sell power to EVN under long-term contract; both are partly financed and owned by Japanese companies. Sumitomo, and TEPCO, a subsidiary of Tokyo Electric Power Company (which has nuclear ambitions for Vietnam) in Phu My 2.2. And Kyuden International and Nissho Iwai Corporation in Phu My 3. Analysis commissioned by Probe in 2001 shows that EVN’s plan to invest in more large hydro for peaking power is an extremely costly and inefficient strategy for expansion because the hydro dams will require their own backup plants in the dry season and also require expensive long-distance transmission lines.

So if investing in more large hydro is neither cheap nor reliable, why is EVN doing it? One reason is habit. Once a utility gets into the dam building business it doesn’t get out unless it is forced out. Another reason is that EVN has access to cheap capital from JBIC and other
donors to defray its dam-building costs and thus keep rates artificially low. Also, the utility wrongly considers water a “free” fuel and externalizes resettlement and environmental costs onto other government agencies and rural communities.

Thus according to EVN’s calculations, large hydro is a bargain, costing the utility on average one US cent per kilowatt-hour to produce it, compared to paying other suppliers four to five US cents per kilowatt-hour for coal or gas-fired power plants, and about 10 to 15 US cents per kilowatt-hour for diesel-fired generators. (On average,
Vietnamese power consumers pay about 6 US cents per kilowatt-hour for electricity.)

But the days of “cheap” hydro dams for EVN may be ending. The World Bank no longer considers direct financing for hydro dams in Vietnam the best use of its funds for poverty alleviation – a tacit admission perhaps that forcing poor people off their land and destroying farmland and riverine fisheries for “cheap” power has never made economic sense. Similarly, the ADB’s power experts openly admit that gas-fired combined
cycle plants are the more cost effective and reliable choice for power generation in the region. And unlike hydro dams, the private sector is willing to risk its capital on finance gas-fired combined cycle plants.

Aid is still flowing to EVN for high-voltage transmission lines, however. But as far as direct financing for hydro dams, JBIC is the only major donor to Vietnam still directly financing EVN’s hydro dams and thus crowding out better and cheaper power generating options.
Knowing that aid agencies can not deliver the billions in capital required to expand the country’s power industry, the Vietnamese government has had to break EVN’s monopoly in power generation in order to attract new investment, both domestic and foreign. Now private companies are allowed to finance and build their own power plants and
even several state-owned corporations are getting into the power generation business (mostly smaller-scale hydro dams in the 5 to 30 MW range) using domestic capital.

This makes the case for JBIC funds to the power sector increasingly dubious. Not only is Japanese ODA stifling the introduction of fair competition among power suppliers it rewards inefficiency and ultimately raises system costs. Rapid expansion of more central power plants may quickly prove financially unsustainable for the state. It is
already a model becoming technologically obsolete given the rapid advances in small-scale power generation. Many energy experts now argue that Vietnam could forego the huge cost and environmental damages associated with large hydro and conventional thermal plants and instead pursue decentralized energy systems – defined as power generation systems that produce electricity at or close to the point of consumption and include high efficiency cogeneration (regardless of fuel, size or technology) and decentralized
renewable generation (including photovoltaics, small hydro, and on-site wind.)

Vietnam took an important step in this direction earlier this year when it approved rules that allow private power generators to use EVN’s grid to sell their power directly to customers. This rule change could stimulate private investment in renewable generation and industrial cogeneration now that producers can use the grid to sell surplus and
get backup power. But the move will require effective regulatory oversight to ensure that EVN does not impose excessive charges on its new competitors. Even longtime dam financier the World Bank appears to be promoting a more decentralized approach to power supply investments in Vietnam. Last year, the Bank lent EVN US$225 million for improving local distribution systems, providing service to 10,000 rural
households using community-based renewable hybrid power plants, and developing rules for renewable energy providers.

For the thousands of people whose livelihoods are directly threatened by Vietnam’s dam building, and the millions more who are without electricity service, a more sensible approach to power supply expansion couldn’t come soon enough.

Aid agencies must move with the times and stop financing large dams and other dinosaurs in the power industry. They must also share financial responsibility for past damages caused by their utility-client, in this case EVN. And they should encourage governments and citizens in Vietnam to set new rules for decentralized power producers, rules that promote investment in power generation but also safeguard the rights of citizens. There is no valid technological or economic justification for repeating the tragedy along the Se San River. Aid agencies must either get out of the way or be part of the solution.

Categories: Mekong Utility Watch

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