Transparency in energy prices needed for huge capital in energy sector

CA - Price of coal sold to power sector is lower than the cost price. The government has been subsidising the first 50 kWh below cost to all households that use power. Whereas, capital needed for energy sector phase 2010-2015 is estimated at over $150 billion

Transparency in energy prices is considered a solution to meet this huge demand for capital. This is the topic discussed in the international seminar on solutions to mobilise capital for Vietnam energy development held on July 7 by Vietnam Energy Association (VEA).

High investment rates – low prices

Deputy minister of Industry and Trade Do Huu Hao said that energy prices in Vietnam in fact have been subsidised by the government for both households and businesses. By doing so, the government has been offering subsidisation for all the power users, including many users who are not concerned about being subsidised. They care about the power quality. The power price should be adjusted accordingly to the market price in order to meet the demand

Due to the low power price, the price of coal sold to power sector could not be increased; therefore, profit for coal industry is limited by power industry. Thanks to the power subsidisation, profit of power sector is indirectly transferred to profits of other manufacturing industries such as cement, steel and iron, and fertiliser, etc. Since the price of power on average is stable at over five cent per kWh, it could not attract foreign investors to pour money into power sector.

Chair of VEA Tran Viet Ngai said that a few days ago, VEA received documents from Hoi An People's Committee (Quang Nam province) on solar energy investment project in Cu Lao Cham Island. The project has been developed for about 100 households. There are still more than 500 households without power. Hoi An city wants to expand the project, but the investment rate for solar energy is relatively high (at about $2,500 to $3,000 per kW), thus the ministries have called for support from the government.

Most power projects have been delayed. EVN deputy director general Dau Duc Khoi said the lack of capital is the main cause. On July 3, EVN has started Nghi Son 1 project by lending money from bond issuance of the government. It could have started six months ago, if not for the lack of 15 percent reciprocal capital.

EVN has currently been assigned for 35 percent of total capacity of the Sixth Power Development Master Plan, with total capital needed to arrange is $33 billion. However, counted all sources, there is only $20 billion available, in shortage of $13 billion. Of the total capital needed for power construction projects of approximately $52 billion (including projects outside EVN), there are about $40 billion has not been financed.

Transparency needed in energy prices

Low energy price is a barrier for attracting investment in electricity. According to VEA, from 2010, coal industry needs to mobilise about $1.3 to $1.6 billion every year to invest in coal mining and electricity production; phase 2010-2015. Petroleum industry also needs $75 billion, of that PetroVietnam needs to arrange about $20 billion. Power industry needs about $80 billion, of that $52 billion is for investment in power sources and $28 billion for investment in power network (average about $4 to $5 billion yearly).

Specially, for power projects mainly using imported coal in the Sixth Power Development Master Plan, investment rate rises up to $1,350 to $ 1,450 per kW. For this huge capital, domestic banks most likely would syndicate loans. For investment efficiency, if there is no source of credit guaranteed by the government and ODA, no business would be able to pay commercial interest rate of 14 to 15 percent for investment in power projects, said Khoi

All participants in the seminar agreed on the need for transparency of energy prices. Power should be priced accordingly to market price following the orientation of the state. Ngai said that VEA would gather comments to propose to the government to cancel the ladder pricing method. For area of social policies, low-income people and students, the state would issue policy to give support by offering reasonable price level based on proves of the right objects to be subsidised.

Other objects will not subject for power price subsidisation. Market prices for power will restore fairness to coal price. Coal price sold to power sector will be at least equal to cost price and there should be profit retained for reinvestment. Electricity reaching seven to eight cents per kWh will encourage investors to invest in power industry for profit.

However, for other investors, opening the power market as soon as possible and applying transparent prices will help resolve the current power shortage situation.