HSBC ranks Vietnam as the best investment destination for renewable energy in ASEAN
According to HSBC Research, Vietnam is ranked as the best investment destination for renewable energy in ASEAN thanks to a number of factors such as resource availability, increasing demand for electricity and the government's ambitious goals to achieve net zero emissions by 2050.
According to Ms. Stephanie Betant, Country Head of Corporate Banking Services, HSBC Vietnam at the Green Economy Forum & Exhibition (GEFE) 2022, in the 3 years before the Covid-19 pandemic appeared, Vietnam is one of the countries with the fastest growth rate in investment in solar power in the world.
Vietnam overtook Thailand in 2019, becoming the country with the largest installed solar capacity in ASEAN, according to data from Wood Mackenzie, an energy industry consulting firm, which jumped from 105MW in 2018 to more than 16,600MW by 2020, far exceeding the government's initial target.
This growth is mainly driven by an attractive back-up electricity tariff (FIT), which allows developers to enjoy a guaranteed price over a period of time, a certainty that investors love. prefer. Besides, most of the large-scale renewable energy projects in Vietnam so far have been developed by domestic companies.
Specifically, data from the Mekong Infrastructure Tracker shows that about 60% of renewable energy projects in the country are developed entirely by Vietnamese companies, the remaining 27% are developed by a Vietnamese company in cooperation with international partners. Only 12% (equivalent to about 10 projects) is developed without a Vietnamese partner.
Most of Vietnam's renewable electricity investments come from domestic sources. The domestic capital market with lending rates (previously) in the range of 10% provided the capital needed to launch projects under the FITs. Similar to other emerging markets, the key to propelling these projects forward is the ability to leverage existing banking relationships, and corporate balance sheets, to obtain funding.
Since 2020, Vietnamese renewable energy companies have issued more than US$3 billion of corporate bonds denominated in VND in the domestic market, according to an estimate by the Institute of Energy Economics and Financial Analysis IEFA). However, currently, no company has access to foreign markets. From 2021 to now, there have been only 7 issuances of bonds abroad by Vietnamese enterprises, mainly for real estate development.
While it is not yet clear how the upcoming Power Plan VIII will set out exactly how much solar and wind power output will be, it is clear that this output will increase. The question is how to finance the massive volume of new renewable energy needed to achieve net zero emissions by 2050.
The World Bank's Country Report on Climate and Development indicates that investments in the clean energy transition could reach $15-17 billion per year in the future, from $7 to $8 billion USD per year today.
The role of foreign direct investment (FDI)
According to HSBC Research, Vietnam is ranked as the best investment destination for renewable energy in ASEAN thanks to a number of factors such as resource availability (solar energy or energy wind), increased electricity demand, and the government's ambitious target of net zero emissions by 2050, as well as an absolute target for renewable energy (about 30% of Vietnam's energy use) in 2030 will be wind/solar).
While Power Plan VIII is still a draft, this large investment will result in a “funding gap” for both Electricity of Vietnam (EVN) and independent power producers, generating demand for electricity demand for international capital flows in a sector that has traditionally relied solely on domestic banks. Given the limitations of domestic lenders, including credit growth limits and maximum loan limits per customer, the role of foreign direct investment is likely to be crucial when new projects (greenfield project) start to be built. In fact, the forms of funding are quite diverse, such as export credit agencies (ECAs), which provide a very popular means of financing projects around the world involving import cost of capital and services.
By 2021, it has attracted $115 billion in financial support globally. However, to date, this type of credit financing has been limited in Vietnam, although there have been intentions to finance new wind farms as part of Power Plan VIII, subject to ability to obtain a local bank guarantee on the borrower's payment options.
In addition, the form of development banks and debt capital markets can be mentioned.
In fact, Vietnam's renewable energy companies have issued bonds in the country, however, the foreign market is still open. International investors remain wary of Vietnam's renewable energy market, expecting assurances from local banks on borrower payment options to mitigate concerns about curtailment contract termination or reduction. "Although a number of European energy project developers have a presence in the Vietnamese market, it is Asian competitors that act as the strongest catalysts, as more than 90% of foreign companies invest in Vietnam. Investment in solar and wind power in Vietnam is from Asian countries, such as Thailand, Japan and the Philippines", emphasised Ms. Stephanie Betant.
Asian companies also play an important role in providing the necessary technical expertise and financial resources. Notably, long-standing Asian energy companies such as AC Energy (Philippines), Gulf Energy and B.Grimm Power (Thailand), have used their resources to raise capital from multinational development banks. (such as ADB) to support renewable energy projects in the country. “It is very likely that local and international joint ventures will dominate the offshore wind power market of Vietnam once this market is formed,” a representative of HSBC Vietnam forecast.
Due to the potential complexity and sensitivities surrounding offshore wind projects, major global offshore wind companies have partnered with local development partners for their first projects in Vietnam. For example, Orsted, a global sustainable energy company, is working with T&T Group, a leading multi-industry company in Vietnam, to jointly develop an offshore wind power project with a capacity of about 10GW in Ninh Thuan and Binh Thuan provinces.
Further reading: Renewable energy in Vietnam: Opportunities and Challenges