VZCZCXRO4853
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #0211/01 0690822
ZNR UUUUU ZZH
R 100822Z MAR 09
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 9263
INFO RUEHHM/AMCONSUL HO CHI MINH 5657
RUCNASE/ASEAN MEMBER COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 000211 
 
DEPT FOR EAP/MLS AND EEB 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAID ECON ENRG TRGY VM
SUBJECT: PLAN TO DEREGULATE VIETNAM'S POWER SECTOR LAGS DESPITE 
SUPPLY SHORTAGES 
 
HANOI 00000211  001.2 OF 002 
 
 
¶1. (U) Summary: The Government of Vietnam (GVN) raised retail 
electricity rates by an average of around 9 percent from March 1 to 
reflect higher costs of power generation and encourage private 
investment in Vietnam's underfunded power sector.  Vietnam expects 
electricity demand to rise sharply over the medium term.  Meeting 
this demand will pose a serious challenge to the GVN, which is 
studying a plan to liberalize Vietnam's antiquated and 
state-subsidized power sector, a proposal that is opposed by the 
state-run utility monopoly.  Increasing the level of private 
investment could prove difficult since foreign energy company 
officials say the new tariff is not high enough to permit profitable 
power generation, and current investors report ongoing barriers to 
entry.  End summary. 
 
GVN INCREASES RETAIL TARIFF DESPITE RECESSION 
--------------------------------------------- 
 
¶2. (U) Starting March 1, the GVN increased the average retail price 
of electricity from VND 860/kWh (5 cents/kWh) to VND 948.5/kWh (5.56 
cents/kWh), an increase of 8.92 percent.  The new rate ranges from 
VND 435 to 1900/kWh for industrial users and VND 600 to 1790/kWh for 
residential customers.  The government will continue to subsidize up 
to 40 percent of the cost of electricity for poor and low-income 
earners who use less than 50 kWh per month.  The long-awaited rate 
increase, which the government announced in 2008 and then postponed 
as inflation soared to a high of 28 percent last year, comes as 
Vietnam's economy has slumped due to the global recession. 
 
¶3. (U) While some have criticized the rate increase, saying it would 
exacerbate Vietnam's plummeting economic conditions, the government 
asserted that a 10 percent or less increase would not negatively 
affect the economy.  Pham Manh Thang, the Director General of 
Vietnam's Electricity Regulatory Agency (ERAV) said the former price 
was based on economic data from 2005 and did not reflect inflation. 
Deputy Prime Minister Hoang Trung Hai also defended the decision, 
saying, "the increase is inevitable and may have even come too 
late."  Vice Minister of Industry and Trade (MOIT) Vu Huu Hao said 
the price increase was needed to raise investment in Vietnam's 
underfunded electricity sector. 
 
THE DEREGULATION CHALLENGE 
-------------------------- 
 
¶4. (U) State-owned utility company Electricity of Vietnam (EVN) 
currently accounts for more than 70 percent of Vietnam's power 
generation, 100 percent of transmission and 95 percent of 
distribution.  MOIT, which exercises a regulatory role over 
Vietnam's power sector, recently proposed to end EVN's public 
monopoly by unbundling the utility company's generation, 
transmission and distribution activities, and divesting the company 
of its 17 power plants.  Those plants, plus any plants that come 
online through 2015 would be consolidated into five or six 
independent, state-owned power companies, three of which EVN would 
still control.  Under the plan, none of the new power companies 
would be allowed to generate more than 25 percent of Vietnam's 
national capacity.  MOIT says the proposal is in-line with the GVN's 
three-phase deregulation roadmap, approved in 2006, whereby a 
competitive electricity generation market would emerge by 2014, and 
wholesale and retail markets by 2022. 
 
¶5. (U) EVN, unhappy with the proposal, complained in a letter to the 
government (that was subsequently released to the press) that 
deregulation would be "inappropriate," endanger EVN's status as a 
strong, state-owned economic group and put national energy security 
at risk.  EVN Deputy Director General Dinh Quang Tri said unbundling 
companies from EVN before the new ventures had a chance to establish 
financial credibility and management skills would jeopardize 
critical new power projects.  EVN, he said, was the only company in 
Vietnam capable of operating the power plants at a competitive 
cost. 
 
UNTANGLING THE POWER LINES 
-------------------------- 
 
¶6. (U) Even if deregulation wins government approval, increasing the 
level of private investment in Vietnam's power sector could prove 
difficult.  Current and potential investors report ongoing barriers 
to entry in the sector, citing in particular the overly complicated 
and ambiguous investment procedures.  Dang Thi Hoang Yen, Chairwoman 
of the Tan Tao Group, a local IPP developing a power project, 
complained that investors must fulfill a litany of complicated 
administrative procedures and win approval from multiple ministries 
and agencies, even for projects already approved by the Prime 
Minister. 
 
¶7. (U) Low profitability is a second barrier.  A recent report by 
 
HANOI 00000211  002.2 OF 002 
 
 
the United Nations Conference on Trade and Development (UNCTAD) 
noted that few foreign investors have been willing to invest in 
Vietnam's power sector due to the lower than average electricity 
tariff.  In 2008, EVN purchased electricity from IPPs at 8-15 cents 
per kWh and sold it to consumers at a government-set rate of 5 cents 
per kWh.  EVN was forced to make up these losses through its 
profitable telecom and banking arms. 
 
¶8. (U) Representatives from the American Chamber of Commerce in 
Hanoi's Energy Committee said Vietnam's electricity tariff remains 
below rates in neighboring countries even after the latest price 
increase and could make it difficult to ensure profitability and 
attract IPPs.  The low tariff invariably leads to protracted 
negotiations.  Dinh La Thang, Chairman of state-run PetroVietnam 
(PVN), said it took his company two years merely to negotiate an 
electricity price for the 1,500 MW Ca Mau 1 and Ca Mau 2 gas-fired 
power plants operated by PVN.  Similarly, it took U.S. power company 
AES nearly two years to negotiate a tariff price for AES's proposed 
1,200 MW Mong Duong 2 power plant. 
 
¶9. (U) Despite the barriers, Vietnam's power sector holds promise 
for persistent investors.  When EVN refused to take on 13 
electricity projects last year, citing a lack of funding, several 
local enterprises, including state-run PetroVietnam, Vinacomin and 
six foreign companies, stepped forward to bid on the projects.  As 
the projects were already listed in the Electricity Master Plan, the 
investors were not required to win approval for these ventures.  In 
November 2008, Deputy Prime Minister Hoang Trung Hai (who oversees 
Vietnam's the energy sector) reallocated several coal-fired projects 
to IPPs, including Malaysia's Janakusa, and additional opportunities 
should be expected as the sector undergoes further deregulation. 
 
MEANWHILE, EXPECT MORE BLACKOUTS 
-------------------------------- 
 
¶10. (U) Even as the government mulls deregulation, Vietnam will 
continue to suffer a deficit of electricity, even more so during the 
dry season given the country's significant dependence on hydropower. 
 EVN has committed, however, to minimize disruptions in 2009.  "This 
is a serious issue that we need to deal with," said Vice Minister of 
Planning and Investment Cao Viet Sinh.  "If power projects fail to 
meet the deadline, Vietnam's economic development will be severely 
impacted in the years ahead."  Observers point out that EVN may 
succeed in minimizing blackouts not due to improved capacity and 
efficiency, but merely due to decreasing demand and slumping 
industrial production in 2009. 
 
¶11. (U) Under its most recent plan, EVN expects electricity growth 
rates to grow sharply over the medium-term due to industrial 
expansion and increasing demand for consumer electrical products. 
Vietnam generated 73.7 billion KWh of electricity in 2008 and plans 
to provide the grid with around 83.2 billion kWh in 2009, of which 
EVN will generate around 70 percent.  IPPs, foreign-invested BOT 
projects (build-operate-transfer) and electricity purchases from 
China will fill the remaining 30 percent. 
 
¶12. (U) Comment:  Investors will participate in Vietnam's power 
sector only if the electricity industry's structural, legal and 
regulatory frameworks are in place.  Competitive electricity prices 
and long-term commercial terms also must be ensured.  Given the 
expected high demand for electricity in Vietnam over the next decade 
and the country's limited success in attracting private investment 
in the power sector to date, Post will continue to urge the GVN to 
expedite plans for sector liberalization, since it would provide 
opportunities for U.S. firms. 
 
MICHALAK