Ahmed Albayrak:
With energy demand projected to increase threefold between 2020 and 2050, Southeast Asia’s energy transition is important in reducing global emissions. Yet progress has been slow. The International Energy Agency (IEA) estimates renewable capacity to grow by 63.1 gigawatts by 2028 — a fraction of the 229 gigawatts of new wind and solar capacity needed by 2030 for the region to keep the IEA’s net zero emissions scenario within reach.
ASEAN is far from meeting this net zero target and needs stronger policy interventions. Luckily, ASEAN members can look to Vietnam for ideas on solar and wind expansion.
In 2023, Vietnam accounted for almost two-thirds of all solar and wind electricity generation in ASEAN. Thailand, in second place, produced just a quarter of Vietnam’s solar and wind output. Vietnam’s rise from laggard to leader in solar and wind offers lessons for other ASEAN members.
The starting gun was fired in 2017, when the first set of generous feed-in tariffs (FITs) were introduced for solar and wind projects operational before June 2019. FITs were later gradually decreased, with the last deadline set at November 2021. On paper, FITs are locked in for 20 years and offer a generous premium over the levelized cost of electricity. Other incentives included exemptions from income tax, tariffs on imported equipment and land-lease payments.
There were other motivations in this pivot towards renewables. Delays in existing coal projects posed energy security risks given fast-growing electricity demand. At the same time, experts believe that public opinion, due to severe pollution in urban areas, favoured renewable energy.
What followed is history. In 2017, the share of solar and wind in Vietnam’s electricity mix was negligible. By 2023, solar and wind accounted for 13 per cent of Vietnam’s electricity mix, an unprecedented growth in the region.
Still, it was not all sunshine. Due to supply chain issues, 62 wind projects were not completed before their deadlines, leaving investors in limbo. Projects that did make it faced high curtailment rates because of grid issues. Thuan Nam, a largescale solar project in the province of Ninh Thuan, was forced to slash its utilisation rate by 40 per cent in 2022. Meanwhile, Vietnam’s north experienced blackouts and could not import electricity from sunny central and south Vietnam due to poor transmission infrastructure. Government inspections also found violations in the certification of some projects, resulting in the arrest, on corruption charges, of some officials administering FITs.
Other ASEAN members can learn a lot from Vietnam’s experience. For one, price incentives matter. FITs must be set at an attractive level for investors. Previous examples of FIT schemes in the region did not offer a decent premium over costs and failed to invigorate renewables. Studies show that the most effective FIT policy for solar and wind deployment is one where FITs cover project costs and yield a profit. Recent introductions of higher FITs in Thailand and Philippines are a step in the right direction.
FITs can be set too high. Since average retail prices are below average production costs in Vietnam, FITs exacerbated Vietnam Electricity Group’s financial losses and eventually forced it to increase retail electricity prices. When electricity consumption is subsidised, like in Vietnam, it is important to set FITs at a financially sustainable level.
Local content requirements can also be a barrier. Unlike Malaysia and Indonesia, Vietnam did not set any local content requirements for solar panels, which proved to be cost-effective. A recent study on India, Brazil and South Africa shows local content requirements for renewable energy projects did not foster domestic manufacturing capacity, but rather increased project costs.
Perhaps the most important takeaway from Vietnam’s experience is the value of policy certainty. Uncertainty over utilisation rates is a major downside risk and can make energy transition a rocky road. Utilisation rates have important implications for renewable projects’ economic viability and financial attractiveness. If high curtailment rates are unavoidable, they should be signalled to better manage load and dampen fluctuations in supply.
Similarly, uncertainty over what happens to projects that do not make FIT deadlines is another constraint. In some cases, investors face the risk of not covering their costs. In the long run, having no mechanism to deal with shocks can deter future investment. For a smoother transition, deadlines should account for factors that may delay projects, such as disruptions in global supply chains.
There is also the issue of inefficient electricity markets, characterised by a single state-owned buyer with fixed prices and poor grid infrastructure. As can be seen from the Eighth National Power Development Plan, Vietnam is addressing some of these issues by adjusting retail prices every three months and improving grid flexibility. After overshooting its solar and wind targets, Vietnam also moved away from FITs to negotiating prices with renewable projects individually. Other ASEAN members should consider flexible pricing and grid planning once solar and wind uptake is initiated.
As well, it is imperative to set a policy narrative to get everyone onboard. Like Vietnam, other ASEAN members can utilise pressing concerns such as energy security and pollution to drive domestic policy. By drawing from Vietnam’s experience with renewables, other ASEAN members can build the momentum needed to promote policy change.
Ahmed Albayrak is a Research Associate in the Lowy Institute, where his research interests include macroeconomics, economic development and energy policy.
