Viet Nam's ability to attract FDI is not based on low energy prices. — VNA/VNS Photo Ngoc Ha

HCM CITY (Biz Hub) — Viet Nam's energy prices, including the possibility of their rising in coming years, are not a major factor in foreign investors' decision-making, a new study says.

The study, done by the International Institute for Sustainable Development to determine the position of foreign direct investors on energy pricing and supply in Viet Nam, suggests that the Vietnamese Government can be more ambitious in raising power prices for large industrial consumers.

The study, supported by the European Chamber of Commerce in Viet Nam (EuroCham) through its Green Growth Sector Committee (EuroCham GGSC), also assesses the impact of Viet Nam's energy policy on its competitiveness.

The results provide policymakers with data and information to allow them to develop an energy policy that reflects the needs and concerns of this important constituency.

The study is based on in-depth consultations with the foreign business community via three workshops held in January and a survey of 150 firms.

The study backs EuroCham GGSC's approach towards sustainable energy supply in Viet Nam. It has announced that a Green Growth Investment Luncheon will be held on 18 June, 2015, in HCM City to further deepen the stakeholder dialogue and showcase successful projects.

New information

The primary research provides significant new information that has important implications for Viet Nam's energy policy.

The study outlines five key points that have important policy implications.

It says Viet Nam's ability to attract FDI is not based on low energy prices. Firms do not typically invest in Viet Nam as a result of the fact that energy prices have been historically low. They rank the state of power prices to be the least important of 10 factors in their decision to invest in Viet Nam.

Foreign investors are not seriously concerned about the prospect of gradually higher power prices, the study says. This is likely partly to do with the fact that firms spend relatively little on electricity. (90 per cent of foreign firms across all sectors spend less than 10 per cent of total operating costs on electricity, with 60 per cent of firms spending less than 5 per cent. The majority of firms indicated that they would be willing to bear sustained annual power price increases of 15 per cent or more before reconsidering future investment.

These findings show that the Vietnamese government should be more ambitious in raising the price that large industrial consumers pay for power, without being concerned that by doing so they will cause a significant adverse investment response from multinationals, the study says. It finds that firms are very concerned by the inadequacy of power supply and the prospects for diminishing supply reliability, considerably more so than by the prospect of higher power prices. Ensuring adequate power supply should therefore be the key priority of Viet Nam's energy policy along with a long-term movement towards greener modes of electricity generation.

Finally, it says there is significant space (and necessity) for private sector solutions to Viet Nam's power supply needs. Given both the current inefficiency of the energy market and the difficulty of EVN in allocating investment, private sector investment will likely need to play an increasingly important role in securing adequate electricity supply in Viet Nam over time.

It notes that renewable generation, in particular, is well-placed to meet growing energy needs due to its scalability over short time frames, with wind power being particularly promising given the extensive pipeline (4.4 GW) of registered projects and existing (although currently inadequate) government support policy.

However, this will require higher grid tariffs, higher PPAs to encourage new private sector investments, and a new enabling legal framework for investment, the study says, adding that working towards these outcomes should be a priority for the Government. — VNS