Liquid natural gas could help Vietnam wean itself off coal while satisfying its growing demand for electricity.
In recent years, liquefied natural gas (LNG) has sparked considerable interest in Vietnam as a potential new source of energy, given the rapid growth of the country’s demand for electricity. According to the World Bank, the scale of Vietnam’s electricity consumption ranks second in the Association of Southeast Asian Nations (ASEAN) after Indonesia and 23rd in the world. Given its fast growing economy, Vietnam’s electricity generating capacity has been under pressure to keep up with demand. Electricity demand is projected to grow 8 percent annually through 2030. This would require generation capacity to increase from 60 GW in 2020 to 130 GW by 2030.
Supporters of LNG argue that a growing reliance on the energy source could reduce the costs and emissions associated with coal-fired power plants and would increase the flexibility of supply. Indeed, over the past two years, local media have frequently reported the announcements of new LNG-to-power projects with multibillion-dollar price tags, many of which include established international firms such as Exxon and AES Corporation.
At the COP26 climate change summit held in Glasgow last month, Vietnam pledged to achieve net-zero carbon emissions by 2050 and to phase out coal power between 2030 and 2040. However, as Vietnam transitions into an LNG importer, there are difficult questions to be asked about the future growth potential of the LNG sector.
“Reality dictates that LNG to power projects are all but essential in Vietnam’s short and mid-term future and there is no shortage of potential investors and, for now at least, potential financiers interested,” said Giles Cooper, a partner at the law firm Allens Pte Ltd in Hanoi, who analyses energy policy.
“The biggest question for me about these projects is how quickly and efficiently the government will be willing and able to address project viability issues to enable them to proceed in accordance with planned schedules,” he added.
One of the challenges is that LNG power generation facilities are large and complicated and require intermodal transport infrastructure such as special facilities within harbors, LNG transfer and onshore storage systems, and then regasification systems and ensuring pipeline transport. For now, an LNG-to-power project will be reliant on its own terminal and will lack backup or alternative fuel supply sources as Vietnam does not have sufficient infrastructure for LNG storage and regasification and gas pipelines.
“Safety and security of such facilities needs to be ensured, such that it is to be expected that there are lengthy permitting and approval issues related to such facilities,” Andrew Jeffries, the country director for the Asian Development Bank (ADB) in Vietnam, told The Diplomat.
He also pointed out there are key regulatory issues that need to be addressed.
One example is a means of ensuring a sufficient linkage between natural gas prices and electricity prices, given that in Vietnam, an open gas market and electricity market are in the nascent stages without some of the hedging and risk mitigation tools that are available in more developed markets.
LNG is a globally traded commodity with prices subject to global factors, and an LNG facility will regasify the LNG into natural gas to be sold domestically.
“Much of the demand in Vietnam for natural gas comes from gas-fired power generators that purchase that gas to convert into electricity, and as in all countries, electricity prices are carefully regulated,” said Jeffries.
As a result, Vietnam will need a regulatory mechanism to ensure that electricity prices reflect the cost of LNG enough to provide revenue for power generators. “The LNG facilities themselves will require predictable revenue streams to attract the investment and finance required to build them,” Jeffries added.
Matt Lorimer, a partner at the law firm Watson Farley & Williams in Hanoi, agreed that for LNG to power projects in Vietnam, there is a long journey from project approval to construction.
“The main issue is that there is no precedent for LNG-to-power projects in Vietnam and the sponsors and the governments are attempting to negotiate a fair risk allocation structure that is bankable and attractive to international investors, but which also ensures that Vietnam is paying a fair price for its electricity,” he said.
Lorimer, who frequently advises investors on LNG projects in Vietnam, indicated the government will not rush into signing power purchase agreements with a 20- to 25-year term.
“Whilst it may be frustrating for sponsors who want to proceed with their projects, the government’s cautious approach is perfectly understandable given the cost and complexity of LNG-to-power projects,” he explained.
Is Natural Gas the New Coal?
The last decade has seen the rise of LNG, which has been touted as a cleaner alternative to coal, and as a result there are substantial plans expand its use globally. However, some environmental groups argued that to reach the Paris Agreement’s 1.5 degree C warming limit, governments and finance institutions must treat gas the same way they do coal: target it for a swift phase-out.
A study released in November by Climate Analytics stated that LNG is “a very carbon intensive fuel source and taking into account emissions in production, manufacture distribution and gasification, including methane leakages, may have a greater GHG footprint than coal-fired generation when used for power production.”
In its latest Revised Draft Master Plan VIII, on diversifying the country’s primary energy sources, Vietnam’s government made clear that the development of renewable energy sources, including wind and solar power, has been prioritized. However, Vietnam faces a number of challenges that will hinder the switch to renewable energy.
The reality is that renewables alone will not be able to meet demand. The government also needs to take into consideration the cost and technical challenges of building large scale offshore wind projects in Vietnam. Lorimer of Watson Farley & Williams said LNG will help Vietnam balance the reduction of greenhouse gas emissions with continued rapid economic growth.
“In the future there is the possibility that developments such as smart grid technologies, improved storage systems and small scale LNG power plants with short lead in may reduce the requirement for large traditional power plants,” he said. “However, my view is that currently Vietnam still requires power plants capable of delivering a base load and LNG looks set to play a role as a transition fuel.”
The ADB’s newly approved Energy Policy said the bank will not support coal mining, processing, storage, and transportation, nor any new coal-fired power generation. The bank also said it will not support any natural gas exploration or drilling activities, and will be selective in its support for midstream and downstream natural gas projects.
Jeffries said that the ADB’s Energy Policy recognizes that natural gas has a role to play as a transitional fuel that can support power system flexibility under specific circumstances, based on the current, widely accepted body of knowledge. But he said that such projects “will have to go through a strict screening criteria under which ADB financing will be provided.”
He added, “ADB’s support for natural gas-based power generation will be conditional on evidence that the project employs high-efficiency and internationally best available technologies, reduces emissions by directly displacing other fossil fuel-based thermal power capacity, or results in a lower grid emission factor estimated as an average over its operational life.”
Looking forward, Jeffries said that the Bank will review its policy in 2025, considering rapid advances in clean energy technologies and research on low carbon development, among other things. “This review will take into account the situation prevailing at the time, including findings of any new research, if widely established,” Jeffries said.
A report in June from the Institute for Energy Economics and Financial Analysis (IEEFA) also raised questions about whether U.S. President Joe Biden’s administration will provide the tangible government financial support that these projects will require.
“The new administration has not yet confirmed whether it will continue to back new international fossil fuel-related projects and has left the door open to rejecting at least some projects that have not yet received approval for federal financing,” the report stated.
A Key Component in the Transition
It should be noted that Vietnam only aims to begin importing LNG in 2022. Vietnam’s first LNG import terminal, by private company Hai Linh, although construction was completed last year, still has to undergo testing and commissioning. Meanwhile, the state-owned PetroVietnam Gas expects to put the Thi Vai terminal into operation by the second half of 2022.
In the first major development after COP26, a conference was held in Vietnam on November 19 to discuss possible changes to the country’s draft power development plan. The latest version of the plan reportedly stated that power generation capacity from newly imported LNG will be slashed to 22.4 GW by 2030 from 40.95 GW in the draft published in March. The planned power generation capacity from newly imported LNG by 2045 will also fall to 55.75 GW, from 83.55 GW in the March draft.
Damon Evans, an Asia-focused energy analyst that writes about LNG market trends in Asia-Pacific, expects that at least some LNG projects will get off the ground. “Vietnam has various LNG-to-power projects proposed and I think some of them will be successful,” he said. “Vietnam still needs base load power for when the sun does not shine, or the wind does not blow. This needs to be coal or natural gas, until energy storage technologies are developed for renewable energy.”
Evans said that Vietnam should also focus on developing its offshore natural gas fields before pivoting to importing LNG, which he said could weaken the country’s energy security. Despite various challenges, LNG will be a key component as Vietnam transitions to its net zero goal.
“More renewable energy projects, more domestic gas and LNG imports will be needed. I would expect no more new coal fired-power projects, which are becoming increasingly hard to finance for Vietnam,” Evans said.