New power pricing rule only a first step in market liberalization, analysts feel

An electrician installs meters on an electrical pole in downtown Hanoi. Vietnam raised electricity rates by about 15 percent in March.

A new rule that allows electricity prices to be changed several times a year can spur investment and help ease Vietnam’s supply shortfall, some experts say.

The government has said it will allow power prices to be adjusted as often as once every three months, depending on market conditions. The policy will take effect at the beginning of June, replacing the current practice of revising prices once every year.

The frequent reviews of power prices will reflect changes in fuel costs and exchange rates, it said.

To raise prices by up to 5 percent, national utility Electricity of Vietnam (EVN) will need to obtain approval from the Ministry of Industry and Trade. If it wants to increase prices by more than 5 percent it will also need clearance from the Finance Ministry.

EVN is also required to cut prices when input costs fall by 5 percent or more.

Tran Dinh Long, deputy chairman of the Vietnam Electricity Power Association, said the new policy was a step forward in tackling power shortage in the country.

“The power sector has been waiting for this moment,” Long was quoted as saying in a report in Monday’s Saigon Tiep Thi newspaper. “The new rule will free the sector from the pricing conundrum that has hindered its development.”

When prices are based on market conditions, investors will be interested, knowing that they can make profits from the sector.

“Once there are many investors, we can develop a competitive generation market, and then a power market with competition at all levels,” Long said, adding that the goal, no matter what, is to have prices determined by market forces.

The government increased electricity prices by about 15 percent on March 1 in a move aimed at reducing losses for EVN.

‘Timely’ move

Every power price hike is a burden on local consumers, particularly in the context of soaring inflation.

But for investors, higher power prices can make the domestic market more attractive. After the recent price hike last month, the average power price in Vietnam is VND1,241 per kilowatt-hour, or nearly 6 US cents. That compares to Singapore power tariff of 24.10 cents for households.

Dam Xuan Hiep, president of the Electric Power University in Hanoi, said the new rule is a timely measure as the country prepares to make its power generation market more competitive.

Vietnam is facing a severe supply shortfall in general, but there have been times when producers refused to sell their surplus to EVN due to disagreements in prices, Hiep said.

A market-led pricing system will prevent EVN from setting unfair prices, and at the same time, allow it to buy from producers at the best prices, he said.

Economist Pham Chi Lan, a former advisor to the government, also supported the price adjustment decision. But she noted that market supervision needs to be strengthened to make sure every power price hike is justified.

“Input costs must be audited for the sake of transparency,” Lan said. She said every time power prices are raised, the public should be informed which input costs contribute to it.

Cracking the monopoly

For years, experts have been calling for aggressive measures to break the existing monopoly that EVN enjoys.

The World Bank, a major advocate of privatization, agreed in February to lend $312 million to Vietnam to support a reform plan that includes developing a competitive power market, giving customers more choice in services, changing electricity tariff and improving energy efficiency.

A roadmap created by the Ministry of Industry and Trade plans to restructure the country’s power market in three phases – creating a competitive generation market by 2015; forming a competitive wholesale market by 2022; and finally, creating a competitive retail market after 2022.

The ministry even wanted to strip down the national utility to just trading and transmission, making all of its power plants independent. EVN now controls all transmission grids and is the sole power trader in the country. It also holds the majority of the country’s generation capacity.

With the launch of the pilot competitive generation market coming in July, all eyes are on EVN now to see how much of its monopoly will be shed.

Duong Quang Thanh, deputy general director of EVN, told Thanh Nien that the generation market in July will consist of 82 power plants of no less than 30 megawatts each, with around 40 of these under the management of EVN. These plants will only sell electricity at prices they see fit and can change the tariff on a daily basis. Plants offering the lowest prices will be chosen, he said.

Four or five major power plants, including Hoa Binh and Tri An, will form a group of “strategic” power sources that ensure stable supply for the national system when other plants refuse to sell, Thanh added.

Small players

Industry analysts have said that even with these reform measures, the market would still be controlled by EVN as long as it remains the sole producer, buyer and system operator in the country.

They say that with small power plants not allowed to offer daily prices and having to sign long-term contracts with EVN, the so-called “competitive” generation market will not be very competitive. Small players will keep facing the risk of being turned down by EVN, analysts added.

There were more than 80 small hydropower plants with a capacity of less than 30 megawatts as of December last year, according to the Ministry of Industry and Trade. Some small producers in the Central Highlands have complained that, despite the ongoing power shortage in the country, they’ve had difficulty selling their output to EVN.

Ta Van Huong, former director of the ministry’s Energy Department, said it would not be easy to make transparent the process of selecting and scheduling power plants for daily generation.

For the market to work properly, a government agency has to operate it with a clear set of rules, especially when EVN is still holding a much larger market share than other producers, he said.

“The current supply-demand imbalance is not right for competition,” Huong said. “The competition only works when supply exceeds demand by a large enough margin to drive out power plants that operate inefficiently and have high prices.”

EVN has said that although its power output is set to increase by 17.63 percent this year, there may be a serious supply shortage of between 3-4 billion kilowatt hours, much higher than the shortage of 1 billion kilowatt hours in 2010.