PROJECT INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB3182
Project Name / Renewable Energy Development ProjectRegion / EAST ASIA AND PACIFIC
Sector / Renewable Energy (100%)
Project ID / P103238
Borrower(s) / SOCIALIST REPUBLIC OF VIETNAM
Implementing Agency / Ministry of Industry
Environment Category / [ ] A [] B [ ] C [ X] FI [ ] TBD (to be determined)
Date PID Prepared / June 14, 2006
Estimated Date of Appraisal Authorization / July 2008
Estimated Date of Board Approval / November 2008
1. Key development issues and rationale for Bank involvement
The Power Sector in its Development Context
From 1995 to 2005, Vietnam's industrial and household electricity consumption increased by about 15 percent per year; household access increased from about 50 percent to 90 percent; and annual per capita consumption increased from 156 kilowatt hours (kWh) to 630 kWh. As Vietnam's GDP continues to grow at 7-8 percent, it will remain heavily reliant on electricity; demand is forecast to continue to increase at 16 percent per year to 2010, reducing to about 11 percent per year during 2011-2015.
The Role of Renewables in Meeting Power Generation Needs
The Government’s Sixth Power Master Development Plan (the Master Plan) covering 2006-2015 with a view toward 2020, forecasts that generation capacity must double from 11,300 MW in 2005 to nearly 24,000 MW by 2010 and to double again, to 50,000MW, by 2020. The electricity transmission and distribution system must match this growth. The Master Plan estimates that investment of about $4 billion per year will be required, of which about $3 billion is needed for new power stations and $1 billion to expand and modernise transmission and distribution. By comparison, about $5.5 billion was invested in the power sector over the entire period of 2001 to 2005
Grid-connected renewable electricity generation, particularly small hydro, is a good vehicle for diversifying sources of energy, improving energy security, engaging private developers, facilitating rural development and providing additional income through the sale of carbon emission reductions. A 2003 study of a sample of about 130 renewables projects (mainly small hydro which is defined in Vietnam as below 30MW, but also including wind and biomass) found that at least 750MW was economically viable (that is, below avoided cost) and could contribute not only to meeting energy needs, but also to peak capacity requirements[1].
The potential of renewable energy resources is by far larger. A recent government estimate shows there are 2800 MW of small hydro resources above 1 MW to 30 MW that can be developed economically. Currently, only 50 MW out of 250-400 MW generation capacity from biomass, bagass and rice husks has been realized. Geothermal power capacity is estimated at 200-340 MW and there is also potential for wind and solar resource development. Given the increasingly wide coverage of the country by the grid (which brings additional resources within range of connection, particularly small hydro) the renewable resource that can be developed at or below avoided cost can be even more substantial.
It is in Vietnam's economic interest to develop these projects ahead of large, conventional thermal power. Because they are comparatively small this capacity can be developed relatively quickly – a typical small hydro can be constructed in about a year, compared with three years for a coal fired power plant or more for a large hydropower project. Moreover, they tend to have relatively few environment and social impacts which offers Vietnam a route to cleaner energy development on a significant scale. They do, however, face substantial barriers specific to the subsector which reduce the incentives for their development.
The main technical and regulatory barriers to renewable energy development are: (i) the absence of satisfactory arrangements for selling power to the grid at an equitable price; (ii) an inhospitable and non transparent regulatory framework with large numbers of approvals required, and no satisfactory means of allocating project sites to those most able to develop them; (iii) weakness of developers to prepare and implement sustainable projects; and (iv) limited capacity to appraise and finance renewable energy projects[2].
Financial Barriers to Renewable Energy Development
The total projected investment requirements for the 750 MW identified would be about US$900 million to US$1 billion, with total debt financing required estimated to be between about US$630-700 million, on an assumption of 30% equity and 70% debt. A typical small hydro project of 15MW might have a total investment cost of $15-20 million, so equity would be $4.5-6 million. The balance would be taken as debt and typically must be taken as a bank loan since there are few other instruments – for example bonds – available at that size of financing need.
The financial viability depends heavily on the tenor of the financing. At normal rates of interest, a project could achieve a rate of return that is positive over its 20 year lifetime but never generate sufficient cash to service the debt repayment in the first five years if financed using a short term loan of five years. By contrast, a longer tenor – say 15 years – would facilitate a higher rate of return but would also enable a project to meet debt service requirements. A 15 year tenor better matches the investment horizon for the SHPs and provides higher returns and steady positive cash flow.
The Financial Sector
Vietnam's financial system consists of five state owned commercial banks, (SOCBs) making up over 70% of the system by assets, 36 small private, Joint Stock Banks, (JSBs) with a 15% share of the market, 30 foreign bank branches, 919 credit cooperatives, and a variety of informal microfinance providers in the country. Despite progress, the level of financial performance of the largest banks has historically been weak and still poses a threat to market stability. SOCB lending is growing rapidly at 20-30% per year but this growth has not been accompanied by development of good risk management.
Capacity to appraise projects and lend on a cash-flow basis is limited, resulting in a lack of available project debt financing on terms and with maturities that match the needs of small or medium-sized infrastructure investment projects. This results in, or is perhaps the result of, a tendency to finance projects based on the borrower's balance sheet and the bank's knowledge and links rather than the merits of the project.
Rationale for Bank Involvement
The Bank supported the development of the Government's Renewable Energy Action Plan. Initial steps are being financed by the System Efficiency Improvement, Equitization and Renewables Project (Cr. 3680 VN, P073778). The proposed project would scale up support, focusing on achieving substantial additions to renewable energy capacity and catalyzing market-based financing for the sector. The Bank has a strong comparative advantage in an area which has been relatively neglected by other donors, whose efforts have been small, scattered and piecemeal.
2. Proposed objective(s)
Task DescriptionThe development objective of the proposed project would be to increase the supply of least-cost electricity to the national grid from renewable energy sources on a commercially sustainable basis, through market-based financing.
3. Preliminary description
(A) Renewable Energy Investment Component
Subcomponent 1: Credit to Support Renewable Energy Investments (total financing $182 million, of which IDA $100 million)
Up to 5 PBs would be selected on a competitive basis, using criteria based on standard financial performance benchmark, willingness and commitment of management and potential to improve their capacity to lend to the sector. Renewable energy sub projects – small hydro, wind and biomass – would be selected and financed by participating banks (PBs) based on their own appraisal of the project. The PB would bear the full credit risk of the funds.
A facility, financed by the World Bank on IDA terms and located in Ministry of Finance, would allow a PB to refinance up to 80% of its loan to a subproject based on eligibility criteria that would be developed during preparation. The eligibility criteria would be a means to ensure that the projects meet best international practice in technical, environmental and social terms, and meet minimum levels of financial and economic performance.
An administrative unit (AU) would be hired to manage disbursement on behalf of the Government and to check the sub-projects against the eligibility requirements.
Subcomponent II: Technical Assistance for Investment Project Implementation (total financing $2 million, of which $1 million IDA, $1 million cofinanced by TF )
A technical assistance (TA) facility would be established to support all participants – the project sponsors, PBs and AU. The TA facility would be managed by MOI and would focus on ensuring that project sponsors had the necessary skills to identify good projects and prepare proposals for bankers, navigate the approvals process, and negotiate financing. It would support the PBs by enabling them to understand the risks of investment in renewable energy projects, and hence prepare credit policies for this kind of project, and then appraise sub-projects against those policies. The technical assistance would also assist the AU to evaluate projects against the eligibility criteria.
(B) Regulatory Development Component
(Total financing $3 million of which $1 million IDA, $2 million cofinanced by TF )
This component will provide technical assistance to strengthen regulations and build capacity of MOI, Electricity Regulatory Authority of Vietnam and other relevant government agencies for renewable energy development. Activities would include: (i) technical assistance in strengthening the legal framework for renewable energy development, particularly focused on preparing the standardized PPA, establishing an avoided cost methodology acceptable to all parties, and then supporting their adoption by the government; (ii) capacity building for preparation and enforcement of regulations; and (iii) further pipeline development. It would also be managed by MOI.
4. Safeguard policies that might apply
Safeguard Policies Triggered / Yes / No / TBD /Environmental Assessment (OP/BP 4.01) / X
Natural Habitats (OP/BP 4.04) / X
Forests (OP/BP 4.36) / X
Pest Management (OP 4.09) / X
Cultural Property (OPN 11.03) / X
Indigenous Peoples (OP/BP 4.10) / X
Involuntary Resettlement (OP/BP 4.12) / X
Safety of Dams (OP/BP 4.37) / X
Projects on International Waterways (OP/BP 7.50) / X
Projects in Disputed Areas (OP/BP 7.60) / X
5. Tentative financing
Source / TotalSub-Borrower / 53,000,000
Local Financial Intermediaries / 24,000,000
IBRD/IDA / 102,000,000
Others / 3,000,000
Total / 182,000,000
6. Contact point
Contact: Anh Nguyet Pham
Title: Sr Operations Officer
Tel: 844 9346600 (ext 311)
Fax: 844 9346597
Email:
Location: Hanoi, Vietnam (IBRD)
[1] See 'Grid Connected Renewable Electricity Generation: Economic and Financial Analysis and Financing Support', March 2006
[2] See 'Renewable Energy Development Project, Financing Overview and Proposed Framework', April 2007