The electricity shortage in Vietnam has become critical and some people say the country, after 20 years of development, is still having as many power cuts as in the days of the state subsidy system.

According to Electricity of Vietnam (EVN), the rapid growth in consumption is one of the main reasons behind the current power shortage.

Although this excuse has angered the public to some extent, it doesn’t mean EVN is wrong to say so.

In the past few years power demand has grown about 15 percent a year. Compared to 2004, the demand is expected to increase two-fold by 2010, three-fold by 2015 and by 5.5 times in 2020. The rates may be higher depending on the country’s economic growth.

EVN also attributed the lack of electricity to the fact that the government didn’t allow it to raise power prices.

Electricity prices have increased from VND600 (US$0.04) per kWh in 1997 to VND860 ($0.05) per kWh now, a 43 percent rise. But it is in fact a price drop if inflation is taken into consideration. EVN said as it wasn’t allowed to raise power prices, it couldn’t find the funds to build new generation capacity.

A product shortage in an economy is usually not the fault of the business. This is the case for the power shortage in Vietnam.

The power shortage should be viewed as a state management issue. Vietnam is capable of generating enough electricity. What it lacks now is a motive for production, which can only occur if a suitable business structure is created by the state.

Texas Utility, a large power firm in the US, for example, has an exchange where the transactors work online to make business contracts with other companies. These transactions are part of a wholesale power market.

A modern power market must have different companies operating in independent sectors, including transmission companies, retailers, power generators and electricity traders. Dividing the market into sectors is the key to building a modern power market.

The important points in the process of restructuring the traditional power market are:

1. Separating the service of providing transmission grids from the retailing;

2. Developing a highly competitive retail market with many distributors for one area; and

3. Developing a competitive whole-sale market in which one retailer can choose to buy power from different wholesalers.

A modern power market operating effectively will create a good competitive environment for power generators, for retailers and also for transmission companies.

Because of the competition, these companies will have to figure out how to cut costs, make their business more effective and create appropriate long-term plans.

An effective market will also prevent the companies from exploiting market power to raise prices and seek profits.

EVN is the monopoly power company in Vietnam. It controls all transmission grids and the network of retailers such as Hanoi Electricity Company and Ho Chi Minh City Electricity Company.

EVN also owns 85 percent of the nation’s generation capacity and has independent power producers (IPPs) supply it with the remaining 15 percent.

EVN signs long-term contracts to purchase power from these producers and, as the only buyer, it can pressure them to lower prices.

Moreover, EVN has very few motives to run effectively unless the government asks it to.

For example, according to the World Bank, EVN’s transmission power loss rate was 12.2 percent in 2004 and 11.02 percent in 2006.

The small drop in the two-year period was the result of an order from the prime minister to cut the transmission power loss rate to less than 8 percent.

However, EVN said it couldn’t reduce the rate any further than it had.

The power shortage in Vietnam is currently critical and will remain critical. It requires a huge financial resource to enable the supply capacity to meet demand, at least $13.5 billion from 2005 to 2020.

EVN itself can’t raise such a huge amount unless it is allowed to raise power prices. EVN can’t resort to bank loans either.

According to the World Bank, if EVN is financed by loans only, its debt over equity ratio will be too high for international credit funds to take the risk.

The best solution now is to open the power market.

The government has already considered this solution and outlined a long-term plan with four steps.

1. Allow private and foreign companies to invest in power production. EVN will buy power from IPPs through long-term contracts (as it is doing now).

2. Liberalize part of the wholesale market from 2010 to 2014: let the IPPs compete and EVN continue to hold its monopoly status. In this phase there will be many sellers but only one buyer.

3. Liberalize the wholesale market completely from 2014 to 2022: break EVN’s monopoly (by dividing the company into smaller ones, for example) and allow large buyers (like large industrial parks) to purchase power directly from wholesalers. When this phase ends, there will be many sellers and many buyers.

4. Liberalize the whole retail market after 2022. When this phase starts, any buyer can choose from different providers.

The only solution to the power shortage is to restructure the power market. However, it is a difficult task.

Maybe it is the reason why the government wants to carry out the reform at a slow pace, which then means that the lack of electricity and its negative consequences on both production and daily lives will not be solved anytime soon.

Source: TN