Here comes the sun (and wind)

Here comes the sun (and wind) Vietnam’s low-cost renewables revolution and its implications for coal power investments

Executive Summary

In this note we present the results of Carbon Tracker’s coal power analysis for Vietnam to understand transition and stranded asset risk.

Three economic inflection points to track transition risk for coal power

There are three economic inflections points which will make coal economically obsolete over time: (i) when new renewables outcompete new or under-construction coal; (ii) when new renewables outcompete existing coal; and (iii) when new firm (or dispatchable) renewables outcompete existing coal. Our analysis highlights how coal power is already losing its economic footing in Vietnam – independent of a carbon price or more stringent air pollution regulations.

1. Inflection point one and its policy implications

Currently, Vietnam has relatively high cost coal generation without any carbon price and minimal air pollution regulations. By 2020 it will be cheaper to invest in new solar PV than new coal and by 2021 for new onshore wind. These changing cost dynamics post a significant stranded asset risk if investors and policymakers decide to go ahead with the 32 GW of coal capacity in the project pipeline. The capital recovery period for new investments in coal capacity is typically 15-20 years and therefore we consider these investments high risk, as burning coal to generate power will unlikely be a least-cost option before debt is fully amortised. Moreover, these estimates could prove highly conservative, especially if policymakers introduce reverse auctions.

Source: Carbon Tracker (2018), Carbon Tracker analysis. Notes: Includes operating capacity and capacity under-construction as of 2018. The long-run marginal cost (LRMC) includes fuel, fixed and variable operating and maintenance costs, capital expenditure related to control technologies and any carbon taxes relevant in the operating region. Please note: Figure 4 contains several modelling revisions from Powering Down Coal. Refer to Section 6 of this report.

Source: Bloomberg NEF (2018, 2019). Notes: Levelised costs of energy (LCOE) forecasts for Vietnam are calculated by taking Vietnamese LCOE data from projects in 2019 and assuming the same rates of change as in BNEF’s Indonesia forecasts. For upper and lower bounds, we use BNEF projections and take midpoints between the median and the upper and lower forecasts.

2. Inflection point two and its policy implications

It could be cheaper to build new solar PV and onshore wind than operate existing coal plants as soon as 2022. Both solar PV and onshore wind deployments in Vietnam have experienced impressive cost reductions over the past four years, declining around 50% and 30%, respectively. We expect these deflationary trends to continue such that, in the near future, new investments in renewable energy will likely cost less than running coal plants. Moreover, as with inflection point 1, these estimates could be brought forward sooner with a policy framework to accelerate the learning curve of renewables. In order to minimise stranded asset risk, policymakers should have a coal capacity retirement schedule agreed and implemented when inflection point two is reached.

Source: Bloomberg NEF, Carbon Tracker analysis (2019). Notes: For upper and lower bounds of LCOEs of onshore wind and solar PV, we use BNEF projections and take midpoints between the median and the upper and lower forecasts. Upper and lower bounds for the cost of operating coal units are calculated using several scenarios. Notes: Operating coal cost is capacity-weighted and based on long-run marginal cost, which includes fuel, variable O&M and fixed O&M (SRMC plus fixed operating and maintenance costs). Imported bituminous coal is assumed from Australia, Russia and Indonesia. The low range assumes $60/t for imported bituminous coal, $48/t for domestic anthracite and $31/t for domestic lignite. The mid-range assumes $80.00/t for imported bituminous coal, $65/t for domestic anthracite and $41 for domestic lignite. The high range assumes $100/t for imported bituminous coal and $81/t for domestic anthracite, as well as $51/t for domestic lignite. Calorific values assumed at 3,713 kcal/kg, 5,316 kcal/kg and 6066 kcal/kg for lignite, bituminous and anthracite, respectively.

3. Inflection point three

Inflection point three is clearly outside the scope of this analysis and will likely form part of future research with local experts. The challenge for policymakers at this point is no longer whether renewable energy will be the least-cost option, but rather how to integrate wind and solar to maximise system value. For instance, the International Energy Agency (IEA) notes that it is possible to get to 15% penetration of solar and wind by simply upgrading some operational practices, such as better grid codes and demand forecasting, which are not capital intensive.

Policy recommendations

If Vietnamese policymakers remain committed to coal power the nation will face a dilemma: continue to subsidise coal generators to maintain their financial viability, or keep tariffs artificially low to shelter consumers from higher costs. Both outcomes will likely prove unsustainable, as subsidising coal generation will either anger taxpayers or energy consumers, while artificially low tariffs for consumers will impact fiscal resources. In the context of this analysis, Carbon Tracker offers three recommendations for policymakers.

1. Stop investing in new coal capacity immediately.

New investments in coal capacity will unlikely be a least-cost solution over the capital recovery period. This period is typically 15-20 years for new coal capacity and 5-10 years for retrofits relating to performance enhancements or control technology installations. Our analysis highlights how coal power is losing its economic footing, independent of additional climate change and air pollution policies. As such, Vietnam should stop investing in new coal immediately.

2. Develop a cost-optimised retirement schedule for the operating fleet.

Vietnamese policymakers should develop a retirement schedule based on the LRMC of individual coal units. This analysis will allow policymakers to close the higher cost units first and lower cost units last, which should help ensure the end consumer receives the lowest cost electricity possible.

3. Subject the retirement schedule to resource planning analysis to understand system value of units.

Once policymakers have developed a cost-optimised retirement schedule at asset level, they should then undertake systems planning analysis to take into consideration the system value of individual assets. Understanding system value is outside the scope of this analysis. Carbon Tracker intends to conduct this analysis with local partners and make this research publicly available.

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