Green Growth and Fossil Fuel Fiscal
Policies in Viet Nam
- Recommendations on a Roadmap for Policy Reform
Briefing
Committee for Financial, Budgetary Affairs
of the National Assembly
Hanoi, 16 June 2014
Background
• Green Growth and Fossil Fuel Fiscal Policies in Viet Nam –
Recommendations for a Roadmap for Policy Reform based on
extensive research over past 3 years
• Research partners include
– Central Institute for Economic Management (CIEM)
– Center for Analysis and Forecasting/ Vietnam Academy of Social
Sciences (CAF/VASS)
– Institute of Energy
– Institute of Finance
– Energy Alliance
– Global Subsidy Initiative/ International Institute of Sustainable
Development
• Work of other development partners (ADB, World Bank, GIZ, IMF,
etc.)
Outline
• How Much Are Fossil Fuel Subsidies Costing Vietnamese
Citizens?
• What are Fossil Fuel Subsidies?
• Why is Reform Important?
• Are Electricity Prices Really Increasing?
• How do Electricity Prices compare to other Countries?
• Fossil Fuel Fiscal Policy Reform requires more than Price
increases
• People’s Perspectives
• Comprehensive Energy Sector Reform is critical
– recommendations for electricity sector
– recommendations for petroleum markets
• How can short term pain be mitigated?
How Much Are Fossil Fuel Subsidies
Costing Vietnamese Citizens?
According to International Energy Agency (IEA) subsidies on fossil
fuels in Viet Nam fluctuated between US$ 1.2 and US$ 4.49 billion
annually from 2007 to 2012.
CONSUMPTION SUBSIDIES FOR FOSSIL FUELS
(price-gap approach, in billion US$)
Energy
Source
Oil
Gas
Coal
Electricity
Total
2007
2008
2009
2010
2011
2012
0.32
0.09
0.01
1.68
2.1
1.09
0.21
0.01
2.25
3.56
0
0.13
0.01
1.06
1.2
1.09
0.19
0.02
3.19
4.49
1.15
0.18
0.02
2.98
4.33
0.33
0.23
0.03
2.86
3.45
International Energy Agency, 2014
What Are Fossil Fuel Subsidies?
• Subsidies are any government intervention that reduces cost of
fossil fuels below what it would be without that intervention.
• In Viet Nam most fossil fuel subsidies on coal and other fuels for
electricity generation.
How do subsidies occur?
• Regulation of energy sector such as price controls or market access
restrictions.
• Most subsidies are indirect:
– therefore not easily identifiable as fiscal transfers
– they occur through provisions to energy producers and distributors,
mainly state owned enterprises (SOEs), e.g. low interest or preferential
loans, low costs for inputs such as land and coal (for electricity)
• Subsidies result in substantial forgone revenue for Government and
increasing debt of energy SOEs which will ultimately need to be
borne by taxpayers.
Why Is Reform Important?
Short term pain for long term gain - reform now will prevent need for
more significant, costly reform efforts in the future.
Benefits include:
• Enhance national energy security
– Consumption of coal, gas and petroleum is increasing. Viet Nam will
become a net importer of fossil fuels in near future. Increased exposure
to international fossil fuel prices will require increasing transfers to
energy SOEs or to consumers if domestic prices remain low. This will
also be essential to limit fiscal pressures.
– Reducing rate of growth in domestic energy use through greater energy
efficiency combined with expansion of renewable energy will reduce
dependency on international energy markets.
• Enhance energy efficiency
– Energy intensity is high in Viet Nam. Ratio of energy use per US$1,000
of GDP is 237 kg of oil equivalent (world average 208 kg).
– Subsidies encourage inefficiencies and provide little incentive for energy
efficiency.
Why Is Reform Important?
• Improve reliability of energy supply
– Rising energy demand is outpacing investments into capacity and
supply constraints lead to regular power cuts. Current prices and
monopoly structure of energy sector provide little incentive for
investment.
• Facilitate investments into non-hydro renewable energy
• Higher GDP growth and efficiency
– Research shows that in medium to long-term subsidy phase-out and
carbon price introduction will increase GDP growth and efficiency of
economy.
• Improve equity and inclusiveness
– Current subsidies are moderately regressive, i.e. they benefit higher
energy consumers/ richer citizens more.
– Subsidy phase out frees up resources for priority investments and
mitigation measures for vulnerable households and businesses.
• Reduce environmental and health impacts
Are Electricity Prices Really Increasing?
Despite commitment to price and energy sector reform and significant price increases
in average retail price, prices remained almost same in 2008-2013 and lower than
those in 2002 -2007 if calculated in constant 2002 prices (i.e. adjusted for inflation).
Trend of electricity prices (VND/kWh)
1,600
1,473
1,369
1,400
1,304
1,200
1,077
971
1,000
871
860
800
707 707
783 761
790
795
789
701
645
610
586
600
495
518
514
527
518
526
400
200
0
2002
2003
2004
2005
2006
2007
Current prices (VND/kWh)
2008
2009
2010
Constant 2002 prices (VND/kWh)
Source: based on Vu et al., 2013, updated with data from State Bank of Vietnam
2011
2012
2013
How do electricity prices
compare to other countries?
Average electricity prices (UScent/kWh)
Country
US
cents/kWh
Australia
22-46.56
2013
Brazil
34.20
2013
China
7.5-10.7
2013
Germany
31.41
2012
India
8.0-12.0
2012
Indonesia
8.75
2012
Japan
20-24
2012
Malaysia
7.09-14.76
2012
Mexico
19.28
2012
Philippines
30.46
2012
Singapore
21.53
2011
South Africa
8.0-16.0
2011
8
7.0
7
6.6
6.3
6
5.7
5.4
5.3
5.0
5
4.64.6
4.9
5.0
5.0
5.1
5.0
4.5
4.1
3.8
4
3.6
2.9
3
2.9
2.7
2.5
2.5
2.5
2
1
0
2002
2003
2004
2005
2006
2007
Current prices (UScent/kWh)
2008
2009
2010
2011
2012
Constant 2002 prices (UScent/kWh)
Source: based on Vu et al., 2013, updated with data from State Bank of Viet Nam
2013
Year
(latest
available
data)
Source:
http://energyusecalculator.com/global_electricity_prices.htm,
assembled from various sources
Fossil fuel fiscal policy reform
more than price increases because…
• Most subsidies are indirect and occur through preferential
treatment of energy SOEs, structure of energy sector provides
little incentive for investments into new capacity
• Lack of competition in sector provides little incentive for
greater efficiencies
• Liberalising prices under monopolistic conditions and in
absence of strong, independent regulators, increases
inefficiencies and structural problems
• Research shows that public sceptical of rationale of price
increases, widespread lack of transparency and perceptions of
inefficiencies of energy sector SOEs
People’s Perspectives
In your opinion what are the main obstacles to reform? (in rank of priority)
Vulnerable Households
• Lack of transparency, limited
information about energy monopolies
• Adverse impact on welfare of
households
• Adverse impact on enterprises,
particularly in economic downturn
• Inflationary pressures
Experts
• Adverse impact on enterprises,
particularly in economic downturn
• Monopoly/ oligopoly structure of
energy markets
• Lack of transparency
• Weak mitigating measures and
capacities
In your opinion what are the main incentives / drivers of reform (in rank of priority)
Vulnerable Households
Experts
• Losses of energy SOEs
• Introduction of competition in market
• Facilitation of energy savings
• Losses of energy SOEs
• Attraction of investment into energy
sector
• Encouragement of energy savings and
technology upgrading
Source: Nguyen et al, 2013.
… therefore comprehensive energy
sector reform is critical
Recommendations for electricity sector include:
• Enhancing competition in electricity markets
• Improving EVN’s functional efficiency
• Improving transparency of price setting mechanisms
• Introducing cost-reflective and predictable pricing
• Improving efficiency and transparency of energy SOEs
• Strengthening electricity market regulation
• Introducing incentives to attract on-grid renewable power
investments
• Moving towards carbon pricing
… therefore comprehensive energy
sector reform is critical
Recommendations for petroleum markets include:
• Enhancing competition in downstream petroleum markets
• Improving efficiency of downstream SOEs
• Better competition and market regulation
• Flexible, cost-reflective petroleum product pricing
• Reform of Petroleum Stabilisation Fund (PSF)
– Strengthen regulation, transparency and management
of PSF
– Phasing out of PSF in medium-term
How Can Short-Term Pain Be Mitigated?
• Higher energy consumers benefit more from current subsidy regime,
reform represents opportunity to make energy and fiscal policies more
inclusive.
• Reform frees up resources for investments and for mitigating adverse
impacts on households and businesses.
While some mitigation measures are already in place…
• Cash transfers to poor and vulnerable households should be expanded
– Impact of new Incremental Block Tariff and reformed cash transfers (decision
28/2014/QD-TTG effective 1 June 2014) on poor and vulnerable needs to be
assessed
– Cash transfers need to be integrated in broader social protection framework
• Cash transfers for small farmers and household businesses should be
introduced.
• Support to SMEs and selected enterprises to encourage energy efficiency
should be enhanced through e.g. energy audits, capacity building on
energy savings, support for technology improvements, access to capital,
tax breaks, etc.
For more information and background reports:
http://www.vn.undp.org/content/vietnam/en/home/library/environm
ent_climate/green_growth_and_fossil_fuel_fiscal_policies_in_viet_
nam/