Rolling electricity outages in Vietnam may deter foreign manufacturers from using the country as an export base, prompting the government to raise prices to boost investment in power plants.
Vietnam may increase the cost of average household electricity by around 18 percent next month. Prime Minister Nguyen Tan Dung said last week factories and other major energy consumers must cut power use by at least 1 percent, Vietnam News reported.
Severe power cuts "would make it very difficult for me to explain to the board that we want to stay here and want to develop the company here," Boy Schallert, managing director of Aalborg Industries A/S, said by telephone, adding that the company has no imminent plans to leave the country. "We hope we will be fine this year, but we fear the worst."
Pricing is the biggest impediment to foreign investment in power plants as state-run Electricity of Vietnam, known as EVN, currently sells electricity at a loss, according to the European Chamber of Commerce in Vietnam.
EVN's profit growth is low, at 1 percent to 3 percent a year, on low retail prices, according to a statement on the government's website. Low profit margins
have deterred foreign investors from power projects in Vietnam, the statement added. EVN sells electricity at 30 percent to 40 percent lower than production cost, it said. The company buys electricity from China at 5.3 to 14 US cents per kilowatt-hour.
Aalborg, a Copenhagen-based manufacturer of marine and industrial boilers, was warned the country "would see heavier power cuts this year because the situation is even worse," said Schallert, based in Hai Phong, a coastal city in northern Vietnam.
The electricity price that EVN offers to investors is about a third of the average amount paid in Thailand and Cambodia, making many energy projects commercially unviable, Matthias Duehn, the European chamber's executive director, said by telephone.
"If the energy price is not adjusted it becomes a serious problem for Vietnam in the medium and long run," he said. "The power cuts affect Vietnam's competitiveness and may direct investment elsewhere."
Record-low levels at Vietnam's water reservoirs are hurting hydropower production, EVN said in a statement on Tuesday. The company said last month it faces a shortfall of three billion kilowatt-hours during this year's dry season.
Vietnam depends on hydropower for about 37 percent of its electricity, followed by gas at 36 percent and coal at 16 percent, according to statistics from the Association of the Electricity Supply Industry of East Asia and the Western Pacific.
The government is working to ensure sufficient power supply, Hoang Quoc Vuong, deputy minister of Industry and Trade, said by telephone on Monday. "˜Bridge the gap'
AES Corp., the sixth-biggest US electricity producer by revenue according to Bloomberg data, last year signed a 25-year pricing agreement for a 1,200 megawatt coal-fired power plant after four years of negotiations. That deal may help others come through more quickly because the government now has a template as a point of reference, said Prabaljit Sarkar, AES's business development manager in Vietnam.
"State-run companies don't have enough funds to meet the entire demand for electricity," he said by telephone. "They need foreign investment to bridge the gap."
The average household electricity bill is about 5 cents per kilowatt-hour. That compares with 6.1 cents in Indonesia and 9.4 cents in Thailand, according to data from the Energy Information Administration.
Vietnam has tried to control inflation as it seeks to expand Southeast Asia's sixth-biggest economy by as much as 8 percent per year until 2020.
While an electricity price rise would boost inflation by a few tenths of a percentage point, it may lead to more price increases following the dong devaluation and high global commodity prices, said Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore.
"You don't want to get too many of these moves that individually aren't that large, but once they are taken all together start to feed on themselves," Hildebrandt said.