The government has approved a record increase in electricity prices, adding pressure to businesses already struggling with rising inflation.
On Wednesday, Prime Minister Nguyen Tan Dung approved a record 15.3 percent increase in electricity prices from March 1. Rates will rise to VND1,242 per kilowatt-hour from VND1,077 per kWh. Poor households will receive a subsidy for the first 50 kWh they consume per month.
Last year the country raised its power prices by 6.8 percent, following an increase of 8.92 percent in 2009.
This year, power demands are expected to rise by at least 16 percent.
According to the Electricity Regulatory Authority, power here remains some of the cheapest in the region.
The average Vietnamese household pays about 5 cents per kilowatt-hour. Indonesian households pay 6.1 cents and Thais pay 9.4 cents.
A losing business
According to a recent statement posted on the government's website, profit growth at the state-run Electricity of Vietnam (EVN) has remained low in recent years between 1 and 3 percent annually. EVN claims it is selling electricity to household consumers at 30-40 percent lower than production costs.
Economist Bui Kien Thanh said
low profit margins have deterred foreign investment in Vietnam's power projects.
The country draws more than one-third of its electricity from hydropower, which leaves the system vulnerable to blackouts during droughts.
Last week, EVN complained that record lows in Vietnam's reservoirs are hurting hydropower production. The energy provider estimates that Vietnam will face a shortage of three billion kilowatt-hours during this year's dry season.
The country is expected to import nearly 4.6 billion kWh of electricity from China this year.
Economist Thanh said that the lastest price hike will raise production costs for every business in the country, making it difficult for the government to curb rising inflation.
In the long term, however, Thanh warned that Vietnam would continue to face serious power shortages unless additional power plants are built.
Bui Tien Thoa, head of the Price Manangement Department under the Minsitry of Finance, said Vietnam needs to raise its energy costs in order to attract investor and dig itself out of this hole. He noted that the new power hike may raise the consumer price index by 0.38-0.76 percent.
Thai Van Quang, manager of a mechanical firm in Quang Minh Industrial Park, said electricity fees account for 10 percent of his firm's production costs.
"We have planned to increase nighttime production to capitalize on lower electricity prices," he said.
Quang said his firm is also considering spending VND1 billion to purchase new, more efficient machinery.
Meanwhile, the Vietnam Sericulture Corporation expects to pay an addition of VND100 million each month for its power usage.
According to the firm's vice general director, Vu Ngoc Van, electricity fees account for over 20 percent of their net production costs.
Van said his firm, which employs more than 700 workers, cannot increase nighttime production because they currently operate three shifts a day, 24/7, he said.
"The best we can do now is to ask laborers to try hard to conserve energy," he said.
Van Duc Muoi, general director of food producer Vissan, said Vietnamese businesses now face tremendous pressure from the price hikes on electricity and gasoline.
The recent dong devaluation has only made things worse, he added.
Muoi said his firm's energy costs will increase by VND200 million a month, after the hike.
They are currently considering modest price hikes, he said.