Vietnam Electricity (known as EVN) is Vietnam’s state-owned electricity company and supplies the majority of electricity to residential, commercial and industrial customers in the country. In accordance with latest reportsthe utility is also suffering huge losses and could run out of cash as early as May of this year, with combined losses for 2022 and 2023 expected to reach nearly $4 billion.
The picture has changed a lot compared to just a few years ago, in 2020, when EVN published profit after tax of VND14.4 trillion (over US$600 million) and ended the year with VND55 trillion (about US$2.3 billion) in cash. Institute of Energy Economics and Financial Analysis noted that EVN has weathered 2020 “in surprisingly good financial health compared to many Southeast Asian peers.” Why has the financial condition of the utility changed so dramatically in such a short period?
The most immediate cause was the COVID-19 pandemic. 2020 has been a good year for EVN, in part because electricity demand has declined. In the years before the pandemic, Vietnam’s electricity demand grew between 9 and 11 percent per year. In 2020, demand grew by only 3 percent. This slowdown became a global phenomenon as much of the world was put on lockdown that year.
Because of this, the price of energy commodities such as coal was very low for some time. With slower demand growth, EVN could purchase or produce a large share of electricity from sources such as hydropower, and the coal it needed to burn was fairly cheap. This was good for EVN margins. But it was temporary.
In 2021, global demand for energy resources such as coal not only recovered but also far exceeded supply, with the price of coal rising sharply in 2021 and 2022. Vietnam, which imports a lot of coal and has many coal-fired power plants running it , the cost of generating electricity has suddenly become very expensive. And this is especially true in Vietnam because of the structure of its electricity markets.
Vietnam is in the process of transitioning from a heavily state-controlled economy to one with more pro-market characteristics. Electricity has been a priority area where the government wants the private sector to play a larger role. They want this, at least in part, because power generation is very capital intensive, and the market can be an effective way to raise money to fund large-scale investments.
But any transition from the state to the market is difficult. EVN and its subsidiaries still control the generation, transmission and distribution of most of Vietnam’s electricity. EVN and its three generating companies produced 57.5% of Vietnam’s electricity in 2020, with the rest coming from private companies and imports.
There is indeed more private sector activity in this sector now than in the past, including a nascent wholesale market. But EVN remains the biggest and most important player at every stage. The state does not want to loosen its control over the most important national function – in this case, the production and distribution of electricity – and exert more influence on private sector entities. And I think the utility’s recent financial problems really help us understand why that is.
When production costs began to skyrocket in 2021, EVN and its sole shareholder, the Vietnamese government, had basically three options. The costs can be passed on to consumers. They can be taken over by EVN. Or some combination of both. They took the second path, and the state has refused to raise electricity prices for the past few years. When expenses rise and revenues do not rise, the likely result is large operating losses and depletion of cash reserves.
It looks like the retail price of electricity in Vietnam will indeed rise soon. And with falling global prices for energy commodities such as coal, the EVN’s operating deficit should shrink. I am quite confident that the Vietnamese government will at the end of the day make up for EVN’s operational shortcomings and prevent the utility from going bust. But as economic growth is forecast to require large investments in grid infrastructure and generating capacity in the coming years, a liquidity crunch could complicate things now.
You can think of EVN’s financial problems as a failure of management or policy. But in reality, the utility is doing what the government wants it to do, which is protecting consumers from big price shocks. It was probably unwise to wait until they were almost out of cash to consider raising retail rates, but it does draw a line under the difficult balance between state and market in many emerging economies and the complex political and economic trade-offs associated with governance. . this balance.