Vietnam's LNG price cap puts gas-fired power target at risk

Electricity-hungry Vietnam wants liquefied natural gas (LNG) to fire 15% of power capacity by 2030 but is unlikely to meet that target as power producers and foreign investors balk at the country's strategy for making the super-chilled fuel affordable.

To promote LNG use and shield consumers from high prices, Hanoi in May set a price cap on generators' sales of electricity fueled by imported LNG.

However, power producers are concerned that a price cap fails to reflect the volatility in the LNG market and will make gas-fired plants uneconomic if prices spike as they did in the past three years.

"It's risky for both suppliers and buyers as LNG supplies and prices depend on geopolitical conditions, which are currently not stable," said Nguyen Thanh Son, a Hanoi-based energy expert, adding the price cap was not appropriate.

The stakes are high for Vietnam as it struggles to wean itself off heavy reliance on coal to cut carbon emissions, and for global LNG producers, who see the fast-growing economy as a ripe opportunity.

Price cap poses hurdles. In a national power development plan last year, the government set a target to have 13 LNG-fired power plants with a combined capacity of 22.4 gigawatts (GW) by 2030, accounting for 15% of the country's total power generation mix.

If built, those 13 LNG-fueled power plants would require imports of 14 metric MMtpy of LNG, according to state-owned PetroVietnam Gas, which on current levels would make the country the sixth-largest market in Asia.

The Ministry of Industry and Trade has now set a price cap of 2,590.85 dong ($0.10) per kilowatt-hour (KWh) for electricity sourced from LNG sold by power producers to state grid operator EVN in 2024.

EVN said the price cap is reasonable for both suppliers and end users, as it "will be reviewed and adjusted annually by the ministry when input data changes, thus offering long-term stability to investors."

The 2024 price cap is based on LNG at $12.9792 per million British thermal units (MMBtu) excluding tax and storage, gasification and distribution costs, and a currency conversion rate of 24,520 dong per $1.

That is slightly higher than current Asia spot LNG prices, and roughly in line with the current value of LNG in long-term contracts linked to oil prices.

But average Asian spot LNG prices have trended higher since 2021, between $14/MMBtu and $34/MMBtu on an annual basis, as COVID-19 and the Russia-Ukraine war drove them to record highs, making plant developers nervous about the price cap.

"The international practice is to link power prices to the LNG price without a cap, to ensure the project's viability and bankability. Vietnam should adopt this practice," said a source with a foreign developer of an LNG-supplied plant. "The Vietnamese LNG power market is still nascent and any rules that deviate from international practice would deter foreign investment.”

On the LNG import side, so far Vietnam has two LNG terminals, which together have a capacity to bring in 4 MMtpy of LNG. To date, only five spot cargoes with a combined volume of more than 300,000 t of LNG have been imported.

Those cargoes have been blended with domestic gas and sold to the country's existing gas-fired plants.

Energy consultants at Wood Mackenzie view the government's targets as "quite aggressive" and expect LNG imports in 2030 only to reach between 2 MMtpy and 3 MMtpy.

"LNG imports into Vietnam will depend on the pricing structure of LNG and favorable policies for the gas sector which unlock demand," said Wood Mackenzie analyst Raghav Mathur.

Offtake mandate key for new plants. Adding to the challenge, LNG is more costly than coal and hydropower, the main sources of power in Vietnam, so gas-fired plant developers are reluctant to commit to projects or to LNG purchases without a guarantee that EVN will buy their output.

"Investors want to sign long-term LNG contracts with suppliers, but suppliers see that it's very risky because EVN does not have any commitments," said an LNG trader.

The next key announcement developers are waiting for is a government mandate on EVN to buy LNG-fueled power.

The industry ministry said in April it was drafting a decree to set an LNG power offtake volume, which it initially expected would be around 70% of a plant's capacity.

The first of the country's LNG-fired plants, Nhon Trach 3, is scheduled to start generating power in November and the second, Nhon Trach 4, in May next year, according to developer PV Power.

Another 11 would be needed to meet Vietnam's 2030 target, but even the government said in a statement in May that projects are facing numerous challenges, including issues related to contracts, site clearance and a lack of offtake commitments.

"The delay in the development of these projects will impact national energy security," Minister of Industry and Trade Nguyen Hong Dien said in the statement.

 

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