Currently, the solution to improve energy efficiency (EE) has been identified as one of the top priorities to achieve the goals of energy policy of countries and Vietnam: energy security, access, comfort and sustainability. Vietnam has issued energy efficiency policy framework and many related legal documents. In particular, financial incentive mechanisms play an important role in promoting technology investment and energy efficient use in different sectors, especially in the industry with the largest proportion of final energy consumption (TFES) (51.3% in 2019 and 47.9% in 2050). However, the process of implementing EE solutions in recent years has revealed inadequacies and lack of synchronization of financial mechanisms to promote energy efficiency, including legal frameworks, policies and EE financial instruments. That problem results to a slow development of the EE market, which is not commensurate with the high energy saving potential of Vietnam. This article aims to briefly present the current status of financial incentive mechanisms and propose some solutions to improve the financial mechanism to support investment and efficient use of energy in the 2021-2030 period.
Current status of financial mechanism to encourage efficient use of energy
According to the provisions of Article 41 of the Law on Economical and Efficient Use of Energy (Law No. 50/2010), financial incentives from the state include: (i) Funding support from the National Program on economical and efficient use of energy efficiency (VNEEP); (ii) Preferential import and export tax, corporate income tax; (iii) Preferential use of land; (iv) Preferential loans from some special funds and Vietnam Development Bank (VPB). Decree 21/2011/ND-CP specifies incentives for investment in production and support for investment projects and import-export activities of EE equipment.
Financial instruments for EE activities carried out in Vietnam so far - at different levels and scopes - are Subsidies, Concessional Loans, Commercial Loans, ESCO, Credit/Risk Guarantees, Credit limit etc. These financial instruments are operated by some financial institutions (FIs). These FIs are two state-specific funds such as the Environmental Protection Fund (VEPF) and the National Technology Innovation Fund (NATIF), the Vietnam Development Bank (VDP) and several commercial/investment joint stock banks and other financial institutions such as BIDV, Techcombank, HD bank, IFC etc. They are also operated through National EE Programs (VNEEP1,2,3) and other EE programs/projects of international partners which have been supporting/coordinating with the Vietnamese government such as: Low Carbon Transformation in Industry and Construction (LCEE), Energy Efficiency and Cleaner Production (CPEE), Energy Efficiency for Vietnam Industry (VEEIE) etc. Besides, the approach to green finance including green credit/green loan package, green bond and carbon credit etc. has begun to take place strongly in Vietnam since the National Green Growth Action Plan (NGGAP) was implemented in 2015 at the sectoral level. Although this source of green credit is still limited in terms of the scale and the access to capital, especially in the EE field, this development trend of green finance in Vietnam in recent years has been being in high prospect, in line with world trend and the gradual improvement of Vietnam legal frameworks. The need and motivation for green finance development in Vietnam is even more strong when the Government does not guarantee (or do minimize) credit guarantees for organizations and individuals, especially in special preferential loans (ODA/soft loan) according to Decree 97/2018/ND-CP.
It can be classified into 2 groups of financial instruments in the EE field in Vietnam: traditional financial instruments (public finance) and non-traditional financial instruments (commercial finance).
Traditional financial instruments
Those instruments include the following key financial ones: Grants/Investment Subsidies, Special Preferential Loans, Credit/Risk Guarantees, Renewable Energy Subsidies (Fit-in prices), Subsidies on EE products from the state budget and energy corporations.
1. Non-refundable loan/subsidy
The government can partially subsidize by providing some immediate finance to overcome the barriers to investment capital and to realize energy efficiency so that the project can be moved into the market. Subsidies can also take the form of research and development (R&D) programs, technical assistance or promotion of energy efficiency awareness, for example a 50% subsidy for the cost of energy-auditing report for key energy users (KEUs). The form of subsidies is implemented through National Financial Funds/Programs based on the state budget or sponsorship programs of partners with the participation of state management agencies. In VNEEP 2, the maximum support levels for investment in project implementation do not exceed 30% of the total investment of the project and do not exceed VND 5-7 billion/project for enterprises which perform improvement and convert the corresponding technology chain.
2. Special preferential loans
Special preferential loans are loans with low interest rates (40-50% market interest rates) and long repayment terms, usually from 5 years or more for investment projects, purchase and sale of EE equipment. Financial sources for special preferential loans are from VNEEPs/National Specific Financial Funds such as Environmental Protection Fund (VEPF), National Science and Technology Innovation Fund (NATIF) or from VDB. For VEPF, lending with preferential interest rates and credit guarantee is one of VEPF's activities. The preferential loan interest rate is 2.6% - 3.6%/year, maximum loan period is 10 years, grace period is up to 2 years and maximum loan amount is VND 50 billion/project and maximum 100 billion VND/investor; those activities have really promoted the effectiveness in EE and environmental protection. In the case of the EU Program for investment financing from European Bank (EIB) with VDB as a partner, the loan conditions are as follows [1]: Total loan is 50% of the total investment but does not exceed 1.77 million Euro from EIB, loan term is not more than 13 years, grace period is not more than 3 years, loan interest rate is 11% (2018) and is adjusted according to market price each year. However, for the enterprises and projects participating in the above loans - mainly related to environmental protection activities and renewable energy - the loan amount for EE activities is still very low.
3. Credit/risk guarantee
Credit guarantees are often provided by sponsors and in some cases can be carried out by the government. The availability of guarantees will create favorable conditions for banks to finance to EE projects. The credit guarantee tool in public finance is clearly demonstrated in the credit guarantee conditions and processes for small and medium-sized enterprises (SMEs) with medium and long-term loans that meet the conditions of VEPF, VDB, Loan Guarantee Fund (LGF, previously under the NATIF Fund) as well as the conditions of each Investment Sponsorship Program. Within the framework of the LGF-NATIF Fund, the beneficiaries of this Fund include SMEs and ESCOs. The loan guarantee at commercial banks/financial institutions can be up to 70% of the total project’s investment capital after deducting the working capital of the project. Maximum loan guarantee for an EE project is 3 billion VND and/or for the guaranteed party is 4.5 billion VND. In order to receive the guarantee, the project must be approved by the NATIF for its economic-technical feasibility and approved for the loan by the guarantor.
Loan guarantee is considered as an effective incentive mechanism in energy efficiency investment, especially for SMEs. However, this Loan Guarantee Fund has been closed, while the NATIF Fund is being restructured to perform new functions and tasks according to Decision No. 04/2021/QD-TTg. Accordingly, the Fund performs the function of giving preferential loans, supporting loan interest rates, providing guarantees for loans and providing capital support for enterprises, organizations and individuals to conduct research, application, transfer and exchange of new technology. It is not known when the Fund will return to normal operation to serve the needs of EE projects.
4. Exemption/reduction of taxes and fees
The increase in benefits of investment and efficient use of energy is achieved by using fiscal measures such as reducing corporate tax obligations, reducing import and export tax on EE equipment mentioned in the Law No.50/2010/QH-12 and Article 28 of Decree No. 21/2011/ND-CP as mentioned above. However for this tool, there is still no specific guiding circular of the Ministry of Finance, so its actual application in recent years is not obvious.
Commercial/non-traditional financial instruments
1. Energy Service Company (ESCO)
The ESCO model has been proposed and introduced to be implemented in Vietnam at different levels on a narrow scale for EE projects of SMEs from 2005 up to now, such as: Project to improve energy efficiency of SMEs in Vietnam (PECME), CPEE project, UNIDO project (Promoting the use and operation of energy-efficient industrial boilers in Vietnam, LCEE) etc. In particular, the CPEE project has introduced the concept of Energy Efficiency Contract (EPC) through ESCO which applied in countries around the world in recent years to businesses, consulting firms, managers and energy experts at ESCO seminars. The actual activities that cover the context broader than ESCO are implemented in accordance with VNEEPs. VNEEP 2 has had many results on ESCO’s activities, for example, activities in collaboration with EVN or different ESCOs such as Solar Bach Khoa, Viet ESCO etc., activities of other energy consulting companies in implementing DSM programs, investment and installation of hot water / rooftop solar panels, energy efficiency equipment. However, in general ESCOs in Vietnam are mostly energy consulting companies which are conducting energy audits, installation and maintenance of energy equipment etc. and almost no timely and sustainable financial support from the state. Even the official concept of ESCO has not been found in Vietnamese legal documents so far. It is expected that the current situation and solutions for the ESCO will be presented in more detail in some next articles of VEECOM.
2. Green Finance
Green finance is financial support towards green growth through the reduction of greenhouse gas (GHG) emissions and environmental pollution. Green finance has received a lot of attention recently through programs/projects of international organizations and donors. Green finance products such as Green Investment Funds (in LCEE), Green Growth Support Fund (MPI) and Green Credit Trust Fund (GCTF, Center for Clean Production) are implemented during the period of 2015-2019 has had initial results for promoting the development of renewable energy and energy efficiency projects. Most recently, the Green Loan Packages ($20 million) and Green Credit Packages ($212.5 million) of the partners of the Global Climate Cooperation Fund (GCTF) and the International Finance Corporation (IFC) have announced by commercial banks (TPB and VPB) in the green credit market. Borrowers are green project owners in the fields specified by banks and partners.
The development orientation of green credit - green banking has also been affirmed in the Strategy for the Development of the Banking System to 2025, with an orientation to 2030 (Decision No. 986/QD-TTg dated 8/8/2018). A number of important documents have also been issued to increase the awareness and social responsibility of the banking system for environmental protection, response to climate change, gradual greening banking operations, guiding credit capital flows to finance environmentally friendly projects, promoting green production, service and consumption industries and clean energy; actively promoting green growth and sustainable development.
According to the Department for Credit of Economic Sectors - State Bank of Vietnam, by the end of 2020, the outstanding credit balance for green projects is about 290 trillion VND, in which the key sectors of green growth have been focused as: clean agriculture (127 trillion VND); clean energy (84 trillion VND); water sustainable management in urban and rural areas (31 trillion VND).
In addition to the initial results, the implementation of solutions to promote green credit activities currently faces some difficulties such as: the investment in green sectors/fields, especially in the field of renewable energy, energy efficiency , green buildings in Vietnam is often suffered market risks, while the capital mobilized by credit institutions is usually short-term and at the cost of commercial capital in the market. The specific criteria for classifying green sectors/fields are still not in detail and quite complicated, which makes difficulty for credit institutions to select, appraise, assess and supervise; awareness and capacity of credit institutions in developing green credit products are at the beginning stage; most credit officers have not been professionally trained in the field of environment and energy efficiency etc.
3. Credit limit
Credit limit is one among the common financial mechanisms used frequently by international financial institutions (IFIs) and governments to provide credit to banks and domestic financial institutions (FIs). Financial institutions then lend at preferential interest rates to investors (borrowers) to directly implement the projects. Credit lines can also be provided to intermediaries (ESCO, equipment manufacturers, property leasing companies, etc.) to conduct EE investments. Currently, the project on Energy Efficiency in Industry (VEEIE) of Vietnam (implemented by the Ministry of Industry and Trade and the World Bank) grants credit lines through VCB and BIDV under this financial instrument. Accordingly, the project's borrowers include industrial enterprises that need to borrow capital to invest in economical and efficient use of energy nationwide. The loan for investment in energy saving projects worth about USD 156 million and implemented within 10 years will be re-loaned by the Ministry of Finance to participating banks. After that, participating banks will lend to industrial enterprises/ESCOs that are eligible to implement EE projects. The loan term agreed by commercial banks and industrial enterprises depends on the type of EE project but must not exceed 10 years. The project is in the early stage, but this model seems unattractive to businesses for the following reasons: interest rates are not insignificantly lower than market rates; lending businesses do not have a wide choice of suppliers; domestic banks are in lack of skills to finance EE projects; ESCOs are difficult to access credit lines due to collateral requirements.
4. Carbon Credit
Carbon credit is the revenue from selling Certificates of GHG emission reduction from energy efficiency projects including Clean Development Mechanisms (CDM) and Joint Credit Mechanism (JCM). Although the revenue from these sources is often not enough to carry out investment in EE projects, it is a practical financial supplement to the cost savings from the energy efficiency project supported by VEPF. As of February 2016, the total CER (Certificate of Carbon) issued is more than 10,000,000 certificates. Most of the above projects are hydropower projects, wind power projects, afforestation, energy recycling, etc. while the field of energy efficiency has a negligible number of projects. For the JCM mechanism, when Japanese enterprises consult and transfer energy saving and emission reduction technologies to Vietnamese enterprises, they will enjoy preferential credits from Japan. The maximum credit limit is up to 50% of the total project cost, at the same time, the amount of CO2 reduction will be charged to the Japanese side. Construction contractors, investors or equipment suppliers can participate in this project. Up to 2017, there were 5 implemented EE projects and 2 JCM projects have been granted credits in Vietnam.
Solutions on the appropriate financial mechanism for Vietnam
Since the energy efficiency market in Vietnam is at an early stage, the proposal of appropriate financial incentives should be based on international experience and the actual context of Vietnam. Synchronous solutions need to fully consider the following factors: legal framework and policies, current regulations on energy efficiency or regulations expected to be promulgated; the development of financial and credit market; energy efficiency service market (ie. ESCO, energy audit, etc.); financial and technical capacity of target customers (ie. enterprises, financial institutions, users), etc.
In the period up to 2025, the priority is given to the implementation of the following important tasks:
- Complete the legal framework, policies and regulations on energy efficiency, including: amend and supplement Decree 21/2011/ND-CP and related guiding documents before 2025 (it is the basis for reviewing and revising the Law on Economical and Efficient Use of Energy by 2030).
- Supplement and synchronously issue regulations on grants, investment subsidies, preferential loans, credit/risk guarantees, subsidies for energy efficiency products from the state budget state and energy corporations.
- Issue detailed and synchronous guidances on exemption/reduction of taxes and fees for enterprises manufacturing and importing/exporting energy-saving equipment.
- Supplement regulations on legal status and legal entity for ESCO organizations to suit Vietnam's conditions.
- Research on the establishment and operation of the Energy Efficiency Fund.
- Develop and complete the legal framework guiding the implementation of green banking and green credit for credit institutions on the basis of the provisions of the Law on Environmental Protection 2020 and the legal documents regulating green credit activities,
- Develop solutions to mobilize resources to grant credit to projects and plans of production and business that use energy economically and efficiently, develop clean energy, use environmentally friendly technology and equipment, make environmentally friendly products.
Conclusion
Vietnam is in the first phase of transition from the publicly financial market to the commercial finance market of energy efficiency. In the transition process, it is necessary to have an appropriate development roadmap for each level/step to sustainable target of the energy efficiency market.
Dr. Tran Thanh Lien
Vietnam Energy Conservation and Energy Efficiency Association (VECEA)
References
[1] United Nations Industrial Development Organization (UNIDO), Ministry of Planning and Investment (MPI). HANDBOOK ON HOW TO ACCESS GREEN FINANCING IN VIET NAM, 2018
