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PE investors scout for deals in Vietnam's renewable energy sector

Opportunities abound in $10bn annual capital requirement but challenges remain

A solar farm in Thailand.  Southeast Asian countries including Vietnam are turning to renewable energy to meet skyrocketing demand for electricity.   © Reuters

HANOI -- Private equity investors are increasingly evincing interest in Vietnam's renewable energy sector as the country, which has long relied on coal and hydropower for electricity production, seeks private investments in alternative resources.

Renewable energy emerged as one of the most preferred sectors for investments in the country in 2019 as it took the third slot after fintech and education, according to a Grant Thorton survey.

The upward move is significant given that in 2018, renewable energy took the 10th place in terms of the most attractive investment sector in the country, as per the survey. This year, the sector has taken a slot ahead of health care, e-commerce and logistics.

"100 percent foreign ownership is allowed in energy production. Wind and solar energy projects, in particular, are absolutely booming -- more active than anything I have seen in my 28 years' working here," said Fred Burke, managing partner of Baker & McKenzie Vietnam.

The country has granted tax relief incentives for green energy projects and has published a national power development plan, which aims to create modern, sustainable and reliable energy services by 2030.

Pham Trong Thuc, director of the Ministry of Industry and Trade's department of renewable energy, said that focus will be given to companies that have proven technologies in hydropower, wind power, solar power, biomass energy and biogas.

"Vietnam's objectives include increasing the proportion of domestically-manufactured equipment value in the renewable energy field up to 30 percent in 2020 and 60 percent in 2030, and being able to export in 2050," he said.

The country is facing a rising demand for energy, growing at 13 percent a year since 2000 and is projected to continue to grow at 8 percent through 2030, according to International Finance Corporation (IFC).

While the Sustainable Energy Promotion Fund will be established and financed by the state budget, Thuc said, Vietnam wanted to mobilize external capital to finance future supply.

Vietnam's power system will require about $10 billion investment each year until 2030 to fulfill the country's targets, according to Electricity of Vietnam's estimates. So, a major challenge is to find the right partners who can commit this huge capital.

Investors in Vietnam's green energy have been more mainstream players. These include both sovereign funds and strategic groups making acquisitions or forming joint ventures such as German ASEAN Power, B.Grimm Power, Trina Solar, Schletter Group, Sunseap International, Gulf Energy Development, InfraCo Asia Development, GE Renewable Energy, and Doosan Heavy, among others.

Meanwhile, some private equity transactions that have been sealed in the sector include Dragon Capital's funding in Pacifico Energy Group that made headlines most recently, Vietnam-Oman Investment's backing the $48 million BCG-CME Long An 1 solar energy plant, and IFC's investment in Phong Dien, Vietnam's first private grid-connected solar farm.

General private equity firms have also started to look at opportunities in this industry. VinaCapital, the local $1.8-billion asset management firm, said in an email that it is currently evaluating opportunities in the sector even as it has not wrapped up any renewable energy deals so far.

IFC and Armstrong S.E. Clean Energy Fund invested in Phong Dien, developed by Gia Lai Electricity, for an 18 percent stake in 2016. The 35-megawatt plant currently generates about 60 million kilowatt-hours, enough to power about 35,000 homes a year, IFC said.

The World Bank Group's investment arm has also invested $75 million in an infrastructure-focused listed green bond by Philippine power company AC Energy, which will develop wind and solar projects in Vietnam that total up to 360MW.

"IFC has identified 60MW of rooftop solar opportunities in a number of factories, highlighting the potential in Vietnam's manufacturing sector," it wrote in a commentary.

Private equity investment in renewable energy is expected to swell up soon, as Macquarie Capital, the Australian group that has a long history investing in the sector, is setting up an office in Vietnam, per an article on the government portal.

The office will be "responsible for researching large-scale renewable energy projects, especially offshore wind, coastal wind and solar energy projects as well as waste-fired energy projects," the article said.

Considering the tremendous $10-billion capital requirement each year, Vietnam needs a silver bullet.

However, most of the financial investors have not ramped up their activities yet as the sector is still at a nascent stage of growth and is yet to witness a renewable energy exit. In addition, the feed-in-tariff has also been brought up as a major issue.

"To be eligible for the current feed-in tariff, approved solar projects must reach their commercial operation dates by the end of 2020. This leaves developers a tight window in which to execute a project," said a report by McKinsey & Company.

Purchase power agreement in Vietnam is not bankable for renewables, making financing, especially for foreign investment more challenging, the report added. "The current renewable purchase power agreement comes as a "take-it-or-leave-it" option, which limits the ability of project developers to offset key project risks."

"The government has warned that the country could face an annual electricity shortage of up to 12 million megawatts per hour by 2023. Shortages could begin as early as next year," IFC said.

Several changes are underway.

Based on available historical data, annual investment in renewables was as small as under $300 million between 2011 and 2015, but increased significantly to $682 million in 2016. In total, Vietnam witnessed investments in the sector at nearly $2.4 billion by 2016, according to UNDP.

The development network last year surveyed 13 respondents who were ready to pour investments into Vietnam's renewable energy, including $200m in equity and $7 billion in debts.

In addition to several already funded developers, SolarBK, GIC Corporation and Tan Hoan Cau are some names that are paving the way for Vietnam's renewables development.

DealStreetAsia is a financial news site based in Singapore focused on corporate investment activity in Southeast Asia and India. Nikkei recently announced the acquisition of a majority stake in the company.

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