Internal rate of return of factories’ electricity generation must not exceed 12%

The internal rate of return (IRR) of power factories’ electricity generation must not exceed 12%, according to a draft circular issued by the Ministry of Industry and Trade on the formula used to determine electricity generation prices.

The draft circular will be applicable on thermal power plants using gas, LNG, coal or oil; hydropower plants; renewable power plants such as solar, offshore wind, sea-based wind, land-based wind, solid waste, biomass; and new energy such hydrogen and ammonia.

The draft circular does not apply to multi-purpose hydropower plants, independent power plants under the build-operate-transfer (BOT) format, and power plants providing supporting services.

The 12% figure is above the ratio of 0-3% achieved by units under state utility Vietnam Electricity (EVN), the Ministry of Justice said in a document on appraising the draft (amended) Electricity Law. The tally aims to attract more private investment in the electricity sector, the ministry added.

The draft formula for power purchasing prices in the base year features a fixed price and a variable price. The variable factor is dependent on changes in the prices of input materials such as coal, gas, LNG, oil.

The fixed factor is determined on the financial analysis of the power factories’ operation and anticipated business results, including the investment, the economic performance of the project per the ministry’s calculation, the average electricity output, the electricity loss and self-consumption, asset depreciation, and loans and equity.

The ministry will collect feedback on the draft circular until March 4, 2024.

The ministry’s most recent rules for power generation prices were issued in Decision 2503/QD-BCT in September 2023 for hydropower and coal-fired power plants and Decision 21/QD-BCT in January 2023 for “transitional” solar and wind power projects.

Transitional renewable power projects are those that missed out on the Vietnamese government's preferential feed-in-tariffs (FiTs).

At a conference to review 2023, state utility Vietnam Electricity (EVN) reported it was facing high power costs of VND2,092.8 ($0.086) per kWh, higher than its selling price of VND1,950 ($0.08) per kWh. EVN general director Nguyen Anh Tuan attributed the issue to renewable energy being costly and hydropower offering a limited stable source.