Southeast Asia's next renewable energy giant

With one of the fastest growing economies in the region, Vietnam has been economically resilient during the COVID-19 pandemic. Previously the country's GDP had grown at around 7% year-on-year, due to strong domestic demand and export-focused manufacturing. While GDP fell significantly in the earlier part of 2020, the economy is expected to rebound strongly in 2021.

Rapid demographic and social changes, along with economic growth and industrialization, have tripled the country's electricity consumption. In 2019, the population was 96.5 million, and this figure is expected to grow to 120 million by 2050. With consumption growing more than output, the country needs to transition urgently to renewable energy and gas turbine power generation.

Vietnam's growth story

According to the World Bank, the "miracle growth of Vietnam" is due to trade liberalization; internal deregulation lowering the cost of doing business; investment in infrastructure, and education (half of the population is under 35 years old). This has attracted Japanese and Korean electronics companies, as well as European and American clothing manufacturers.

In 2017, Vietnam was the largest exporter of clothing in the region and the second largest exporter of electronics, after Singapore. From 1986 to 2018, Vietnam's GDP per capita increased 10x, and the middle-class group is expected to make up 26% of the total population.

Increasing demand for electricity drives investment in renewable energy

According to Government forecasts, Vietnam's electricity consumption will increase from 55GW in 2019 to 70 GW by the end of 2022. This remarkable increase is due to urbanization, industrialization and increasing affluence (according to Fitch Ratings). Vietnam plans to increase its coal-based electricity up to 55% of the energy mix by 2025. But in parallel to building more coal power stations, Vietnam is also promoting the introduction of Renewable Energy technologies.

For Renewable Energy, Vietnam has tremendous natural resources: 4 to 5 kilowatt-hours per square meter for solar and 3,000 kilometers of coastlines, with consistent winds in the range of 5.5 to 7.3 meters per second.

A successful pathway to reduce reliance of coal requires 39 GW of wind power and 61 GW of solar power to be installed by 2030 (according to McKinsey). To encourage investment in Renewable Energy sources, Vietnam had an attractive Feed-in-Tariff (FiT) in place for projects connecting to the grid before November 2021. While there is consideration to extend the timeframe, there are also concerns to ensure the grid is not overloaded. These incentives should trigger interest that will lead to the development of many wind and solar projects, previously put on hold. 

With growth comes challenges

Locally based developers and financiers are attracted by the opportunities, but can lack deep experience in Renewable Energy projects. So capital investments are also coming from Thailand and Australia (indirectly through China). While some players have a robust project evaluation process, for others, cost seems to be the only criteria to optimize their investment.

Foreign players may lack familiarity with the country, specifically its climate, industrial organization, and local administrative processes:

  • Climate: Part of the country is exposed to typhoons, with strong winds and torrential rain. Wind can pose a challenge for the construction and the operations of Renewable Energy plants, while  flooding can affect the construction timetable and damage equipment in storage, if necessary precautions have not been taken.
  • Industrial organization: The industrial set-up may lead local onshore contractors to venture offshore. This creates its own challenges; elsewhere (for example) there have been incidents of barges carrying cranes nearly capsizing during the assembly of offshore turbines.
  • Interaction with administrators: The process to obtain the necessary permits can be time-consuming, and non-local players may underestimate the time it takes to secure the proper permits and the necessary approvals.

These challenges indicate the need for local risk management know-how and for insurers and reinsurers to intervene swiftly when required. Local or regional insurers and reinsurers need to have extensive knowledge and experience, so they can address any unforeseen issues that emerge.

Technical challenges

Wind and solar technology is relatively recent. As equipment develops in size and efficiency, insurers can be confronted with prototype (or relatively recent) equipment.

Attention is focused on the wind turbine and the blades; but secondary exposures can also prove to be very costly.

Strong technical review of how marine operations are carried out and the use of Marine Warranty Surveyors (MWS) for offshore wind turbines or floating solar panels, can help to prevent accidents. MWSs play a critical role as they are the insurers' 'eyes' on site. Additionally, it is critical to engage in dialogue with the certification bodies to ensure that the turbine blades have been properly approved/certified for the local conditions.

Risk and insurance solutions

Swiss Re Corporate Solutions has industry specific knowledge on risk prevention for Renewable Energy projects. Our involvement in industry forums and standardization committees globally means we can share with clients the latest insights and information for compliance with regulatory standards.

Our Renewable Energy team is well connected with stakeholders in the sector, including manufacturers and certification bodies, public authorities and Marine Warranty Surveyors (MWS). These industry-wide connections enable us to provide our customers with end-to-end solutions for risk mitigation and insurance.

Summary
In conclusion, we believe it is paramount to develop local and regional knowledge and expertise further. This is true for contractors, owners, financiers – all the key stakeholders in the sector. Most of the equipment and the knowledge currently comes from Europe and the USA. But Asia has different patterns, be it for industrial organization, natural catastrophe exposures, language and culture.

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