Transparent and Competitive Electricity Pricing

On the morning of August 20th, the Government Portal organized a seminar on “What breakthrough to attract investment in the electricity industry”.

Mr. Nguyen Tien Hoa, former Director of the Price Management Department (Ministry of Finance), stated that there are four major problems with electricity prices. The first and most encompassing issue is that electricity prices are not determined by market mechanisms.

“All input costs for electricity production such as coal, gas, oil, exchange rates… have followed market prices, but the output price does not reflect the fluctuations of these costs. Sometimes the adjustment takes too long, sometimes it is not calculated correctly and comprehensively, and does not ensure full compensation for all costs incurred in electricity production and business.” said Hoa.

This has led to numerous difficulties in electricity production and business. According to expert Hoa, the latest data for the years 2022 – 2023 show that this management approach has caused a loss of about VND 47,500 billion for the electricity industry.

This is a significant challenge for improving the electricity industry’s cash flow for investment and development of power sources and grids.

Along with that, the issues with electricity prices mentioned by expert Hoa include bearing multi-objective tasks, cross-subsidization, and not being separated from social welfare policies.

He illustrated that electricity prices not only cross-subsidize among groups of household electricity consumers – with higher tiers subsidizing lower tiers, but also between household and production electricity prices, and among regions. “Electricity in coastal communes and districts often costs 7,000-9,000 VND/kWh, but we still sell it at 1,000-2,000 VND/kWh, meaning that lower regions subsidize higher regions…” Hoa explained.

Meanwhile, Dr. Bui Xuan Hoi, an energy economics expert, stated that while Vietnam’s electricity prices are still multi-objective, countries around the world have relatively clear separations. “Of course, saying that a product is 100% market-based is unrealistic, but the question is how to regulate it,” he said.

According to Dr. Bui Xuan Hoi, the typical price structure consists of two components: one is the calculation of capacity costs, which we call the capacity price (subscription price); and the second is the energy cost, after subscription, you pay for what you use. This is usually the approach taken by countries around the world.

Looking back at Vietnam’s pricing system, the current calculation is based on the average retail electricity price. He argued that this has limitations but is not the core of the difficulties faced by the electricity industry today. The most crucial issue is price management. “If electricity prices cannot be determined by market mechanisms immediately, then all regulatory aspects must gradually move towards the market,” the expert advised.

According to the experts, electricity prices need to be calculated accurately and comprehensively based on market principles, but most importantly, they must be transparent. This has also been requested by the Politburo, the Government, and the National Assembly.

To address these “bottlenecks”, National Assembly Deputy Phan Duc Hieu, a member of the Economic Committee of the National Assembly, assessed that the Government and the Prime Minister have been very determined in amending the Law on Electricity, reviewing Decision No. 28 on electricity selling prices, and making many other moves, including infrastructure development.

Along with that, to promote market characteristics, it is necessary to increase competition in all activities and aspects of the power industry. In this regard, Mr. Hieu emphasized retail competition.