Study on Economic Partnership Projects in Developing Countries in FY2013 Study on the small hydro power project in the province of Lam Dong in Socialist Republic of Vietnam Final Report SUMMARY February 2014 Prepared for: The Ministry of Economy, Trade and Industry Ernst & Young ShinNihon LLC Japan External Trade Organization Prepared by: Industrial Decisions, Inc. Hokuden Sogo Sekkei Co., Inc.
(1) Background and the Necessity of the Project 1) Background of the Project Establishing a stable power supply system is one of the most important issues to be solved for Vietnam, to prepare for the sharp increase of power demand arising from expected from the rapid economic growth of the country. The Government of Vietnam created the National Master Plan for Power Development for the 2011-2020 period with the vision to 2030, hereinafter referred to as the Master Plan, in July 2011, which was the national power development plan for the next 20 years. At the same time, the Government of Vietnam set some numerical objectives, such as increasing the proportion of renewable power generation to 6% of the total national energy generation by 2030, in order to maximize the usage of domestic energy resources and develop sustainably of the power generation capability of the country. The People s Committee in each province has been planning many small hydro power projects in line with the policy of the Government of Vietnam to promote investments in renewable power generation. The Dai Binh Small Hydro Power Project covered in this study, is one of such projects planned by the People s Committee in the Lam Dong province. However, after fears rose on the potential collapse of a middle scale dam, the hydro power project plans are under review by the Government of Vietnam, which could result in cancellation of 40% of the overall small hydro power projects across the country. In the Lam Dong province, 46 out of 79 small hydro projects, which had been originally planned are scheduled to be removed from the power development plan due to the absence of developers, their low economic value and negative environmental impact. The Dai Binh Small Hydro Power Project will not be removed from the project development list of the Lam Dong province, and is being developed by Binh Thuy Lam Dong Hydroelectric JSC., hereinafter referred to as BTLD. 2) Necessity of the Project Although various investment incentives are offered by the Government of Vietnam, it is challenging to develop wind or biomass power plants as their development costs are too high for their respective electricity tariff, lacking in economic rationality. It appears that the Government of Vietnam intends to promote small hydro power plant development, led by the private sector, as these can be developed with the current electricity tariff and technological standards, while aiming to increase the ratio of the installed capacity of wind and biomass power, two energy resources with high potential the country is deemed to have been endowed with. The southern region is expected to have a shortage of power supply between 2017 and 2019, and the Government of Vietnam is considering countermeasures to resolve the situation. While the development of small hydro power plant projects is concentrated in the northern and central regions, the Dai Binh Small Hydro Power Project is scheduled to connect to the grid in the southern region where power shortage is a concern. As the capacity of the transmission line to connect each region is limited, it is considered that the Dai Binh Small Hydro Power Project is highly anticipated and will contribute to the stable power supply in the southern region.
(2) Basic Policy of Deciding Project Content The Dai Binh Small Hydro Power Project is in the list of the small hydro power development plan of the Lam Dong province, and it matches both the development policy of the Master Plan and the energy policies of the province. The small hydro power plant will supply its power to the southern region where there is a concern over power shortage, making the project highly desired for. Although all the permissions to implement the Dai Binh Small Hydro Power Project have already been obtained, the following points are examined in this report, based on the results of the preliminary study. Socio-environmental aspects around the project site with field study Generation capacity Adequacy of basic design of civil structure and electronic equipment Utilization of Japanese technologies and know-how As a result of this study, the study team has identified that there are no specific issues with the content of the project. The project is expected to be highly competitive in the view of Japanese technologies and know-how, and the total cost of the project. The advantages are detailed in the following section (6).
(3) Overview of the Project 1) Overview of the Project and Total Cost a) Overview of the Project The Dai Binh Small Hydro Power Project will be developed by BTLD as dam with a regulation pond type at the Dai Binh River, which is located in the Lam Dong Province. The power plant will supply its power to the southern transmission and distribution operator, EVN Southern Power Corporation, hereinafter referred to as EVNSPC. Table 1 shows the overview of the project, and Table 2 shows the specification of the power plant. Table 1 Overview of Dai Binh small Hydro Power Project Name of the Project Dai Binh Small Hydro Power Project Project Developer Binh Thuy Lam Dong Hydroelectric JSC Project Site Lam Dong Province Bao Loc City, Bao Lam District Installed Capacity 13.4MW(6.7MW 2) Expected Generating Capacity 52.9GWh/y(Load Factor: 45.0%) Generation Type Dam with a regulation pond type Connecting System Power System in Southern Region
River system Item Table 2 Specification of the Dai Binh Small Hydro Power Project Dai Binh River Catchment Area 984 km 2 River Flow Rate Power Generation Plan General Equipments River Utilizatio n Type of Power Generation Intake Level Tailrace Level Gross Head Effective Head Specifications Estimated from precipitation data at two locations (average from 1977 to 2008) Average:44.74 m 3 /s Maximum: 270.01 m 3 /s High Water: 62.79 m 3 /s Normal Water: 25.99 m 3 /s Low Water:10.65 m 3 /s Droughty Water: 4.62 m 3 /s Minimum:3.31 m 3 /s Dam with a regulation pond Elevation, hereinafter referred to as EL :705.000 m EL:684.935 m 20.065 m 19.060 m Discharge 86.92 m 3 /s Output Yearly output capacity Dam 13,400 kw 52,880 MWh Height: 22.0 m Crest length: 122.243m (concrete dam 30.000m, filldam 92.243m) Spillway Two gates (width 12.0m), overflow spillway EL: 691.0m Intake Penstock Powerhouse Two gates (height 3.65m, width 6.68m) Two lines (height 3.65m, width 6.68m, length 20.0m) Semi-basement Tailrace Width 19.50m, length 16.44m Turbine Type Capacity of Generator Maintenance Flow 0 Two vertical shaft Kaplan turbines 6,700kW 2 Plan Factor 92.8 % River Utilization Rate 44.8 %
b) Project Cost It is expected that the Dai Binh Small Hydro Power Project will require 325 billion VND (approximately 1,520 million JPY 1 ) for the investment, and the breakdown of the cost is shown in the following table. Table 3 Project Cost Breakdown of Dai Binh Small Hydro Power Project Project Cost Vietnamese Dong (million VND) Equivalent in Japanese Yen (million JPY) Civil Engineering/Construction Costs 161,755 757 Equipment Costs 80,267 375 Consulting and Supervisory Costs 3,785 18 Land Accusation Costs 20,000 94 Other Costs 19,086 89 Interest During Construction 40,106 188 Total 325,000 1,520 2) Result of Preliminary Finance and Economic Analysis With the assumption of a finance structure of 60% senior loan, 10% mezzanine finance and 30% equity, the draft of the project plan (statement of profit or loss and other comprehensive income, statement of financial position, and statement of cash flow) was created. If the operation goes smoothly in line with the assumptions, the project is assumed to run with stable revenue from sales of electricity. The economic and financial analyses were also conducted by calculating the Financial Internal Rate of Return, hereinafter referred to as FIRR, as well as the Economic Internal Rate of Return, hereinafter referred to as EIRR, based on the project plan explained above. For both analyses, the Net Present Value, hereinafter referred to as NPV and the Benefit / Cost ratio, hereinafter referred to as B/C were also calculated. The results are shown in Table 4 and Table 5 respectively. Table 4 Investment Efficiency in Financial Analysis Index Value FIRR 12.8% NPV 66,235 million VND (approximately 310 million JPY) B/C 1.21 1 Converted into Japanese Yen at the Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) rate of 213.78VND/ Yen as of October 31, 2013
Table 5 Investment Efficiency in Economic Analysis Index Value EIRR 24.3% NPV 239,516 million VND (approximately 1,120 million JPY) B/C 1.98 The FIRR of the Dai Binh Small Hydro Power Project exceeds the yield (8.85% 2 ) of the 10 year Vietnamese National Bond, and the EIRR is over 10-12% which is generally referred to as general social discount rate by international authorities such as World Bank and Asian Development Bank. In addition, respective NPV and B/C of FIRR and EIRR meet the general standards 3 of investment for financial and economic analysis, which implies that investment for this project is reasonable from both financial and economical perspectives. 3) Consideration of Socio-environmental Aspect For the study of the environmental impact of the development of the Dai Binh Small Hydro Power Project, the study team did the research on the current situation of both natural and social environment of the project area as well as the environmental regulations in Vietnam. As a result of the study, including the field investigation and examination of items which will have an impact on the environment, no significant environmental or social impact could be identified. However, there are several holders of land usage right for coffee plantations in the planned flooding area; the compensation for these farmlands has not been completed. Therefore, it is required to continue the discussion with these holders of land usage right. The deterioration of water quality which stems from the decomposition of plants, once the area is flooded, is expected to last for a period of 1-3 years after the flooding, which would require the removal of plants prior to flooding in this area and continuous monitoring of water quality after the flooding. Environmental Impact Assessment, under the environmental protection law, has already been implemented for the Dai Binh Small Hydro Power Project, and it has received the approval from the People s Committee of the Lam Dong province. In order to further proceed with this project, it is required to complete the land compensation for the holders of land usage rights, as well as to obtain the dam safety certificate, approval of reservoir operation, permission for using water resource, and the permit for operating the electricity business. 2 Source: Investing.com web page, yield of 10-year Vietnamese government bonds as of as of October 31, 2013 3 Standard of investment NPV>0 B/C>1.0
(4) Planned Project Schedule Planned project schedule of Dai Binh Small Hydro Power Project is shown in Table 1. The expected construction period is for 20 months and commercial operation is scheduled to start in the second quarter of 2016. Figure 1 Dai Binh Small Hydro Power Project Schedule(Estimate) 2014 2015 2016 Item 3 6 9 12 3 6 9 12 3 6 9 1 Permissions required for operation & Closing of PPA 4 contract 2 Design 3 Procurement of finance 4 Construction & Commissioning 5 Commercial Operation 4 Power Purchase Agreement, hereinafter referred to as PPA
(5) Feasibility of the Project Dai Binh Small Hydro Power project meets the policy of Lam Dong Province, and it is assumed to be a necessary project for the local economy as it plans to provide power to the southern area of Vietnam which has a concern over power shortages. Approvals and licenses affecting the feasibility of the project have already been acquired. However, the negotiation with some holders of land usage right around the reservoir area on the amount of compensation needs to be completed and the discussion between BTLD and the land owners will have to be monitored closely. 1) Negotiation with the holders of land usage right regarding compensation For the holders of land usage right around the potential power plant and the dam, the compensation has been paid by BTLD. Therefore, it is possible to start the construction of the dam and the power plant. However, the agreement has not been reached with some holders of land usage right around the reservoir area regarding the amount of compensation, and it is necessary to check the progress of the discussion closely. 2) Securement of additional finance in the preparation for interest rates increase As a result of financial and economic evaluations conducted based on the interest rates and total project costs at the end of October 2013, the validity of the investment into the project was concluded. However, local banks in Vietnam employ variable interest rates for their loans in general, thus BTLD is exposed to the risk of interest rates fluctuation. Additionally, because the construction contracts of the project do not employ a fixed lump-sum scheme, the project has the risk that the total project costs might increase due to the possible rise in material costs. Securing of additional finance is required as a preparation for these risk scenarios and requires additional financing to cover the shortage. The results of the evaluation have already been explained to BTLD, and the consultation with regard to future handling toward implementation of the project is planned.
(6) Advantages of Japanese Companies in Technological Aspects and Others Japanese companies are deemed to have advantages in technology and costs and abundant financial resources and investment experience, which is described in the following table. Development of power plants has been already liberalized and private companies are able to enter into the power market in Vietnam. Foreign companies are also able to enter into power development market, based on Enterprise Law article 8 clause 3, through free contracts with contractors regarding technology and finance to implement power projects as developers. The study team s participation in the development of the project has contribute to rise the expectation for the participation of Japanese companies into the development of the small hydro power projects (generation capacity of 21.6MW). This will encourage the entry of other Japanese companies into the small hydro power projects in Vietnam. Table 6 Advantages of Japanese Companies in Technological Aspects and Others Aspect Advantage Technology Abundance of track records in investigation, planning, and design for hydropower generation in and out of Japan. Guarantee of optimum safety and economy: design technology seasoned in the earthquake-prone country. Construction of highly efficient wide-area operation/maintenance framework through the use of remote monitoring system. Highly efficient waterwheel and generator optimized through hydraulic simulations Provision of strategically designed machinery/equipment supported by cutting-edge technology. Cost Reduction of total cost. Longer useful life and prolonged maintenance intervals can well offset the relatively high initial cost associated with this project, leading to reduction of the gross expenditure. Reduction of initial cost. Various equipment, manufactured by and delivered directly from the overseas bases of Japanese corporation, can have a significant effect on lowering the initial cost. Finance Construction of financial schemes utilizing mezzanine finance and others to support the developers of projects facing the shortage of funds.
(7) Map of the Investigated Country Showing the Project Site Dal Site based on LAM DONG PORTAL Management agency center manage electric information, of the department information and communications