Which comes first, policy or technology? The chicken and egg of net zero

Vietnam’s economy is booming. But having one of the fastest growth rates in Asia comes with an equally fast growth in power demand, with the average demand in Q1 2022 15.8% higher than in Q1 2019. This is alongside soaring fossil fuel prices, in a country that currently relies on fossil fuels for around half of its power. It’s clear that aside from environmental concerns, there are also strong economic reasons for transitioning Vietnam’s energy sector.

At COP26 in 2021, Prime Minister Pham Minh Chinh announced Vietnam’s goal to reach net zero by 2050. At the same time, Vietnam also signed the Global Coal to Clean Power Transition statement, pledging to scale up renewables and stop building new coal power plants. Most recently, Vietnam together with a coalition of international partners announced a $15.5 billion Just Energy Transition Partnership in December 2022, which aims to accelerate decarbonisation and increase the integration of renewables.

Despite these positive commitments, Vietnam’s Power Development Plan 8 (PDP8) doesn’t currently go far enough at the moment for the country to realise these goals. To help turn targets into action, we modelled the power systems in Vietnam, the Philippines and Indonesia with a clear roadmap to net zero in our report, Rethinking Energy in Southeast Asia.

Five steps to net zero

While every country has its own unique situation and therefore its own path to net zero, there are enough common features to provide a roadmap that is applicable across the Southeast Asian region. In short, the steps are:  

In the short term (from now to 2030):

1.     Add significant renewable capacity to the system. In Vietnam this should take renewables from 10% of the total generation today to 30% by 2030.

2.     Add balancing internal combustion engines (ICEs) and energy storage to ensure grid stability and smooth out the intermittency of renewables. For Vietnam, 7 GW of balancing capacity provided by modular grid-balancing ICEs should be added to the system by 2030, supported by 1 GW of short-duration battery energy storage installed by 2035.

In the medium to long term (2030–2050):

3.     Phase out inflexible plants once there is sufficient renewable output supported by balancing power plant capacity.

4.     Convert to sustainable fuels like green hydrogen.

5.     Fully phase out fossil fuels.

This shows us the big picture but getting there requires both the technology – which is already available and commercially feasible – and the market mechanisms to encourage investment. What needs to come first is a chicken or egg question: is it the market mechanisms to encourage technology investment, or the technology investment to lead the policy change?

Technology and policy in partnership

This chicken or egg situation has one clear answer: the market mechanism is needed at the same time as the technology. Policy has already shown itself to be a driver of decarbonisation in Vietnam. The country had a big increase in solar in 2020 with over 9.3 GW installed, one of the highest rates in the world. This growth was enabled by a government policy of feed-in tariffs, showing the powerful effect they can have on investment. Unfortunately, growth in renewables has now stalled with the ending of the feed-in-tariff scheme, and a next-generation policy framework is needed to replace it to ensure the momentum is maintained.

Think big, but start small

One way to solve the chicken and egg problem is to start small with pilot projects, working with experienced partners. This has been done to great effect in Singapore, for example with a pilot project for a utility-scale energy storage system. This was a 2.4 MW/2.4 MWh test bed, the first utility-scale energy storage system in Singapore, which enhanced grid stability by providing the quick response and flexibility needed when integrating renewables into the grid. The pilot proved its worth and now Singapore is discussing building 200 MW of energy storage.

Another testbed pilot run in Singapore in 2021 was the first hydrogen-enabled engine for the Keppel Offshore & Marine Floating Living Lab, which again proved a success. In 2022, Singapore launched its national hydrogen strategy, which will be part of the country’s race to net zero. Singapore is often the innovator in Southeast Asia, but they don’t take risks by making big commitments to new technology. Instead, they start small and learn by doing, then use what they’ve learnt to write policies and make further advances. This is something other countries could – and should – learn from.

See what’s working well elsewhere

Another method of mitigating risk is to see what is working well elsewhere. In October 2022 a new 100 MW balancing plant was announced in Japan, which will support the integration of renewables into Japan’s power mix by balancing the intermittency of supply with fast-starting internal combustion engines (ICEs). This has been a success due to Japan’s new cross-regional balancing market, which bridges the gap between energy demand and supply while variable renewable energy is being introduced into the system. The new power plant allows the Japanese customer to hedge market price fluctuations while providing balancing and peaking capabilities to ensure stability of supply. Having the right policies and market mechanisms to support technology investment in renewables and flexible balancing is an essential element in Japan’s target of achieving 36–38% renewables by 2030.

The right market mechanisms to reach net zero in Vietnam

To reach net zero by 2050, Vietnam needs to develop and implement critical regulatory frameworks to incentivise renewables and flexible assets, while creating a more competitive energy market. Mechanisms must encourage investment by ensuring the financial viability of flexible assets and should include separate capacity payments for flexibility and ancillary services markets. In addition, the next generation of power purchase agreements (PPAs) should be designed so that incentives for flexibility are built into agreements.

To support renewables development, a new feed-in tariff or investment support is needed. In the long term, competitive wholesale markets with real time and short interval pricing should be developed. This would mean power plants competing by bidding into the power market instead of having fixed price contracts, which would provide incentives to invest in more renewable and balancing capacity to meet demand when supply is low.

The technology is ready and waiting, but without the market mechanisms in place to incentivize investment we cannot progress quickly enough towards our net zero goals. While we at Wärtsilä can champion the flexible technology needed, we also need policy champions to drive the adoption of new market mechanisms. Policy makers often think the technology isn’t ready, but it is – to unlock its benefits we need market mechanisms that reward the value of renewables and flexible assets in wholesale power markets. Net zero won’t be solved by one thing alone, but policy and technology together can help us solve the challenge of net zero.