Vietnam sugar farmers pin survival on green energy

Vietnam’s sugar industry is ill-prepared for the wave of competition set to hit when trade barriers fall at the start of 2020.

The Asean Trade in Goods Agreement, which will open the country’s markets to other members of the regional trade body, is expected to lead to a surge in imports, particularly from Thailand.

Despite a two-year grace period and warnings that full implementation could lead to domestic prices falling by as much as 20 per cent, producers have largely failed to cut costs, while Vietnam’s farmers still struggle with low productivity. Without proper government intervention, the industry, which directly and indirectly employs 1.5m Vietnamese, may not survive open market competition.

Inevitably, the approach of possible Armageddon is fuelling calls for state protection, including non-tariff barriers. Prime minister Nguyen Xuan Phuc has hinted at measures to protect the sugar industry when trade barriers fall, which could open Vietnam up to retaliation from trade partners but would be in keeping with measures taken elsewhere in the region.

The Thai government has spent nearly four decades nurturing its sugar industry, including generous direct subsidies, which is why it is globally competitive and now poses a direct threat to Vietnam’s.

“The Thai sugar industry produces almost six times more sugar than it consumes, which means 80 per cent of sugar production is dedicated to exports,” said Antoine Meriot managing director of Sugar Expertise, a US consultancy.

“Very clearly, it means a real threat for the Vietnamese sugar industry.”

Vietnamese sugar factories are already closing because producers cannot compete with smuggled product from Thailand, which accounts for about a fifth of domestic market supply.

Head-on competition with Thai sugar producers “is going to be very tough,” Nguyen Van Loc, secretary-general of the Vietnam Sugarcane and Sugar Association (VSSA), told scoutAsia Research.

Ten Vietnamese sugar mills have closed since 2015, leaving 36 operating. The VSSA expects less than 30 to remain in production by the end of 2020.

The anticipated fall in prices could lead to further closures and encourage farmers to shift to more profitable crops, hurting domestic sugarcane supply.

But a renewable energy push presents another solution to the industry’s competition problem. This may not be enough to tackle the country’s looming power crunch, but waste from sugar production, known as bagasse, along with other agricultural production waste could be turned into biomass to generate electricity.

Chart of Vietnam’s electricity fuel mix, showing renewables’ share of total used to grow but is set to remain a sideshow in the country’s energy mix

Vietnam could generate up to 4,300 gigawatt hours per year — enough to power 630,00 households — using readily available waste resources such as rice husks and bagasse, according to a 2018 study by the Global Green Growth Initiative (GGGI), a Seoul-based non-governmental organisation, and German development agency GIZ.

By 2030, the government is targeting renewables, including biomass but excluding hydropower, to account for 7.5 per cent of Vietnam’s energy output, up from little more than 0.5 per cent now. With the right policies in place, domestic sugar mills could account for about 40 per cent of the biomass energy output target, according to the VSSA.

“Biomass is a small piece in the [energy] pie but it is an important one, along with wind and solar,” said Adam Ward, Vietnam Country Representative of the GGGI.

However, a more generous feed-in-tariff (FiT) will be needed to boost investment in biomass energy and support the sugar industry. Vietnam’s sugar mills have combined generating capacity of 352MW but investment is stymied by low prices. The country’s eight grid-connected sugar mills sell power to the grid at 5.8 US cents per kilowatt hour, in line with a 2014 government policy. This is far below the tariffs offered by grids in Thailand and the Philippines.

“Investments have been cautious, for instance, employing inexpensive equipment, and thus, are not efficient in the long run,” Mr Loc said.

Based on its analysis of the financials of five local mills, the GGGI-GIZ study concluded that a tariff of at least 9.35 US cents is needed to ensure profitability and incentivise companies to invest in more advanced power generation systems. Biomass power capacity could be doubled “very quickly” with the right technologies to process a variety of waste products, according to GGGI-GIZ.

Biomass energy would not only help the sugar industry but also give the government a clearer path to achieving its renewable targets because it is more predictable than solar and wind, and can be more evenly distributed around the country.

“It’s a great opportunity for Vietnam to add some stable renewable energy to the grid. It just checks all the boxes,” Mr Ward said.

The industry has lobbied for the government to revisit the biomass FiT, demanding more equality with regional peers, as well as with the prevailing solar and wind energy FiT rates.

The experiences of the solar and wind sectors are instructive because raising their FiT rates has led to a dramatic surge in investment. As much as 10.5GW in new solar and wind plants were approved by the middle of this year, while nearly 4.5GW of solar power is already connected to the grid, compared with the 4GW 2025 target.

Chart of solar and wind Feed-in-tariffs between 2016 and 2019 showing high tariffs have spurred both power industries

The sugar industry’s calls have been rebuffed so far. The government is revisiting the 2014 “supporting mechanism” policy which set the original tariff rate but has only proposed a new tariff of 6.8 US cents. The industry remains hopeful of more measures ensuring a level playing field, including a better tariff policy.

Failure to act will end up hurting not just the sugar industry, but Vietnam’s overall development.

scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in east Asia, south Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research