Electricity industry at tangent with Government

(ĐTTCO) - The Ministry of Industry and Trade is presently reviewing a draft decision sent by the Prime Minister on regulating the structure of retail electricity tariffs for general public use, by amending Decision 28/2014. 

Electricity industry at tangent with Government

This is being seen as a relatively complicated issue that will need careful consideration, especially under the current very volatile situation of the Covid-19 pandemic and its dire effect on the overall economy.

There are six steps in the restructuring of the electricity tariff. The Ministry of Industry and Trade proposal for restructuring has added a one-price electricity option for domestic use in its five tier plan, with a price equal to 145% to 155% of the average retail electricity price, equivalent to VND 2,703 to VND 2,889 per kWh.  According to the Electricity Law, the average price includes the cost of production, distribution, transmission and ancillary services such as dispatching, administration and overall interest rate, which means that the electricity industry can never suffer any losses. As this is the stipulated law, many people don’t argue against it. However, the Ministry of Industry and Trade offers a retail price which is 145% to 155% higher than the average price without any transparent explanation.

In principle, the volume of electricity supply has no inventory, and production can be any unlimited amount with consumption too being of unlimited amount. Along with receiving a fixed interest on the cost price, the electricity industry has always seen high rising profits after each increase in electricity prices. In 2018, Vietnam Electricity (EVN) announced a profit of nearly VND 700 bn, with an average retail rate of VND 1,720.65 per kWh. At the beginning of 2019, the Government decided to increase the electricity price by 8.36%, which was almost VND 1,864 VND per kWh, after recommendation from the Ministry of Industry and Trade. With this increase in prices, EVN summarized that in 2019 the profit was an estimated VND 950 bn, up by 35.7% compared to 2018. Thus, if the electricity industry increases average price by 1.45%  to1.55%, then EVN will see huge profits at a time when other industries are struggling and reeling under the Covid-19 pandemic.

Data from the General Statistics Office shows that in 2010 the labor productivity of the power sector was 11.5 times higher than the general productivity. In 2017 the labor productivity of this industry increased 15.1 times the average labor productivity of the economic sector, and in 2018 the figure touched 17 times. This shows that the value added at the base price of the power sector is very large. The value added at the base price is made up of two factors, namely, the income of workers and the profit. These factors are very high compared to the general level of the economy and the question arises if people are paying high bills just to enrich the electric industry.

The Covid-19 pandemic is bringing with it increasing unpredictability and unseen complications for the economy and also to a majority of businesses. The government is having to bailout many key sectors in business, but the Ministry of Industry and Trade seems to be looking at ways to get more by making a plan where people will have to pay more for electricity. The Government wants to keep growth at a non-negative level and stabilize the macro-economy by keeping the consumer price index stable. According to calculations, if the electricity price increases according to the plan set by the Ministry of Industry and Trade and EVN, it will directly affect the Consumer Price Index (CPI) by about 1.02%. The increase in electricity price will cause the consumption of other products to decrease, which will impact the prices in the next production cycle, thereby causing the GDP to drop by about 0.5% to 0.7%.

In addition, the contribution to GDP by the household sector over the last fifteen years has been largely attributed to individual households. The total value added by this sector accounts to nearly 30% of GDP, the highest level among all economic sectors. Therefore, when the retail electricity price increases, the added value of the household economy will decrease, causing the GDP to decrease by about 0.3% to 0.5%. Thus, the impact of electricity prices will cause the Consumer Price Index to increase and GDP to decrease. This puts forward the question whether the electricity industry in Vietnam is going against the Government which is trying to stabilize the macro-economy under the current dire circumstances being created by the global Covid-19 pandemic.

Dr. Bui Trinh Economic Expert

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