National utility EVN’s gross margin fell from 15.1 percent in 2015 to 12.9 percent last year due to rising costs of payment to new coal-fired independent power projects (IPPs), a recent report by the Institute for Energy Economics and Financial Analysis (IEEFA) says.

As EVN has to pay these projects a fixed price for their power, as more such plants come online, the sole power distributor in the country will experience a financial crunch.

Between 2015-2019, EVN’s own generation capacity shrank from 61 percent to 52 percent of the total system, a ratio that IEEFA Vietnam expects to fall even more rapidly in comping years.

It estimates that in the next three years, there will be on average 4.4GW of capacity addition annually from IPPs, significantly increasing EVN’s payment obligation.

Payment for IPPs, which accounted for 42.7 percent of EVN’s total cost of sales last year, will likely rise to 60.1 percent in 2023, it says.

This means the drop in EVN’s gross margin "will likely continue as more IPP capacity with fixed capacity payments comes online."

The solution is to increase tariffs, but this has become more difficult this year with the Covid-19 pandemic crippling key industries and cutting jobs.

A plan to increase tariffs by the end of this year has been suspended as the government now focuses on protecting jobs and ensuring economic growth while keeping inflation below 4 percent.

EVN also had to offer a 10 percent reduction in billings to customers from April to July, resulting in a subtraction of VND6.8 trillion ($292 million) from its revenue.

The national utility now "faces the risk that if tariff increases cannot keep pace, new debt will be needed to help meet the company’s growing IPP payment obligations," the report says.

It cites credit rating firm Fitch as saying that EVN’s financial profile can be significantly affected if tariffs are not adjusted regularly as it faces major hydrology, currency, and demand risks.

IEEFA forecasts that EVN could report a loss of VND14.5 trillion this year against a post-tax profit of VND9.7 trillion last year.