Editor’s Note: Thai Doan Hoang Cau has a doctorate in economic behavior in electricity markets and over 25 years’ experience in researching and working in the Australian electricity market. The Saigon Times introduces his article on a new electricity market design that is expected to create an opportunity for Vietnam to catch up or even lead in the sustainable energy transition towards the goal of net-zero emissions by 2050.

Vietnam has chosen the market mechanism as a means to implement its energy and electricity development strategies and is currently finalizing the legal framework to gradually implement the electricity retail market according to the proposed roadmap. At the same time, Vietnam faces new goals and challenges of sustainable energy transition, requiring a very high level of renewable energy penetration into the electricity system. According to National Power Development Plan VIII, the share of renewable energy in Vietnam’s electricity production structure will reach 30.9-39.2% by 2030 and 67.5-71.5% by 2050. A high level of renewable energy penetration has significant impacts on electricity markets worldwide. The question is whether a new electricity market design can help Vietnam, as one of the latecomers in building its electricity market, catch up or even lead in the global trend of sustainable energy transition. Electricity market design Essentially, the electricity market consists of various related market mechanisms aimed at commercialization and promotion of competition in the activities and transactions of the electricity system. To meet the electricity demand at any given time, the electricity sector must plan and construct sufficient sources and grids years in advance (3-5 years), plan capacity allocation, primary input energy in the medium term (1-3 years), and develop operational plans for the year, month, week, day, and then hourly or even shorter periods consecutively and in real-time to balance supply and demand economically while adhering to the physical and technical constraints of the electricity system. Correspondingly, the basic architecture of the electricity market includes the components described below. Architecture of the electricity market Spot market: The spot market ensures the highest trading benefits by connecting the demand and supply of electricity in the short term, calculating electricity prices, and the supply and demand of electric energy close to the actual delivery in each cycle of 1 hour, 30 minutes, or even 5 minutes before. The spot trading cycles occur continuously and consecutively. Futures market: The futures market allows market participants to use future electricity contracts such as contracts for differences (CFDs/swaps), options, and other electricity contracts with various durations such as several years, years, quarters, and months to manage financial risks related to fluctuating electricity prices and generation capacity in the spot market. Through these contracts, participants can implement development plans and mobilize capacity from one month to three years ahead or even longer. Ancillary services market: This market ensures the quality of electricity and the secure operation of the electricity system. Transmission rights market: The transmission rights market helps participants manage financial risks due to price differences between regions when the electricity transmission network is congested (reaching capacity limits). Financial transmission rights can be periodically auctioned for a specific period. Capacity market: This market or capacity management mechanisms help forecast, manage reliability, and provide information and warnings about capacity shortages to ensure timely investment for sufficient supply to meet long-term demand (growth). Retail electricity market: The retail electricity market allows consumers to freely choose their supplier and suitable retail electricity service packages and includes policies to support retail electricity, promoting competition among retail companies and customers. The market governance structure ensures that the aforementioned market mechanisms operate effectively, achieving economic efficiency, technical reliability, environmental sustainability, and other market goals such as transparency, fairness, and participatory investment. The specific design of the electricity market varies depending on each country’s characteristics but generally follows two trends: (i) Less regulation with more decentralized decision-making for market participants to more regulation; and (ii) More centralized decision-making power to governing agencies. Vietnam’s current spot electricity market has a 30-minute cycle, allowing for pricing close to the marginal cost (variable operating cost) with a real-time wholesale electricity market pricing mechanism. This includes market electricity prices reflecting the system’s marginal cost for short-term operation (ex-post) and market capacity prices determined on the principle of ensuring the best new power plant recovers enough variable and fixed costs for generation when participating in the electricity market. Retail electricity prices are regulated, including wholesale, grid, electricity market operation services, electricity system, retail costs, and other related taxes and fees. Vietnam’s competitive wholesale electricity market (VWEM) currently lacks regional pricing mechanisms, reflecting the supply and demand balance of each area and the transmission grid constraints linked with current average loss distribution; it also lacks a market for ancillary frequency control services. Most future electricity purchase agreements are Power Purchase Agreements (PPAs), and allocation contracts are executed through the Electric Power Trading Company (EPTC) under the Vietnam Electricity Group (EVN). The Government manages long-term capacity through power plans revised or adjusted every five years and assigns subordinate units to implement new power source and grid development plans from these power plans. Impact of sustainable energy transition Impact on the electricity system and market: As previously mentioned, the future electricity system will have a high penetration of renewable energy. Due to the low levelized cost of electricity (LCOE), the average cost of building and operating a specific power plant over its economic life, and the continuing decline in renewable energy technology costs, wind and solar power will account for a large proportion of the energy mix. The common characteristics of wind and solar power are that they have zero or very low operating costs because they incur no fuel expenses, but their drawback is instability. The electricity system will increasingly require flexible generation sources such as hydroelectric power, pumped storage, battery storage, and diesel generators to offset the disadvantages of renewable energy. It is important to note that these changes do not affect the physical and technical laws of the electricity system (Ohm’s law, Kirchhoff’s laws) and the economic foundations of the electricity market (theory of optimal spot electricity pricing - nodal marginal prices). However, they significantly impact management methods, short-term operational decisions, and long-term investment in the electricity sector in several key ways as follows: Increased variability: There is greater variability on both the supply side (where many wind and solar farms are connected to the grid) and the demand side (where there are many rooftop solar installations on the customer side), making the task of mobilizing generation capacity and operating the electricity system securely and economically more challenging. Need for new ancillary services: The replacement of traditional thermal power plants, which use controllable synchronous generator technology, by renewable energy creates a demand for new ancillary services such as inertia, fast frequency response, ramp rate, and system strength. Impact on traditional power plants: Policies promoting rapid development of renewable energy lead to a significant reduction in the operation of coal-fired power plants. Some coal plants may not generate enough revenue to cover total costs, forcing them to close prematurely, as seen in Australia. This can reduce the reliability of the electricity system and potentially increase production costs to ensure reliability. Growth of distributed energy resources (DER): There is a growing installation of rooftop solar, smart meters, energy-saving devices, smart energy control systems, and energy storage systems (including the use of electric vehicles connected to the grid to provide services such as energy shifting and ancillary services) on the consumer side. These DERs allow customers to use electricity more economically, respond more quickly to market prices, and participate more actively in electricity consumption and production decisions within the energy market. Impact on electricity market design: These characteristics and trends significantly impact the electricity market design. The spot market needs shorter cycles, like 5 minutes (as in the Australian electricity market), to encourage investment and optimize the operation of flexible sources and DERs. The ancillary services market needs to incorporate corresponding mechanisms for new ancillary services that can be marketable, such as faster frequency control services (2 seconds as in Australia), flexible ramp rates, and effective management mechanisms for other new services. Temporal linkage constraints – where decisions made at one point affect subsequent decisions in the future, such as energy storage, generation unit startup and shutdown, ramp rates – become more important, requiring centralized market operation planning with a longer-term outlook than just one dispatch cycle. Spot electricity prices will fluctuate in response to supply-demand changes from very low (even zero or negative) to very high. High price variability means designs based solely on energy markets, like spot markets and futures markets (trading primarily for periods from the next month to three years ahead), may not provide stable and timely signals for new capacity investment as effectively as a centrally controlled capacity market. A suitable capacity market added to the energy market can help reduce uncertainty and risk in power source investment for investors. The retail market needs appropriate policies and market mechanisms to encourage innovation and new products and services to meet higher consumer demands and to reward and incentivize increasing flexibility in their demand-side responses. All these impacts and design changes require a more responsive, flexible market governance structure and better coordination of governance functions to keep pace with rapid technological changes, new products, and market demands. Thus, simple, decentralized market designs like those in Australia (NEM), which have previously worked well for systems with many controllable traditional generation sources (coal, gas, hydro), may no longer be suitable in the new context. New design to ‘lead’ in sustainable energy transition I believe that a new market design will create opportunities for “latecomers” in electricity market reform, such as Vietnam, to catch up or even “lead” in the sustainable energy transition for the following fundamental reasons: First and foremost, Vietnam urgently needs to attract investment capital to meet its substantial development needs as outlined in National Power Development Plan VIII and to adhere to Vietnam’s international commitments on sustainable energy transition. A new design that aligns with new goals and contexts and is implemented swiftly will soon create revenue stability and reduce policy and market mechanism risks for investments in renewable energy and new flexible sources. This is a prerequisite for attracting investment into the electricity sector. Second, the new design will help better and sooner prepare the electricity market to integrate increasing renewable energy, ensuring the operational security of the power system in the short term and economic efficiency. The slower the appropriate design changes, the more issues, and inefficiencies in operation and investment, lack of transparency, and fairness from market governance bodies and the Government will arise. Third, Vietnam can implement electricity market design changes relatively more easily than countries with established electricity markets. Fully established retail electricity markets in countries like the UK, the U.S., Australia, and the EU, with many commercial contract transactions and intricate regulatory and legal bindings, will find it harder and take longer to transition their designs. In my observation, Vietnam’s current electricity market design is quite simple and does not significantly impact market participants compared to countries that have had long-established markets. This makes it easier and faster to change. This can be seen as an advantage of being a latecomer: being more flexible and able to learn from the “painful” experiences of the pioneers.