With the 1997-98 Southeast Asian economic crisis becoming a distant memory, investment in hydroelectric projects in the region is on the rise. The Malaysian Bakun project has once again been upgraded to 2400MW capacity, while work on Vietnam’s Son La venture is underway. Economic growth and demand for electricity are projected to continue growing strongly in most markets but the real driving force behind new investment appears to be the ongoing process of regional economic and power sector integration.

The situation in Thailand provides an excellent example. The development of several power schemes in the country was suspended following the 1997 economic downturn, including the Krabi and Ratchaburi thermal facilities, although these are now being brought on stream. The economic crisis also resulted in the postponement of power purchase agreements (PPAs) between the Electricity Generating Authority of Thailand (EGAT) and the Nam Ngum 1 and 2 hydro schemes in Laos, but these have now been resumed. Gas fired plants are to provide most of the new generating capacity in the country, partly as a result of the completion of a new gas pipeline from Myanmar’s Yadana field to Thailand, but there is a great deal of potential for hydro facilities elsewhere within the ASEAN region to target the Thai market.

In Thailand, as in most of the other major economies in Southeast Asia, economic growth and industrial output have recovered strongly over the past five years, resulting in a rapid rise in demand for electricity. Thailand itself still has a significant amount of surplus generating capacity, probably around 25% of total capacity. Nevertheless, this will disappear within the next five years, so decisions on the development of new capacity need to be taken now.

Further expansion of Thailand’s hydro generating capacity could be affected by the future deregulation of the countries power sector. The state owned EGAT continues to dominate the power sector at the level of generation and transmission, although there are some independent power producers (IPPs) and more are expected to enter the market. However, the country is expected to figure more prominently as an importer of electricity generated by hydro projects.

The main thrust of the Malaysian government’s energy policy is to move away from gas and towards coal as a thermal power plant feedstock. However, the Bakun hydro scheme on Sarawak will provide an additional 2400MW if it is completed as planned by 2010, while a number of smaller projects are also under development. The government gave the go ahead for the development of the project in 1994 and it was originally scheduled for completion in 2002. Although a construction contract was awarded to Asea Brown Boveri (ABB) in 1996, the project was shelved the following year as a result of Malaysia’s economic downturn.

The government has subsequently taken control of project development and initially seemed ready to cut back Bakun’s planned generating capacity but renewed growth in demand for electricity prompted it to revert back to the original plan. The first generating units could be complete by 2007, while the government is considering using the scheme to export electricity to neighbouring Indonesia rather than dedicating all output to supply the Malaysian capital Kuala Lumpur.

Funding agreed on Nam Theun 2

Beyond Malaysia, however, the biggest hydro power exporter in the region is likely to be Laos, although the prospect of further hydro developments on the Nam Theun river has provoked strong opposition from environmental groups for at least the past decade. Opponents fear that the amount of land lost and general disruption to the local people, flora and fauna will not justify the benefits in terms of increased generating capacity. Nevertheless, rising demand and a lack of new plant developments over the past few years mean that the government is keen to make the most of the country’s hydro potential and it has promised to minimise the negative environmental impact of its schemes.

The biggest hydro development in the country is the Nam Theun 2 scheme. The consortium that set up the Nam Theun 2 Power Company (NTPC) comprises Electricité de France (EDF), with a 35% stake, plus the government of Laos (25%), the Electricity Generating Public Company of Thailand (25%) and the Italian Thai Development Public Company (15%). A number of other major international companies have been awarded contracts on venture, including ABB and GE Energy.

In April this year, funding totalling US$1.58B was secured from a variety of sources, including seven Thai banks, the World Bank, Agence Française de Développement (AFD) and the European Investment Bank (EIB), which has agreed to provide a US$55M loan on easy terms. Another loan of US$20M from the Asian Development Bank (ADB) will fund the government’s equity stake in the 1070MW project. The World Bank has agreed to provide US$1B in loan guarantees, while the remaining US$580M has been supplied in the form of equity stakes and bonds. The first electricity is now expected by the end of 2009.

The US$1.6B price tag includes US$1.2B in direct development costs, plus another US$380M to fund compensation packages and to minimise the environmental impact of the project. This makes it the biggest single investment in the country’s history. The scheme is designed to provide additional capacity to supply Electricité du Laos’ rural electrification programme, as well as satisfying the rapid rise in demand for electricity in urban areas. However, the lion’s share of production will be exported to help fund more infrastructural spending in the country.

The World Bank has been eager to support the view that the benefits of the project outweigh the costs, at least in terms of human benefit. James Wolfensohn, the president of the World Bank, commented: ‘We believe that a sound approach to selling hydroelectricity, supported by improved government policies, is the best way for the country to increase the amount of money it can invest in health, education and basic infrastructure for the benefit of the poor. My colleagues and I have visited the project area and spoken to villagers on many occasions over the past several years. We have also had many intensive discussions with the Lao government and the project developers, making it clear that we all share the responsibility for this project succeeding in the years ahead.’

The president of the ADB, Haruhiko Kuroda, commented: “The project will improve the living standards of one of the poorest countries in the region. We recognise that there are risks involved and we have studied these very carefully with the other government and other development partners. That is why we are involved. We feel that the risks can be managed and that these will be better managed by our involvement.” NTPC estimates that the electricity exports will generate income of US$150M a year for the government, while further income will come from NTPC’s taxes, dividends and royalties.

Vietnamese expansion

The country of greatest hydro expansion, however, is Vietnam. At present, state owned Vietnam Electricity (EVN) relies heavily on coal fired generating capacity but hydro is set to provide an increasing proportion of national capacity over the decade to come. Some new coal fired plants will be developed but these will not be sufficient to cope with rapidly rising demand. Unlike most other states in the region, Vietnam is experiencing a more rapid rise in demand for electricity than economic growth. The economy is growing at a very healthy 7-8% a year but the government predicts that demand for electricity will increase by a massive 15% per year between 2005 and 2010. At the end of 2004, EVN was forced to sign a deal to import electricity from China because of impending shortages and it is also expected to sign up for imports from Laos from 2008.

The biggest project under development is the Son La scheme, which should have a generating capacity of 2400MW when completed in 2012. Development costs are estimated at US$2.3B, including around US$700M for the resettlement of families living in the area to be flooded. Last year saw the commencement of work on several other schemes. Development of the Dong Nai 3 and 4 plants began last year and is scheduled for completion in 2008, providing generating capacity of 520MW. Then, in December, EVN began the construction of the 330MW Se San 4 scheme, while most of the country’s existing hydro schemes are also being refurbished.

Over the course the summer of 2005, EVN published plans for a wide variety of hydro projects, from large pumped storage facilities to 5MW small hydro schemes, as part of its latest ten year plan, covering the years 2006-15. Three 1200MW pumped storage plants will be built at Bac Ai, Phu Yen Dong and Phu Yen Tay, at a total cost of about US$2.3B, in order to help meet peak demand. In August, EVN published details of the small hydro projects, which will be spread across the country but concentrated in the north. The 173 new schemes will have generating capacity of between 5MW and 30MW, adding a total of 2296MW to national generating capacity.

As a result of economic deregulation over the past decade, foreign firms are now playing a much bigger role in the development of the country’s hydro sector and several major contracts have been awarded over the past year. For example, Mitsubishi of Japan leads a consortium that is currently working to modernise the Da Nhim hydro plant. The facility should be brought back on stream by the end of 2006, after EVN secured development funding from the Japanese government. In July, Sumitomo Corporation of Japan was awarded a contract to complete the development of the Buon Kuop plant on the Srepok river in Dac Lac province. The company is expected to install two 140MW turbines, which will be operational by the start of 2009.

The Vietnamese government has taken its first steps towards reducing state involvement in the hydro industry. The sector’s first initial public offer (IPO) was launched in February, when a US$28M stake in the 70MW Son Song Hinh facility was sold. This is expected to be the first in a long line of IPOs as the company seeks to raise large scale funding over the next few years. The increasing sophistication and liberalisation of the Vietnamese financial sector is also aiding hydro development. For instance, a consortium of local banks has agreed to provide EVN with US$88M of the US$188M cost of developing the 100MW hydro scheme in Kon Tum province. The project’s power plant is expected to come on stream in 2008.

Construction of the 210MW A Vuong hydro facility in Quang Nam province is now well underway. The first electricity production is expected in 2007 but the entire project is not scheduled for completion until the following year. In September, Power Machines of Russia secured a US$40M contract to supply turbines for the project. Total investment costs of US$240M are being provided by EVN, domestic banks and the Japanese government.

EVN has also completed a feasibility study on the 520MW Huoi Quang hydro project in the northern province of Lai Chau. Construction costs are estimated at US$500M and thousands of people will have to be relocated but the government is expected to give the go ahead for the development of the project. Development could begin before the end of this year, as part of a series of EVN schemes, including the Chat Hamlet, Srepok 3 and Tranh river 2 plants. The four plants will contribute combined capacity of 1293MW.

Obstacles and incentives

One of the biggest obstacles to the development of new hydro schemes in Southeast Asia could be conflict over the use of the Mekong basin water resources. The Mekong River Commission (MRC) was formed to coordinate water developments in the basin but the efforts of Cambodia, Laos, Thailand and Vietnam to work together have been undermined by the Chinese policy of developing a spate of hydro schemes upstream with little consultation with the members of the MRC.

As a result of upstream dams, the river’s flow rate, which can reach 50,000m3/sec, has fallen as low as 2000m3/sec over the past five years, resulting in salt encroachment on agricultural land in the lower part of the basin. China has drawn up plans to build dozens of new dams on the river and the MRC member states are therefore understandably a little reluctant to make environmental problems even worse by developing more hydro schemes of their own, but this has not prevented hydro developments to date.

On a more positive note, the development of the Association of Southeast Asian Nations (ASEAN) power grid is providing a massive incentive for new investment in the power sector. Although the grid enables thermal plants in neighbouring states to soak up demand that could have triggered the development of new hydro schemes in any particular member state, it can also encourage hydro schemes. State and private sector developers can invest in a scheme safe in the knowledge that they are not only relying on domestic consumers but also have the option of exporting surplus electricity production.

Many transmission links have already been put in place: 115kV and 230kV interconnectors link Laos and Thailand, while 115kV, 132kV and 300kV lines connect the Thai and Malay power grids. However, as in most of the other cross-border power grids elsewhere in the world, the grid does not yet operate as a power pool with generators able to compete to supply electricity within a spot price market. Rather, most electricity trading takes place via long term bilateral deals. This works against private sector developers that are seeking to break into any particular market, but can also provide a level of security and stability for investors. On balance, however, there is no doubt that cross-border developments are one of the main driving forces behind new hydro development in Southeast Asia.

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