Development dilemma: How did coal sneak into Laos’ energy plans?
Coal is gaining traction on Laos’ energy scene, throwing the nation’s dream of becoming the ‘battery’ of Southeast Asia into question. As the country thirsts for foreign investment, has poor governance placed it at the mercy of rogue firms?
The plan to turn Laos into a hub of Southeast Asia’s rising cross-border power trade was never without controversy. But amid the nation’s recent approval of yet another coal power plant, a question looms large: In its thirst for foreign capital, has Laos fallen prey to rogue firms doing more harm than good?
At the end of May, the government signed a deal with two corporations, greenlighting a feasibility study on the development of a proposed 1,000 megawatt (MW) coal plant in the country’s southern province of Sekong. The firms are Singapore-based energy firm Evolution Power Investment Corporation (EPIC) and Lao company Khounmixay Bridge and Road Construction and Repair Company (KMX).
The move is, perhaps, unsurprising. Plagued by poverty, the landlocked nation has placed big bets on electricity trade to boost its economy. The power sector represented more than a quarter of total exports in 2017.
However, crisscrossed by the mighty Mekong and several of its tributaries, Laos has focused the majority of its energy development plans on hydropower dams. Faced with increased drought risk, authorities have in recent years eyed thermal coal as a means to ensure steady electricity supply, and trade.
The US$1.7 billion plant will reportedly mainly combust domestic lignite, the cheapest and dirtiest type of coal. Slated to go online by 2027, it will export electricity to neighbouring Thailand, Cambodia and Vietnam.
Laos currently has only one coal-fired power plant in operation. The 1,978 MW Hongsa station in the northwestern province of Xayabury is 80 per cent Thai-owned and was solely built to export power to Thailand. Ever since its construction, the plant has come under heavy criticism. Hundreds of households reportedly lost lands and livelihoods as it was built, receiving little compensation, while farmers living across the border in Thailand have reported impacts on their farmland and water resources.
But besides the newly approved project, Laos has more coal ventures in the pipeline. Last October, Laos inked a deal with Cambodia to sell power from two other new coal plants with a combined capacity of 2,400 MW to the Kingdom. The projects will also be sited in Sekong province, and are set to be commissioned in phases from 2024 to 2027. When the agreement was announced, it was met with severe opposition over its social and environmental impacts.
Out of sync
In embracing coal power, Laos is jumping on a dying bandwagon. Across the world, fewer new coal plants are starting to be built as countries move away from the fossil fuel amid a dwindling willingness among banks to finance it, a rise in opposition to dirty energy from civic society groups, and stronger competition from renewables.
Coal capacity under construction globally dropped 16 per cent from 2018 to 2019, with declines even in China and Southeast Asia. Only this month, coal-loving Japan announced that it would mothball as many as 100 of its oldest, and most expensive, plants by 2030.
Amid plummeting clean energy costs and increasingly stringent environmental regulations that require coal power generators to retrofit pollution control equipment, the odds are stacked against the new project in Laos delivering sufficient returns in a few decades’ time, said Tim Buckley, director of energy finance studies, Australasia at the Institute for Energy Economics and Financial Analysis.
“The chance of that a coal-fired power plant being viable in 2050 is close to zero. That is the definition of a stranded asset before you even build it,” he said. “Why would the government allow a company to pollute the environment when there are so much cheaper, cleaner alternative energy sources available that are superior in every possible way to a coal-fired power plant?”
The burden, Buckley said, will eventually fall on taxpayers, both in countries that finance the plant through public capital, and in Laos, where the nation’s state-owned utility firm, Électricité du Laos, will need to sign a power purchase agreement with the plant’s operators, locking itself into filthy, costly energy for decades.
It does not get better when the Lao legal system is taken into account, which stipulates that all independent, export-oriented power producers must enter into concession agreements with the government under build–operate–transfer schemes.
These models require that control over energy projects is handed back to a public entity after a period of 20–30 years. In other words, the firms backing the new coal plant would eventually pass the buck to the Laotian government and people.
It has not been announced who will finance the project, and a deal won’t be sealed until the feasibility study and social and environmental impact assessments have been conducted, said Buckley. Even if financiers are already lining up, any agreement reached would be subject to environmental approvals.
From ruthless markets to poor governance
But who is to blame for misdirected capital flows in Laos’ energy sector? As the country scrambles for foreign investment, has it perhaps turned a blind eye to environmental and social ills, leaving the door wide open for ruthless firms to enter the market?
Looking at the nation’s relentless pursuit of hydropower, this does not seem far-fetched. As well as wiping out riverine ecosystems, wrecking livelihoods and displacing communities, Laotian hydropower projects have been notorious for their disregard for safety concerns, leading to dam collapses that have claimed dozens of lives and displaced thousands.
Only last year, Laos revealed plans to move ahead with the Luang Prabang dam, the eleventh hydropower project sited on the lower Mekong. Along with the other planned dams, the project has drawn criticism for its potential to wreak havoc on food supplies and the livelihoods of 60 million people dependent on the mighty river’s waters.
Meanwhile, Laos has largely failed to harness other clean energy sources it is endowed with, such as solar and wind. Efforts to undertake pre-feasibility studies on wind development in mountainous areas are lacking, while solar deployment has so far amounted to a mere 32 MW.
Other nations that are just as reliant on foreign capital, such as Vietnam, have demonstrated that the transition to clean energy largely hinges on political will. Nothing is more critical to getting international investors on board than conducive policies and targets.
But compared with other Southeast Asian nations, the regulatory framework for renewables in Laos is weak, creating an opaque and baffling business environment that scares banks and industry players alike.
There are no tax incentives that would attract foreign financiers, and frustratingly complex market entry procedures and the persistent lack of information on investment opportunities further increases project costs. Making matters worse, the government has yet to introduce a pricing mechanism for renewables, with power purchase agreements negotiated on a case-by-case basis.
A new report by Jakarta-headquartered intergovernmental organisation Asean Centre for Energy argues fixing such issues requires an autonomous agency able to govern the renewable energy sector more effectively. In the absence of a dedicated body, capacity to streamline market processes and overhaul existing policies is missing, the think tank says.
Buckley said: “Investors are willing to invest in renewable energy technologies if the political mandate is clear.” In the absence of clear government policy on renewables that de-risks clean energy investments, the proponents of the new coal project simply opted for a more promising path: subsidised coal finance.
In the absence of foreign corporates or foreign governments providing green finance, Laos will take whatever it can get.
Tim Buckley, director, energy finance studies, Australasia, Institute for Energy Economics and Financial Analysis
However, Laos’ dilemma is also the result of a flawed premise of the Paris Agreement, a treaty aimed at curbing global heating by capping greenhouse gas emissions. Five years after the deal was signed, nations are still not working together to address the climate crisis the way its architects hoped they would, said Buckley.
Like other developing nations, Laos financially depends on international support to live up to its climate commitments. But, he said, industrialised countries have not delivered on their half of the bargain, failing to raise the capital needed to spur carbon-aware investment in emerging markets, despite much-touted climate funds.
Worse than rich nations’ failure to provide green finance, it will likely be an industrialised country that will provide public capital to underwrite the new plant, he continued. In recent years, nine out of 10 new coal projects across Asia have been bankrolled by Japanese, South Korean and Chinese state-owned enterprises.
“Laos is desperately in need of development. It is desperately in need of foreign capital that would help it do the right thing. But in the absence of foreign corporates or foreign governments providing green finance, Laos will take whatever it can get,” said Buckley.
In 2017, foreign and private power producers accounted for 88 per cent of total installed electricity capacity in Laos.
“Do I blame Laos for this? Not at all. Laos desperately needs foreign investment to boost its economy. But Laos should be moving into renewables rather than filthy coal power exports,” he continued. “It is the hypocrisy of the developed world that is the core problem,” he added.
Evolution Power Investment Corporation did not reply to Eco-Business’ queries on the proposed project, despite repeated requests. Established in 2018, the privately-held energy development and advisory company does business in both fossil fuels as well as renewables, according to its website.
Its directors are Panyavilay Victor Rattanavong, a Laotian based in Thailand, and Don Lim Jung Chiat, a Singapore citizen based in Singapore. Its shareholders include both directors as well as Phuket-based Swedish entrepreneur Adam Sebastian Hyrvall.
Commenting on the deal, Don Lim said in May that he believed the project could make a “significant contribution” to the country’s energy sector. The proposed plant will reportedly use ultra-supercritical technology to enable higher efficiencies and lower emissions.
To build, or not to build
There may be nothing intrinsically wrong with Laos’ energy ambitions but the country must take the impacts of projects on public health, community livelihoods and the environment into consideration to ensure better lives for Lao citizens, said Muhammad Rizki Kresnawan, research analyst at Asean Centre for Energy.
When climate change is entered into the equation, hydropower—although seemingly vital to Laos’ climate commitments—and coal no longer appear viable pathways towards development, casting serious doubts on Laos’ current power plans.
As of last year, close to 12,000 MW of hydropower projects were at various stages of development, with nearly half of them earmarked for power exports to neighbouring Thailand and Vietnam and, to a lesser extent, Cambodia and Myanmar. Last year, Laos managed to increase its installed power capacity to 9.15 GW as 12 new power plants kickstarted commercial operations.
As monsoon patterns change and Himalayan glaciers thaw, Laos’ rich rivers are poised to eventually carry less water than today, hobbling hydropower generation. At other times, extreme flooding events can potentially threaten the structural integrity of dams. And with water resources strained, the country’s rivers may eventually no longer be able to support thirsty coal power plans that require huge amounts of water to be cooled.
The plant may still get funded, but that does not stop it from being a white elephant.
Tim Buckley, director, energy finance studies, Australasia, Institute for Energy Economics and Financial Analysis
All things considered, the new coal project might yet fall over. It wouldn’t be the first time. India, for instance, has scrapped several proposed coal ventures in favour of cheaper solar energy in recent years. Amid diminished power demand due to economic fallout of Covid-19, energy projects around the world have also come under scrutiny as concerns of an oversupply of electricity mount, said Buckley.
But the project could go ahead. The biggest financier of coal globally, China, continues to bank on the fossil fuel, although the current pandemic-induced economic slump may lead it to rethink its lavish approach to overseas project finance. Despite signs that Japanese public institutions are backing away from coal, a new policy allows Japan to keep funding power plants that use high-efficiency technology, provided that recipient countries commit to long-term goals to cut emissions. Even South Korea appears keen to continue bankrolling coal in spite of green pledges made earlier this year.
“The plant may still get funded, but that does not stop it from being a white elephant. At the end of the day, Laos is desperate for energy and they are going to take whatever they can get. But it is not helping the country in the long term, and they would be much better off developing industries of the future and investing in local wind and solar capacity,” said Buckley.
Source: https://www.eco-business.com/news/development-dilemma-how-did-coal-sneak-into-laos-energy-plans/
