Mekong Utility Watch

Unnecessary increase of Thailand’s electricity capacity

The Nation
October 13, 1999

In October 1999, the Thai Government increased the price offer to the 900 megawatt (MW) Nam Theun 2 hydroelectricity project in Lao PDR from 4.173 US cents per unit to 4.372 US cents per unit, plus a further unit transmission cost of 0.756 US cents.  However, irrespective of the price, Thailand has no need of additional electricity capacity.

In a comment in the Bangkok Post Mr. Witoon Pennpongsacharoen, Secretary General of the Foundation for Ecological Recovery, said, “When Nam Theun 2 comes on line in December 2006, EGAT plans to have an excess electricity capacity of 9,211.6 MW equivalent to a massive 44.3 per cent of Thailand’s total capacity. In effect Thailand is buying electricity, on a take or pay contract, that according to EGAT’s plans we do not need.

“Yet EGAT’s projections have already failed. This year’s actual peak demand is far below what EGAT forecast for 1999. If actual demand continues to fall short of EGAT’s optimistic forecasts, the real excess in 2006 will be much higher.”

“EGAT’s planned expansion of capacity will increase costs to Thai consumers,” warns Witoon.

Consultants, PriceWaterhouse Coopers (PWC) who were hired by the National Energy Policy Office (NEPO) to conduct a Review of Electric Power Tariffs have issued the same warning. PWC recommended that “there is scope for further delaying planned investment and perhaps for canceling some projects.” According to PWC, “power charges could be 7 per cent lower if consumers did not have to pay for unused generating capacity in the system.”

Yet, according to a report in The Nation, electricity tariffs in Thailand are going to continue to rise as a result of increasing fuel costs. Prapan Thianhiran, head of EGAT’s System Planning Division, said it would not be easy for the state agency to abandon its purchase and expansion plans, especially those involving foreign parties. The Thai negotiating team has consistently said their negotiations for Nam Theun 2 are based on recognition of the friendly relationship between Thailand and Laos.

“Offering high prices for unnecessary electricity purchases is a very substantial gesture of friendship when Thai consumers are already suffering the effects of the economic crisis. Yet, the price is still too low for the Government of Lao PDR (GoL) to earn profits,” says Witoon.

In fact the projected benefits to be earned by the GoL have consistently decreased since Nam Theun 2 was first proposed. The first feasibility study of the dam in 1991 estimated it would generate US$176 million in annual revenue for Laos, yet the Louis Berger Economic Impact Study, completed in 1997, estimated it would produce only US$38 million annually. This study assumed a price of 5.7 US cents per unit, 23 per cent above the current offer price. According to the Berger report, the GoL will lose money if Nam Theun 2 goes ahead with the current offer price. However, while the outlook for the GoL looks bleak, the private companies in the Nam Theun 2 Electricity Consortium (NTEC) are placed to make handsome profits from the project construction.

These companies include:

Electricite de France (EdF) (30%); Transfield (10%); Italian-Thai Development (I 5%); Merrill Lynch Phatra Securities (10%); and Jasmine International (10%). The GoL has 25 per cent equity in the project.

According to the recently concluded contractual arrangements for project construction EdF and Transfield are to assume overall responsibility for construction. As ‘project management’ these two companies would take a project management fee of approximately 20 per cent of the total construction cost that is currently estimated at US$740 million. At this cost, EdF and Transfield would receive the princely fee of approximately US$148 million.

The final price for construction will be agreed between the project management and NTEC on the basis of ‘guaranteed maximum cost’. This means that the project management would absorb any cost overruns. However, as EdF and Transfield are also members of NTEC, and will participate in negotiations to set the price, it is unlikely they will face any real cost overrun risk.

Meanwhile, Italian-Thai Development has secured the contract to build all the above ground construction associated with the project, including the dam, downstream channels, roads, and houses.

As a further blow to the Lao Government, in September 1999, Thai negotiators on Nam Theun 2 recommended that NTEC find ways to make the project feasible with the low tariff on offer.

Thailand’s suggestions included reducing the benefits paid to the Lao Government in royalties, resource rents and taxes or amending the project design to increase capacity.

Witoon says, “neither Thai consumers nor the GoL have anything to gain from pushing ahead with the Nam Theun 2 project. In fact the costs will be high in economic terms and in terms of the destruction Nam Theun 2 will have on the livelihoods and environment of communities living on the Theun and Xe Bang Fai rivers. The only beneficiaries of the proposed Nam Theun 2 hydropower project would be the private sector.”

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