Mekong Utility Watch

At what price electricity?

Bangkok Post
October 30, 1999

The outcome of purchasing electricity that cannot be used is obvious and frightening. What is obvious is that Thai consumers will have to pay for nothing. What is frightening is that Egat has already been warned Thailand is negotiating for an additional 1,600 megawatt of electricity from Laos in 2006, including 900 megawatt from the controversial Nam Theun 2 hydropower project. Does Thailand need this electricity? Will the Lao People’s Democratic Republic benefit from damming a major Mekong tributary and selling electricity to Thailand?While the Thai government is telling us the answers are yes, the real story is somewhat different.When Nam Theun 2 comes on line in December 2006, the Electricity Generating Authority of Thailand plans to have an excess electricity capacity of 9211.6MW equivalent to 44.3% 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. What is worse is that Egat’s current development plan has grossly overstated Thailand’s electricity demand growth; already this year the actual peak demand is far short of even Egat’s forecast worse-case scenario. The plans for new purchases assume not the worst case, but a medium level (higher) growth scenario.


Within just one year of Egat releasing its Power Development Plan 99-01 its forecasts
have failed. We cannot assume otherwise, but that electricity demand will continue to
fall short of Egat’s eternal optimism. If this is the case, and it appears at best extremely
risky to assume otherwise, excess capacity in 2006 will be higher than 9211.6MW,
possibly a lot higher.

The outcome of purchasing electricity that cannot be used is both obvious and
frightening. What is obvious is that Thai consumers will have to pay, effectively for
nothing-for electricity that will just sit in the Thai system unused. What is frightening is
that Egat has already been warned. Several studies have recommended that Thailand
reduce planned purchases and investments, including cancelling some agreed projects.
The alternative is increased tariffs for consumers.

In the negotiations for Nam Theun 2, Egat recently raised the offer price. We are told
they have done this to demonstrate the spirit of Thai brotherhood with our friends in

So now Thailand is offering to pay 4.372 US cents per unit for electricity from Nam
Theun 2 and will also incur a further unit transmission cost of 0.756 US cents per unit.
Compare this total price-5.128 US cents per unit-with the cost Egat calculated to be
equivalent to the cost of new Egat-owned plants-4.178 US cents per unit. Existing Egat
plants are cheaper still, and unlike Nam Theun 2, neither of the above require new
transmission investment.

Offering to pay premium, even platinum prices, for electricity that won’t be used is a
very substantial gesture of brotherhood while Thai consumers are suffering the effects
of the economic crisis; but unfortunately, it is a gesture that will not bear fruit for Laos.

Since Nam Theun 2 was first conceived the promises made to Laos have been wildly
inflated. The World Bank and project developers promised Vientiane that Nam Theun
2 would deliver the foreign exchange Laos so desperately wants in huge quantities. But
will it? A closer look at the economics of Nam Theun 2 is revealing.

When Thailand had a purchase agreement with Laos for Nam Theun 2, the agreed
price was 5.6 US cents per unit. This agreement expired because Nam Theun 2 wasn’t
going to be ready by Thailand’s deadline of 1999. Following this, an economic study of
Nam Theun 2 was conducted by consultants Louis Berger that assumed a price of 5.7
US cents per unit. According to Berger’s report the Nam Theun 2 project would only
be profitable for Laos if inflation remained low and the exchange rate was stable. The
risks of the project were high, warned Berger, and there was a good chance that the
government of Laos would earn little, or worse, that returns on equity would be

Yet Berger was talking about a project with a price of 5.7 US cents per unit. Although
the price being offered by Thailand is above the market rate, 4.372 is hardly the same
as 5.7. It is impossible that the government of Laos could turn a profit on such a price.
Sadly though, it is not impossible that the price will be accepted. After all, the Laotian
government is not the only player with a stake in Nam Theun 2, and those other players
are playing a clever game.

The Nam Theun 2 hydropower project is owned by a consortium called the Nam
Theun 2 Electricity Consortium (NTEC) which includes: Australian company
Transfield, French electricity giant, Electricite de France (EdF) and several Thai
companies including Merril Lynch Phatra Securities and Thai-Italian construction
company. The Vientiane government has a 25% share in the project and Egco, an
Egat-owned company, is looking to replace Jasmine International, the Thai company
which recently quit the consortium. Interestingly, Egat’s increased price offer comes at
much the same time Egco is looking to buy in.

Nam Theun 2 is a so-called a Build-Own-Operate-Transfer (Boot) project. This
means the project will be built, owned and operated for 25 years by NTEC and then
transferred to the government of Laos. So for 25 years when the hydropower station
and reservoir are in peak operating condition, the consortium members will share the
income from Thailand. What remains of Nam Theun 2 will then be handed over for the
Laotian government to own alone for the last few years of project viability. Note: large
hydro-electric dams have a lifespan of only 30-50 years, towards the end of which they
produce less and less electricity and require extensive and expensive repairs.

But the sweetener for the private companies in the consortium is not that they will be
able to offload the project just when it is starting to become a liability. The private
companies are involved to do, and to profit from doing, what they do best:

Imagine a situation where you own a project that is going to have a low return, but you
can set the price for building it. With Nam Theun 2, the developers are really on the
money. EdF and Transfield, who will manage the construction, will not only set the
price; they will get a project management fee of around 20% of the total construction
cost for assuming cost overrun risks.Given that they are setting the price, we can fairly
assume these risks will be very small.With an opportunity like this it is no wonder that
developers have clung on to the project through years of controversy and near
collapse. Transfield and EdF have even been successful at cajoling their governments to
pressure Thailand to offer a better price for the electricity.

This is not to forget the World Bank, which has been with Nam Theun 2 from the start.
After spending years convincing Laos that Nam Theun 2 will solve Laos’ economic
problems, the World Bank has recently used the project as a stick to beat the
Vientiane government into adopting their economic mantra. Their message is simple and
difficult to refuse: if Laos further liberalises the economy (and conveniently forgets that it
was recommendations like these that got Laos into the economic mess it now faces) the
World Bank will support Nam Theun 2.

The net is complete when you add the criteria that Laos must repay World Bank loans
in foreign currency-currency they can only earn with an export-oriented project;
currency they borrowed to develop export projects recommended by the World Bank.

Nam Theun 2 cannot solve the problems of the Laotian economy, but it can make
money for private developers and it can make money flow, if not grow, in Laos.
Perhaps this is the straw the Laotian government is grasping at-a flow of money in,
even if it is less than the money flowing out.

The question for Thailand is: is it enough? As a friend of Laos should we offer this
straw that will solve nothing? And should we offer it at such a high cost to Thailand
when the economic crisis is already causing us great pain?

Witoon Permpongsacharoen is director of Towards Ecological Recovery and
Regional Alliance (Terra)

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