Witoon Permpongsacharoen
Bangkok Post
March 15, 2005

Lao power may not be the best buy.

The World Bank is scheduled to make a landmark decision in the next month on whether to provide a partial loan guarantee for the controversial Nam Theun 2 hydroelectricity project in Laos. Because the 995 megawatt project is a commercial risk on its own merits, the World Bank subsidy will make or break the $1.3 billion (49.8 billion baht) project.

At the same time, Nam Theun 2 is a test case of the leading development institution’s plan to return after a decade-long hiatus to the funding of risky, large-scale infrastructure in developing countries.

The World Bank claims its Nam Theun 2 subsidy is a good deal for Thai consumers, who, whether they know it or not, will be obliged to purchase over 90% of the electricity from the dam for the next 25 years. But a review of the latest analysis suggests the bank may be exaggerating the dam’s economic benefits.

The price the Electricity Generating Authority of Thailand has agreed to pay for Nam Theun 2 electricity – $0.047/kWh (1.974 baht/kWh) – is more than Egat’s available alternatives. Power from the latest gas-fired, combined cycle plants that are coming on line will cost Egat 14% less than Nam Theun 2, or about 1.70 baht/kWh. Energy conservation from Egat’s own successful conservation programme has also proven to be cheaper – much cheaper – at 0.5 baht/kWh.

Despite Nam Theun 2’s uncompetitive commercial costs, the World Bank recently concluded that the project is “economically favourable,” meaning it is the best overall choice for society as a whole. But a review of the bank’s Nam Theun 2 Hydro Power Project Regional Economic Least-Cost Analysis Draft Final Report and the Nam Theun 2 Project Economics Interim Summary Report unearths a number of questionable assumptions. In order to justify the economics of Nam Theun 2, the World Bank has to play with Egat’s power development plan and overestimate future Thai electricity demand growth and suppress analysis of cheaper energy conservation and renewable energy.

The World Bank has construed Thailand’s power development plan to show a shortfall equivalent to the electricity that Nam Theun 2 would generate.

Egat’s March 2003 power development plan includes a commitment to upgrade old power plants with higher capacity generators at North Bangkok, South Bangkok and Bang Pakong generating stations. Yet the World Bank Nam Theun 2 Regional Economic Least-Cost Analysis, which is based on this March 2003 plan, erases these planned upgrades and replaces them with the assumption that the plants will only be “reconditioned” and retain their old capacity. The change results in a calculated shortfall of at least 930 MW – which helps justify the 995 MW Nam Theun 2 project. The text of the study provides no justification for this considerable change.

The World Bank’s assumptions about the Thai demand for Nam Theun 2 power are overly optimistic. Nam Theun 2’s viability requires high growth in future Thai demand for electricity.

The World Bank adopts a Thai government electricity demand forecast without appropriate consideration that these forecasts are developed by players with vested interests in power plant construction and that these forecasts have historically substantially overestimated actual demand. In the past 11 forecasts, 10 have overestimated demand – sometimes by as much as 40%. Only once have forecasts underestimated actual demand, and only then by 1.5%.

Thai government load forecasts are based on a 15-year prediction of sustained economic growth of 6.5% per year. By comparison, the actual average annual gross domestic product growth rate over the past 10 years was only 3.3% and only 5.2% over 15 years, and the size of the economy was much smaller then.

The National Economic and Social Development Board warned on March 8 that 2005 growth could fall below 6%, while 2004 economic growth was only 6.1%. While Thailand’s economy has been recovering (although not at 6.5% per year), even World Bank economists have expressed concern that this recovery is not sustainable.

So what? If Nam Theun 2 is built it will be commissioned in 2010. If Thai economic growth maintains its 15-year historic average of 5.2% rather than 6.5%, and if other flaws in the demand forecast are corrected, then my analysis shows that actual electricity demand will be at least 4,100 megawatts below that predicted by Thai government load forecasts by the year 2010. My analysis shows that Nam Theun 2 is not needed, and in contrast to the bank’s calculation that it is an economic benefit of $277 million (10.6 billion baht), I find it will be an economic burden of $116 million (4.4 billion baht), compared with electricity from natural gas.

The World Bank has not released a study that shows that Thai consumers have cheaper, cleaner options to Nam Theun 2. Under pressure from concerned stakeholders, the World Bank commissioned a study in early 2004 to compare the cost and potential of renewable energy and energy conservation to Nam Theun 2. According to an August 2004 draft of the study that was leaked, the potential from these sources is more than triple the capacity of Nam Theun 2 at a cost that is 25% cheaper than electricity from the project.

Will this study be released officially to the public soon enough to make a difference in the bank decision regarding the loan guarantee for Nam Theun 2? The World Bank failure to disclose this study suggests two things. Firstly, the bank does not want Thai power consumers to know that they have cheaper options than Nam Theun 2. Secondly, the bank does not want public scrutiny of its failure to encourage energy conservation and renewable energy.

These questionable economic calculations, and others beyond the scope of this piece, strongly suggest that Nam Theun 2 is not a “least cost” option and is a burden rather than a benefit to Thai consumers. They also suggest that the bank is willing to go to great lengths, including violating its own operational guidelines regarding economic evaluation and disclosure of information, to justify a project that, in turn, justifies the World Bank’s existence.

Witoon Permpongsacharoen is a member of the National Economic and Social Advisory Council.

Please note that TERRA/FER has a new email address: fer@terraper.org