Project Completion Report on Theun Hinboun Hydropower Project
1. PROJECT DESCRIPTION
1. The main objective of the Project was to support economic growth in the Lao PDR by enhancing foreign exchange earnings through the export of electric power to Thailand. The Project represented a new policy direction in the power subsector, which had been initiated through discussions with the Asian Development Bank (ADB). It was the first time that the Government of the Lao PDR formed a joint venture (JV) with the private sector for financing, constructing and operating a power plant.
2. The Lao PDR has exported surplus power from the existing Nam Ngum Hydropower Plant to Thailand since its commissioning in 1972. A memorandum of understanding (MOU) between the two countries, dated 4 June 1993, on developing 1,500 megawatts (MW) of electric power in the Lao PDR by year 2000 for export to Thailand, and the Lao PDR's new foreign investment policies paved the way for private sector participation in the development of the Lao PDR's hydropower resources as a major export commodity. The Project was the first to be implemented under this MOU, and the first major investment under the new foreign investment policies of the Lao PDR. Except for a minor local supply to the nearby area, the electric energy being produced is for export to Thailand.
3. The hydropower potential of the Nam Theun River had been recognized for a long time. In 1991, the Government started studies to identify a suitable project in central Lao PDR to export power to Thailand and provide a local supply. The project, initially, was conceived as a public sector project. A full feasibility study was started in 1992 and foreign investors joined in 1993. Project implementation started in November 1994, and the Project was completed well below the budget. Commercial operation commenced on 31 March 1998.
4. At the time of project formulation there was no legal framework in the Lao PDR allowing the establishment of this type of JV. ADB therefore assisted the Government through a small-scale technical assistance (TA) grant in establishing the required legislation.1/
5. The Project is located about 100km upstream of the confluence with the Mekong River on the border between Borikhamxayi and Khammouan provinces. In this area, a narrow mountain ridge separates the Nam Theun basin from the lower Nam Hinboun. The project site is ideally suited to the establishment of a run-of-river hydropower station through transbasin diversion of water for about 10km from the Nam Theun to the Nam Hai,2/ utilizing a difference in elevation of about 240m for the production of electric energy. As a result of its easy access, technical soundness, low cost of generation, and limited environmental impact, the Project ranked high among those considered for development by the Government and private sector sponsors. The intake is located in Borikhamxai Province on the Nam Theun, which is one of the largest tributaries of the Mekong in the Lao PDR, with a total catchment area of about 14,650km2. The powerhouse and the tailrace canal are located in Khammouan Province. The owner of the Project is the Theun-Hinboun Power Company Ltd. (THPC), a Lao PDR-registered company established for this purpose.
6. For the 210MW rated capacity, the average annual generation potential is estimated at 1,645GWh before the implementation of any upstream development, and at 1,356GWh after commissioning of the planned upstream 600MW Nam Theun 2 Hydropower Project. A compensation flow of 5 cubic meters per second (m3/s) is being released past the weir during dry periods. The river inflow to the intake exceeds the plant capacity on the average during about 230 days per year. After completion of the Nam Theun 2 Hydropower Project, the inflow to the Project will exceed the plant capacity on the average about 175 days per year.
7. The Project consists of the following components:
i. civil works associated with the intake weir, waterways, powerhouse, and auxiliary structure;
ii. supply and installation of 2 x 105MW vertical shaft turbine generating units;
iii. supply and installation of station auxiliaries and switchgear;
iv. supply and installation of metal structures such as sluice and radial gates, trash racks, and penstocks;
v. construction of a 230kV double-circuit transmission line, 86km long from the project site to Thakhek on the Thai border, including a metering station at Thakhek, and provision for a switching station and a future substation; and
vi. consulting services for feasibility, design, and project implementation.
A. Establishment of Theun-Hinboun Power Company, Ltd.
8. On 23 June 1993, the Government signed an MOU with the foreign sponsors MDX Lao Public Company Ltd. (MDX)3/ and Nordic Hydropower AB (NH)4/ to jointly develop the Project. Based on sound commercial and industrial practices consistent with the foreign investment incentives provided under the policies and laws of the Lao PDR, the parties agreed to establish a Lao PDR-registered company with the objectives to plan, design, finance, construct, own, operate, and maintain the Project primarily for sale of electricity under a long-term contract to the Electricity Generating Authority of Thailand (EGAT). The Government assigned to the State-owned power utility of the Lao PDR responsibility for nationwide generation, transmission, and distribution of electric power, with Electricité du Laos (EdL) to hold its interests in the Project. The shareholders and their respective ownership are (i) EdL with 60%, (ii) MDX with 20%, and (iii) NH with 20%. The structure of ownership of THPC is shown in Appendix 1.
9. Until the company could formally be established, a steering committee representing the sponsors was appointed to oversee further development of the Project. The main tasks to be supervised were (i) preparing the shareholders agreement and other documentation required to register the company, (ii) negotiating the license agreement (LA) with the Government, (iii) negotiating the power purchase agreement (PPA) with EGAT, (iv) arranging for project financing, and (v) monitoring design and procurement. The shareholders agreement was signed on 13 October 1994, and the company became registered on 7 November 1994. Following organizational resolutions by the shareholders, the first shareholders and board meetings were held 6-7 December 1994.
B. License Agreement
10. At project preparation, the legal framework of the Lao PDR was inadequate for the Project to be realized under commercial financing (para. 4). Hence, the Government and THPC entered into a LA with the status of a decree. The LA authorized THPC to plan, finance, construct, own, and operate the Project for a period of 30 years from the start of commercial operation. Unless both parties agree to extend the term, the Project will be transferred to the Government, or its nominee, free of charge at the end of 30 years. The LA contains provisions on the rights and obligations of the parties. The most important provisions focus on exclusive rights for THPC, tax and royalty obligations of THPC, and responsibility for environmental and social impact mitigation.
11. THPC is protected under the LA against any upstream activities and diversions detrimental to it, except for implementation of the planned Nam Theun 2 Hydropower Project. In return for being granted this license, THPC is obliged to pay a royalty of 5% of gross revenues to the Government. THPC was granted a tax holiday of almost five years commencing with the start of commercial operations at the end of March 1998 up to the end of the year 2002, after which it will pay 15% tax on its taxable income. The Government assumed the responsibility for environmental impacts including compensation to affected parties, but THPC would pay the cost of such mitigation measures and compensation up to an amount of $1.0 million. This amount was later increased to $2.6 million.
C. Power Purchase Agreement
12. The Project was first officially presented to EGAT and the Coordination Committee on Electricity Cooperation of Thailand in November 1993. Tariff negotiations followed, and an agreement was reached in June 1994. As EGAT at this stage was in the process of developing a standard grid code that would apply to all purchase of power from domestic as well as foreign independent power producers, the full PPA was not signed until 19 June 1996.
13. The PPA is valid for 25 years from the start of commercial operation with an option for renegotiating the tariff after 10 years. It is based on the take-or-pay principle by which EGAT undertakes to purchase 95% of the Project's available energy output. The tariff is a pure energy tariff denominated in dollars, of which 50% is payable in dollars and 50% in baht at the exchange rate on the execution date of the PPA.5/ In the first year of operation, the tariff was $0.0484 per kWh. Thereafter it was to increase at a fixed rate of 1% per annum. The point of delivery is at the border between the Lao PDR and Thailand near Thakhek.
D. Planning and Engineering
14. The criteria for identifying a suitable project were (i) favorable economy, (ii) fast implementation, and (iii) no serious adverse environmental and social impacts. The conclusion of the first Fact-Finding Mission to the area was that a project generally in line with those criteria and the technical solution later implemented would be highly viable. Thereafter the Hydropower Office of the Ministry of Industry and Handicrafts (MIH) awarded Norpower (later merged with Norconsult International A.S.) a contract to execute a feasibility study, which was financed by the Norwegian Agency for International Cooperation (NORAD) as a TA on a grant basis to the Government. The United Nations Development Programme (UNDP) provided a grant for site investigations at that stage. The feasibility study was completed in May 1993 and confirmed that the Project would fully satisfy the requirements.
15. The Government started to prepare to implement the Project and ADB confirmed its financial support. The Government invited MDX and NH to establish a JV Company with EdL to further develop and implement the Project. Planning of the Project, from then on known as Theun-Hinboun Hydropower Project, proceeded concurrently with the formation of THPC and preparation of the final design and tender documents for all procurement and construction works. In March 1994 MIH awarded a contract to Norconsult (now merged with Norpower) with EdL as Executing Agency. This phase of the Project was also financed by NORAD. In December 1995, Norconsult was retained by THPC as consultant for detailed design and construction supervision including follow-up during the defects liability period. This work was financed mainly through a soft loan to the Government by the Nordic Development Fund.
1. TA 2054-LAO: Theun-Hinboun Power Legal Advisor, for $100,000, approved on 4 January 1994, for a five-month legal adviser to assist in structuring legal agreements.
2. The Nam Hai is a tributary of the Nam Hinboun, which joins the Mekong about 30km upstream of Thakhek on the Thai border.
3. MDX is owned to 90% by GMS Power Public Company Limited, then known as MDX Power Public Company Limited. The remaining 10 percent of MDX is owned by the Thailand Crown Agents.
4. Nordic Hydropower AB is beneficially owned by Statkraft A.S. of Norway and Vattenfall AB of Sweden.
5. $1.00 = B25.35.