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Hydropower Development in Lao PDR (Laos)

(Presentation Slides)


1.     Overview

The Lao People’s Democratic Republic (Lao PDR or Laos) is a mountainous landlocked country, with a territory of 236,800 square kilometers and population of 6 millions, endowed with natural resources. Its territory covers substantial part of the Mekong River basin. Around 35% of total inflows of the Mekong River are contributed by main tributaries that are scattered through the territory of Laos. As the country intercepts monsoons from two directions i.e. from the Gulf of Thailand and the Gulf of Tonkin precipitation is considerably high and favorable for hydropower development. Despite oil and gas is under exploration coal as non-hydropower source has been developed at its initial stage.

Currently, the country’s electrification ratio is around 70% of total households and by 2020 the ratio has been planned to increase above 90%. In addition to electrification program mining and mineral processing industry has been emerging and thereby need more electricity. At the same time export electricity to neighboring countries has also been steadily increasing.

Scarcity of finance for investment in power generation has been presenting a bottleneck of the development plan for the sector. Historically, financing needs have been met by International Financial Institutions (IFIs) but their support for generation has been limited in recent years. The power sector was thereby opened up to foreign investment since the first law on promotion and management of foreign investment was promulgated in 1988. Since then private investment in the Lao power sector has therefore been sought and promoted through an independent power producer (IPP) approach by outsourcing funds from private banking system. Given limited recourse financing private participation in the development of power projects has been seen in various forms such as equity investors, financiers, security providers, contractors, suppliers  to name but a few. 

In June 1993, the Government of the Lao People’s Democratic Republic (the “GOL”) and the Government of the Kingdom of Thailand signed the first Memorandum of Understanding (“MOU”) to support the development of power projects in the Lao PDR through the supply of up to 1,500 MW of electricity to Thailand. To accommodate the steady increase in demand for electricity in Thailand the two Governments have extended the MOU several times up to December 2007 when the most recent agreement saw the power purchase scheme expanded to cover the supply of 7000MW of electric power to Thailand by 2020.

In 1998, the Government of Laos also signed a Memorandum of Understanding with the Government of Vietnam covering the development of power projects in Lao PDR for the supply of 2000MW of electric power to Vietnam. In December 2006 the two Governments signed a second MOU that resulted in the agreed supply of electricity being increased from 2000MW to 3000MW by 2015. Then, in January 2008, a further increase, from 3000MW to 5000MW for the supply of electricity by 2020, was agreed in principle.

The power sector in Lao PDR serves two vital national priorities: (i) it promotes economic and social advancement by providing a reliable and affordable domestic power supply; and (ii) it earns foreign exchange from electricity exports.

The Lao Government’s plans for the power sector involve rapid and simultaneous development on several fronts with a view to:

·         Expanding the generation, transmission, distribution and off-grid development to increase the electrification ratio for the country from current level of about 70% to a target of above 90% by 2020;

·         Increasing government revenues from independent power plants (IPP), export,  investments and honoring power export commitments with Thailand and Vietnam by promoting a development carried out by private sector;

·         Promoting 500Kv grid development within the Greater Mekong Sub-region (GMS) to integrate the power systems of Lao PDR and its neighbors.

Sustainability is one of the core requirements for developing power projects in Laos. Environmental and social negative impacts resulted from the development shall be well addressed. In addition to technical and financial studies on projects the developers are required to carry out environmental and social studies in accordance with international standard before starting construction. All costs related to the required studies shall be internalized in project costs. Environmental and social mitigation measures including resettlement and developing new sustainable livelihoods for project affected people are borne by the projects. Implementation of the projects is subject to international and third party monitoring at the cost of developers.

The Government of Laos has adopted several investment-friendly laws whereby attractive financial and non-financial incentives have been offered to developers/investors and other participators of the development. Reasonable equity internal rate of return and debt service coverage ratio as the main financial thresholds sought by equity investors and commercial lenders have been balanced with risks associated to the development considering nature of IPP projects in Laos. Laos as host country has also shared commercial and political risks with investors, lenders and power off-takers. The Lao legal framework has been amended from time to time as to facilitate more investment in the power sector. A series of international treaties and bilateral agreements have been signed and ratified aiming at creating credibility for all stakeholders.


2.    Progress

Electricity from hydropower plants was not produced in Lao PDR until the late 1960s. Some small hydro-electric plants ranging from 50KW to 5MW serving small isolated local grids in different parts of the country were commissioned. By contrast, today the electricity sector is the third largest export earner for the country. It has been estimated that the country has the potential to generate about 18,000MW through the application of hydropower source. Additional capacity of electricity to be developed from other sources such as coals is accounted. Before 1993 only three hydropower plants had been developed by the government and brought into operation. There are now four IPP projects in operation, one under commissioning, seven projects under construction and several others are under technical feasibility studies aiming at supplying electricity to domestic load demand centers and export to neighboring countries:


2.1.        IPP Projects in Operation

1.    Houay Ho Hydropower Project (150MW) achieved its commercial operation date in 1998. Investment by Suez Energy of Belgium (60%), HHTC of Thailand (20%) and Electricité du Laos (20%). Debt financing was raised from international private banks. Of the generated energy, 98% is supplied to Electricity Generating Authority of Thailand (EGAT) with a take-or-pay commitment for 30 years-period.

2.    Theun-Hinboun Hydropower Project (210MW) achieved its commercial operation date in 1999. Direct shareholder investment in this project represented 30% of total project cost while the remaining 70% was raised from international private banks. Electricité du Laos (EdL) holds 60% of shares and each of GMS of Thailand and the Nordic Group of Scandinavian countries has 20%. A take-or-pay Power Purchase Agreement was signed and entered into by and between Theun-Hinboun Power Company Limited (THPC) and Electricity Generating Authority of Thailand to supply electricity to EGAT’s grid for a period of 30 years from the commercial operation date.

3.    Nam Theun 2 Hydropower project (1088MW) just started delivering electricity to Thailand late April 2010.  Nam Theun 2 Power Company Limited (NTPC) was established under Lao PDR law, being the owner of the Project. Shareholders having shares in NTPC are the Lao Holding State Enterprise (25%), Electricity Generating Public Company Limited (25%), Electricité de France International (35%) and Italian-Thai Development Public Company Limited (15%). Being involved in the financing of the Project are 26 international banks including international financial institutions such as the World Bank, the Asian Development Bank, the European Investment Bank, Agence Française de Développement, etc. The Project resettled around 6,000 indigenous people, mostly various ethnic minority peoples, who were living in the inundated reservoir area. In order to share information and gain support from the local public and international communities, a series of domestic and international consultations were launched during the project preparation phase.  Around 95% of its generation is supplied to Thai grid and the rest for domestic consumption.

4.    Nam Lik 1.2 Hydropower Project (100MW) is a BOOT project with investment by China Water and Energy Corporation (CWE) holding 90% of the shares and EdL 10%. All generated energy will be used to supply domestic needs. The project achieved its commercial operation in August 2010.


2.2.        IPP Projects under Commissioning

Nam Ngum 2 Hydropower Project (615MW) achieved its financial close on 1 July 2006. EdL, holding 25% of total shares, represents the Government of Lao PDR in the Project. The rest of shares are held by US and Thai companies. The Project is financed on a limited recourse basis. The Project is now under running test and will start supplying electricity to EGAT early 2011.


2.3.        IPP Projects under Construction

1.    Hongsa Lignite-fired Power Plant is the first thermal power developed in Laos. It is a mine-mouth power plant with installed capacity of 1887MW of which 100MW will be supplied to domestic load demand center in the north of Laos, about 75MW for facilities use and the rest for export to Thailand. Lao Holding State Enterprise which is subsidiary of the Lao government holds 20% of total shares and 80% of shares are held by two Thai companies. The project will achieve its commercial operation date by March 2015.

2.    Xe Kaman 3 Hydropower Project (250MW) is the first Lao project to supply electricity to Electricity of Vietnam (EVN). Financial close was achieved in April 2006. The Project is currently under construction.

3.    Xe Kaman 1 Hydropower Project (322MW) developed by a Vietnamese consortium. There is one percent golden share held by EdL. It is expected to achieve power-on date by 2014. The project will operate on a production sharing basis. 

4.    Nam Ngum 5 Hydropower Project (120MW) is a joint investment by Sinohydro Corporation from China having a 95% shareholding and EdL holding 5% of total shares. The project will start supplying the EdL grid by 2011.

5.    Theun-Hinboun Expansion (220+60MW) jointly invested by Electricité du Laos (EdL) that holds 60% of shares and each of GMS of Thailand and the Nordic Group of Scandinavian countries has 20%. The Project will supply 60MW and 220 to EdL and EGAT respectively in 2012.

6.    Nam Nhone Hydropower Project (2.5MW) is the first Small Power Plant (SPP) project, being jointly developed by Lao and Chinese private investors from Hong Kong. The project will supply the EdL grid in Bokeo, a northern province of Laos in 2011.

7.    Tat Salene Hydropower Project (3.2MW) is wholly-invested by a Thai company. All electricity will be supplied to remote community of Savannakhet province in the middle part of the country. The construction started early 2010 and will take for 2.5 year to complete.


3.    Plans

Following the implementation of the MOUs that were signed with the Government of Thailand and the Government of Vietnam a numbers of projects have been studied in respect of feasibility, social and environmental impact studies. IPP projects that export energy to neighboring countries are required to set aside at least 10% of total installed capacity for the supply of electricity to the local market. The projects shown below are selective from the point of view of readiness and advancement.


3.1. Plans to Supply to Thailand

Works on technical feasibility, environmental and social studies have been finalized for the projects listed below. These projects are in the pipeline, aiming at supplying electricity to Thailand before 2020. Projects in this category are:

1.    Nam Ngum 3 Hydropower Project (440MW) is a joint development by MDX Co Ltd of Thailand, Marubeni Corporation (Japan), EGCO (Thailand) and Lao Holding State Enterprise (LHSE). The project is scheduled for its commercial operation in 2017.

2.    Nam Ngiep 1 Hydropower Project (262MW) is a joint investment by Kansai Electrics (Japan), EGAT International (Thailand) and LHSE (Laos). 2018 is the anticipated date for commercial operation.

3.    Nam Theun 1 Hydropower Project (520MW) is being jointly developed by Gamuda Berhad (Malaysia), EGCO (Thailand) and LHSE (Laos). March 2018 has been set for commercial operation.

4.    Nam Ou Hydropower Project (1100MW) is a development project that is being headed by Sinohydro Corporation of China. The Project will supply domestic grid and is planned to achieve commercial operation by 2018.

5.    Xepian-Senamnoi Hydropower Project (390MW) is developed by SK Engineering of South Korea. The developer signed energy tariff MOU with Electricity Generating Authority of Thailand (EGAT) in August 2010. Negotiation on power purchase agreement and concession agreement is underway.

6.    Sekong 4 Hydropower Project located in the deeper south. The installed capacity varies from 300 to 600 megawatts depending upon operation characteristics the power off-taker will dispatch. The Project is developed by Region Power from Russia. Region Power is negotiating energy tariff with EGAT.

7.    Sekong 5 Hydropower Project (253MW) is a downstream scheme of the Sekong 4 Hydropower Project. Progress of the Project is at the same pace of that Sekong 4 Project.  

8.    Donsahong Hydropower Project (250MW) located on one creek of the Mekong River. Technical feasibilities together with environmental and social studies are at final stage. Discussion on energy tariff with EGAT and Electricity of Cambodia is underway.


3.2. Plans to Supply to Vietnam

A numbers of hydropower projects such as the Sekong Hydropower Project 3A and 3B, with installed capacities of 152MW and 96MW respectively, are under study. A further study, of the Dak Emeule Hydropower Project having an installed capacity of 138MW, is due to be finalized by the end of 2010. There are 20 projects in the pipeline to supply electricity under the 5000MW MOU as so signed between the two governments.


3.3. Plans to Supply to Cambodia

In December 2009 Electricite du Laos (EdL) started delivering around 10MW from its southern grid to meet small load demand centers in Cambodia. In the meantime, there was an agreement in place between the two governments for the supply of 200MW from Laos to Cambodia by 2020. Done Sahong on the main stream of the Mekong River is the first hydropower project to supply electricity to the northern grid of Cambodia.


3.4. Plans for Domestic Supply

In addition to the 10% of total capacity that was to be made available for local supply through the IPP export projects, several medium size IPP projects have been nominated by the Lao government for development to meet demand in the country.


4.    Process of Development

There are several governmental departments involved in the promotion, management and monitoring of independent power plants known as “IPP” projects in Lao PDR. The availability of green field projects ready for development depends upon demand for electricity both inside the country as well as neighboring countries where potential for export of electricity exists from time to time. The following steps highlight general information regarding the process of project implementation.

(i)            Initial Contact

Information on power sector strategy projects (list of projects ready for development) can be obtained from the Department of Electricity (DOE). Details on the process of project development, including advice on required project studies, agreement drafting, and incentives and coordination issues with the Government of Lao PDR (GOL), may be obtained from the Department of Energy Promotion and Development (EPD).  Both DOE and EPD operate under the Ministry of Energy and Mines.

(ii)          Memorandum of Understanding (MOU)

Once selection of a project has been made by the interested party, an application for investment attached with a draft MOU is required to be submitted for consideration to the Investment Promotion Department (IPD) within the Ministry of Investment and Planning. Printed application forms and draft MOU’s, including advice on licensing procedures, may be obtained from the IPD. 

Once the application form has been processed, the applicant, or developer, will be invited to discuss the terms and conditions of the MOU as submitted. The Ministry of Investment and Planning is the designated Government signatory for the MOU while the Ministry of Energy and Mines, through the EPD, is the implementing agency on behalf of the Government.  EPD monitors performance and adherence to the obligations, including exercising the rights of the GOL as contemplated in the MOU, Project Development Agreement (PDA), and Concession Agreement (CA). 

Upon signing the MOU, the developer is granted with a mandate to carry out technical feasibility studies (FS) and environmental and social (E&S) impact studies. Detailed guidelines for the FS and E&S studies are available in pertinent Lao laws. All correspondence, FS and E&S studies and reports are submitted to EPD for further action to be taken by various relevant governmental departments. Once the FS and E&S studies reports have satisfied the GOL and the project has been proven financially feasible, the developer will be advised to negotiate the PDA with the GOL. The MOU mandate period expires upon the earlier of 12 months or upon joint signature of the PDA.

(iii)         Project Development Agreement (PDA)

It is a prerequisite that preliminary FS and E&S studies and reports contemplated in the MOU are signed off by the relevant GOL departments before the developer and the GOL sign and enter into the PDA. The PDA grants exclusive rights to the developer to develop the project.  The relevant GOL ministries will issue certificates to sign off the completion of the final FS, E&S and technical design as prerequisites for signing the CA.

During the 18-month mandate of the PDA, the developer is required to establish a special purpose company, to negotiate the concession agreement & power purchase agreement(s) and to approach potential financiers.    

The PDA shall be terminated upon signing the Concession Agreement and hence all rights and obligations of the parties to the PDA shall have been novated to parties of the CA.

(iv)         Special Purpose Company (SPC)

A Special Purpose Company is usually a limited liability company which is established by the shareholders under the terms and conditions defined in the shareholders’ agreement. The company is to be registered under Lao law and jurisdiction. The company has a special purpose for operating the project facilities during the concession period.  Upon termination of the concession period, such project facilities shall be transferred to GOL at no cost.

(v)          Concession Agreement (CA)

The Concession Agreement is an agreement to be signed and entered into by the GOL and the SPC. The CA contains detailed obligations and rights of the parties including provisions of statutory taxes payable to the GOL in exchange for the concession rights and financial privileges granted by the GOL to SPC. The parties also agree on the dispute resolution mechanisms and general provisions, such as events of default, force majeure events, governing law and several other issues in the CA. In addition to the rights granted in the Concession Agreement, Lao law requires that a series of approvals are to be obtained from various GOL agencies as to permit the SPC and its contractors to carry out the necessary activities related to the construction of the project. 

The CA, as the master piece, shall not be contradicted by provisions of any counterparty agreements. All the CA and counterparty agreements will be used as collateral to raise debt financing with the lenders.  The concession period is 30 years following the effective date of the CA.

(vi)         Counterparty Agreements

There are a number of counterparty agreements to which the SPC is a party. These include Power Purchase Agreement(s), Construction Contract(s) and Financing Agreement(s). The aforementioned agreements do not represent an exhaustive list but are selected examples for reference. The SPC is the party to sign such agreements with the relevant parties. The GOL reserves its rights to review the counterparty agreements to make sure that such agreements comply with the provisions of the CA as well as to ensure such agreements are not detrimental to the GOL.

(vii)       Construction

While the SPC plays owner’s roles in supervising construction activities, the GOL has the right and obligation to monitor compliance of the construction activities with the CA in all aspects. The construction activities are open to monitoring by third parties (i.e., Lender’s Technical Advisors or engineers, or independent monitoring agencies) which are jointly appointed by the GOL and the SPC. 

(viii)      Operation

The SPC, as the owner of the project facilities, may subcontract to a separate entity to undertake the operation and maintenance works of the facilities. The GOL shall monitor the project in accordance with its rights as set forth in the CA. The monitoring mechanism is same as during the construction.

5.    Public Participation

People participatory process is key philosophy in the development of hydropower projects in Laos. This involves project affected people, stakeholders including civil society. People who are potentially affected by the construction and operation of the projects are well consulted during the phase of project formulation. Voices of those people are heard and incorporated in various studies and mitigation plans before be endorsed by relevant governmental agencies and before being implemented by the project companies.


6.    Incentives

Laos has offered the developers a wide range of financial incentives in developing hydropower projects that usually take place in remote area where infrastructure and services are inconveniently accessible. Such financial incentives include long tax holiday, waiving certain taxes and import duties for construction materials, equipments and heavy vehicles.


7.    Pace of Development

Over the past 20 years the development of IPP projects in Laos has been up and down due to effect of the economic recession in the late 1990s and subsequent cycles that resulted in static demand for electricity in the country as well as in the region on the one hand and the hike in fuel price and rocketing costs of construction materials and equipment on the other. Consequently, several IPP projects in Laos were delayed or suspended during the period of economic crisis. Recently when the demand for electricity started to pick up again, the IPP development in Lao PDR was back on track.


About the Author

Mr. Xaypaseuth PHOMSOUPHA, following his earlier background training in economics graduated in 1996 with a Master’s Degree in Development Studies at the Australian National University in Canberra.

Mr Xaypaseuth has been working within the Lao public sector in a number of different government ministries since 1985. He was first involved in the power sector as senior project analyst in 1991. Subsequently, he was appointed chief secretariat of the Lao National Committee for Energy (LNCE) in late 1999. Since 2005 he has held position of Chairman of ad hoc Coordinating Committee for Development of Electric Power (CDEP) that is in charge of negotiating power sale with counterparties in neighboring countries. He was appointed Director General of Energy Promotion & Development in 2007 when the Ministry of Energy and Mines was established to succeed the LNCE.

Currently, he is directly responsible for drafting and negotiating legal documents for non-recourse financing in the Lao power sector. Cost benefit analyses of hydropower projects investment are also carried out under his direct supervision. During his career he has been involved in non-recourse financing negotiations within the power sector involving a number of IPP projects that are now supplying electricity to Thailand and several others that are currently under construction. Presently he is the lead negotiator heading up the government negotiation team to negotiate the concession agreements and other relevant agreements to which the government of Laos is party. He has also been involved in negotiation on power purchase agreements and credit facilities agreements of IPP projects to supply electricity to the domestic grid, as well as to Thailand, Cambodia and Vietnam.


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