Locked in – Why Thailand buys electricity from Laos

As low production prices make hydropower a player in Thailand's energy market, the cost and impact of dams in neighbouring Laos face scrutiny

Written By:
November 12, 2021
Locked in – Why Thailand buys electricity from Laos
Laos hydropower is a cheap electricity source for Thailand, but the hidden costs impact Thai consumers. Illustration: Jia Dong Lin

Deep into a summer night in 2018, a destructive wave of water washed over 7,000 households. The water was unleashed from the partial collapse of the Xe Pian-Xe Namnoy dam in southeast Laos and was expected to produce electricity for Thailand. Its catastrophic collapse was perhaps the worst in Laos history, causing severe flooding and sweeping away homes.

Despite the dam’s role in providing energy to Thailand, the story barely made headlines. There was no disruption to the household power supply because Thailand generally has more energy that it can use.

Premrudee Daoruang, coordinator of the Laos Dams Investment Monitor, a network focused on hydropower development that was set up days after the dam collapse, took part in a virtual session commemorating the disaster three years earlier on the Xe Pian river in Attapeu province between Vietnam and Cambodia. 

“The dams are not needed. We cannot use the argument that we need more electricity, it’s not true,” she said. “What we need, especially after Covid-19, is sustainability for the people that rely on the river and its resources.”

Thailand is a major consumer of electricity from Laos. Over the years, hydroelectricity has become an important Laotian export and source of electricity for Thailand. The low production price makes hydropower a competitive player for Thailand’s energy security despite a harmful impact on the environment across the Lower Mekong River Basin. However, with Thailand’s surplus energy growing, the cost-effectiveness of Laos’ hydropower is less certain. 

Today, the repaired Xe Pian-Xe Namnoy dam supplies electricity to the Electricity Generating Authority of Thailand (EGAT), a state power utility. The dam is one of seven hydropower developments in Laos from which the authority purchases electricity. In 2019, EGAT bought close to 4,000 megawatts of hydroelectricity from Laos, around 10% of Thailand’s installed capacity. The volume has made Laos hydroelectricity an indispensable source of Thailand’s energy security. 

The Thai National Energy Policy Committee reportedly decided on 5 November to purchase electricity generated by three planned hydropower projects on the Mekong River in Laos. An unnamed official from the Laos Ministry of Energy and Mines said Laotian and Thai negotiators were working out details of the power deal involving the Nam Gneum 3, Pak Beng and Pak Lay dams. Thai environmentalists criticised the agreement, saying it was rushed and would negatively impact the ecosystem and people along the river, Radio Free Asia reported 10 November.

Data from the EGAT, Ministry of Energy Thailand, Bank of Lao PDR, Électricité du Laos and the Stimson Center show how politics and economics are driving Thailand’s energy policy toward Laos and what a sustainable energy future for both countries would look like. 

Thailand’s power purchases

Energy is big business in Thailand. When the country caved to international and domestic pressure to move away from environmentally destructive power sources, Thailand took its money to Laos, where Thai executives can speak the language and navigate the business environment unencumbered by environmental regulations and other safeguards.  

“There’s a kind of a marriage of interests in that sense where there was an opportunity in Laos for Thailand,” said Courtney Weatherby, Southeast Asia Program deputy director for the Stimson Center, a US-based policy analysis organisation. “Compared to other neighbouring countries, it’s more convenient because there’s a clear cultural and linguistic connection that makes it a little easier for Thai companies to do business [in Laos].” 

Thailand is the largest international sponsor for Laos’ hydropower developments, supporting four in ten hydropower projects in Laos, four times the number China sponsors. Thai Utilities is also the largest international client for Laos’ hydroelectricity. 

Around half of the electricity generated in Laos is exported to Thailand. The purchases are part of the memorandum of understanding (MOU) between the Thai and Laos governments for energy purchases. In 2016, Thailand signed a MOU to buy 9,000 megawatts of electricity from Laos. There are talks of extending the agreement to cover an additional 1,200 megawatts.

The energy from dams in Laos is cheaper than any energy source Thailand can produce itself. It is almost 30% less expensive than natural gas and almost 80% less expensive than solar power.

The low cost of imported Laos hydropower drives the market. In 2019 and 2020, the cost of Laos hydroelectricity was slightly lower than Thailand’s average electricity production price and made up close to 10% of Thailand’s total electricity production. The cost of imported Laos hydropower is around half of the average Thailand’s electricity production cost, subsequently pulling down Thailand’s electricity production costs. 

“When the EGAT is considering which individual projects it wants to sign power purchase agreements with, there’s a range of key considerations, but one of them is absolutely cost,” Weatherby said. 

The surplus cost

Thailand simply has too much energy now, with an installed generation capacity higher than power demand. Most countries keep an electricity surplus of about 15% to accommodate fluctuations. In the past decade, Thailand’s energy reserve has risen to 38%, with an excess of 17,564 megawatts in 2020. The extra energy is slightly higher than Laos’ total electricity production.

The electricity surplus is not necessarily physical waste, but rather a technicality in the purchase agreements that forces Thailand to pay for energy the country doesn’t use. Under ‘take-and-pay’ agreements, payments consist of two parts: availability cost and the cost of the actual power purchased. Regardless of the power purchased, utilities must pay the availability cost stated in their contracts.  

Obtaining a long-term power purchase contract with EGAT, Thailand’s energy monopoly, is a “lucrative business deal,” said Chuenchom Gracean, an independent energy researcher. 

“You are guaranteed to earn a pretty fixed, stable profit for the investment. [Due to the incentives] there is an inherent problem with the planning process where there’s not really a lot of accountability,” Chuenchom said. “This is why we have so much surplus capacity right now. The planning process in the past has led to the decision to commit to way too many projects.”

Consumers pay for excess

Thailand’s governance failures, which lead to an electricity surplus through take-and-pay contracts, fall directly on consumers.

“It has led us to the situation where we have way too much capacity, and we can’t really hold anybody to be responsible for all the excess investment or the excess burden that could eventually get passed on to consumers,” Chuenchom explained.

For most consumers, this means the price rising a couple satangs each month without their awareness. These adjustments are factored into the Ft cost, a variable tariff calculated by the Metropolitan Electricity Authority and shown on the monthly invoice.

The Ft cost is murky because it automatically covers additional costs and is laid on top of the electricity production price, which is the average of all energy sources. The price of electricity for an average Thai consumer equals the electricity production price plus the Ft value. Therefore even if Laos electricity is cheaper to produce, additional costs such as availability payments for the use of Laos dams are added to the Ft cost.

“I simply see the price and pay each month’s electricity bill,” said Ooy, a 35-year-old mother living in Bangkok. “There are fluctuations, but I think that is mainly coming from the changes in consumption [of our household].”

Thailand plans to sponsor 133 more hydropower development projects in Laos, according to the Stimson Center’s Mekong Infrastructure Tracker, in addition to the 13 Thai-sponsored dams in operation and 15 under construction. While Thailand is not guaranteed to buy back the energy generated by these investments, Thai companies frequently find ways to turn a profit even in times of energy surplus. 

Energy glut profits

EGAT has subsidiary companies, including Ratchaburi and EGCO, which often invest in projects in Laos and profit from selling energy to Thailand that the country doesn’t need. 

“Because of their connections, they are able to get EGAT to sign [power purchase agreements] with these companies. Because EGAT owns some of the shares in these companies, EGAT also sends some of its high-level executives to sit on the board of directors,” Chuenchom said. 

Investors see potentially attractive investments in contracts of 25 to 29 years with EGAT as the single buyer and the public taking all the risk, while Chuenchom notes the “broken planning process” is no longer based on actual electricity needs.

“There isn’t a way to call anyone accountable for this failure in planning,” Chuenchom said. “We can’t really hold anybody responsible for all the excess investment or the excess burden that could eventually get passed on to consumers.”

The profit from each deal is hard to decipher, with calculations lumped together with tariffs passed to consumers. A report of the amount of money Thailand loses each year to maintain the electricity surplus is not available, though experts suggest the funds narrow the price gap between cheap, imported hydropower and other energy sources. 

Laos’ environmental bill  

The Laos government has been a key proponent of hydropower developments, pushing a vision of the country as the ‘Battery of Southeast Asia.’ In 2020, electricity production comprised 12% of the country’s GDP.

Laos is pulling itself out of poverty in tandem with the growth of hydropower. As of 2019, nine of ten households in the country had access to national grid electricity. Laos’ GDP has increased steadily in the past decade with a growth rate of around 7% each year. 

Still, for NGOs and research groups focused on the riparian communities and the Mekong’s ecosystem, there are hidden costs undermining economic development progress. Many of these impacts on the environment and communities are poorly measured and poorly understood. 

A study from the Mekong Butterfly, which monitors the Mekong River and its communities, reveals environmental costs are not fairly accounted for in the group’s impact assessments since they involve communities beyond the project’s immediate geographic area. The Xayaburi dam in Laos, for example, not only displaces communities and affects the river ecosystem in the immediate area, but fluctuations also impact the ecosystem and livelihoods downstream in Cambodia and Vietnam. 

“There are many hidden costs,” said Montree Chantawong, a Mekong Butterfly co-founder. “These kinds of costs are not calculated or mentioned in feasibility studies of dam projects such as how there are ecological and environmental impacts for people and areas far beyond the project areas.” 

However, such transboundary impacts are beyond the area included in the project’s environmental survey and, as a result, not considered as impacts for which to hold the project developer accountable. 

“The message that imported Laos hydroelectricity is cheap is a myth. There are other environmental costs that outweigh the economic benefits,” Montree said. 

Moving beyond hydropower 

It’s hard to define the cost of Laos’ hydropower to Laos and Thailand because the final balance sheet is not public.

“We may get cheaper electricity from Laos on the kilowatt-per-hour basis, but still overall, these stranded costs of having too much capacity that we have to pay for are not getting smaller at all,” Chuenchom explained.

Thailand’s mechanism to provide checks and balances for the government’s policy and plans is the Energy Regulatory Commission (ERC). However, the body does not have jurisdiction over projects located in other countries because they are considered arrangements between governments.

In 2018, during the military junta headed by Prayuth Chan-ocha, the government used the authoritarian Article 44 of Thailand’s constitution to install a new set of ERC commissioners. As a result, weakening the independent check and balances on the country’s electrical system decisions. 

With unavoidable, upfront investment costs for existing energy, some renewable energy sources are now growing and becoming more affordable, Weatherby said. A September Stimson Center report penned by Weatherby indicates new technologies are available for more environmentally friendly energy production based on Laos’ current resources such as ‘floating solar’ systems, consisting of solar panels floating on stable water surfaces such as dam reservoirs. 

“The big surprise is that it would cost even less to invest in a similar amount of installed capacity of only floating solar inside Laos, and then purchasing from that floating solar instead of additional hydropower,” Weatherby said, adding that there are other considerations. “Solar, unlike hydropower, cannot be produced at night unless there is battery storage built in. At the same time, with the electricity excess, there is room for Thailand to explore.” 

Thailand still has flexibility in which projects to purchase from Laos. In August EGAT announced a halt to power purchase agreements for four planned dams in Laos – Sanakham, Luang Prabang, Pak Ley and Pak Beng – until more detailed environmental measures are included. Yet hydropower development construction continues without clear purchasers. 

“The decision to buy or not to buy power from Laos depends on the needs of Thailand, the [industrial] production in Thailand and prices,” EGAT said in a statement.

Thailand is now under the pressure of its targets for moving to renewable energy alternatives. At the UN’s COP26 conference in Scotland earlier this month, Thailand committed to net-zero carbon emissions by 2065. 

“The main options that are on the table would be renewables such as solar and wind, which are widely available inside Thailand, but also the import of hydroelectricity from Laos because it is also counted as carbon clean compared to Thailand’s traditional mainstay in the power sector: natural gas,” Weatherby said.

While an internal reckoning has prompted a decision by Thailand to divest in hydropower within its borders, it has yet to fully consider the regional impact of investing in the same energy source next door. To have that debate, more information is needed on how much consumers pay for excess electricity, which companies profit on the status quo and how investors in hydropower are held accountable for long-term impacts. 

“We need to take a new perspective in that, as consumers, we also have responsibilities for the impacts that are caused by our consumption,” Chuenchom said. “So the impact of our consumption is not externalised to people in other countries.” 

This article was supported by a Mekong Data Journalism Fellowship jointly organised by Internews’ Earth Journalism Network and the East-West Center.

This feature is part of an article series on energy landscape in Southeast Asia supported by Heinrich Boell Stiftung SEA Regional Office

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