With its abundant water resources, Lao PDR has vigorously developed its electricity sector in the 2010s and exported electricity to neighboring economies, earning the title of the “Battery of Southeast Asia” in recent years.
For the economy itself, the electricity sector has long been one of the key growth drivers. As of 2020, Lao PDR has already built 10,021MW of electricity generation capacity, of which 80 percent is sourced from hydropower. The share of the electricity sector in the Lao PDR’s GDP nearly doubled from 6.5 percent in 2012 to 12.8 percent in 2022. Externally, electricity exports quadrupled in the same period.
However, the country’s investment in the power sector has come at a cost. Over the years, the construction of power plants has resulted in higher external debt, putting pressure on the economy’s macro-financial stability.
In Lao PDR, 25 percent of its total power is consumed domestically where Electricite Du Lao (EDL) buys electricity from producers, such as the EDL Generation Public Company and Independent Power Producers for domestic use [IPP(d)s]. EDL then sells it mainly to domestic consumers at prices which are below the cost-recovery level. As such, EDL has been running at a loss, which in turn affects the government that provides EDL with on-lending and guarantees EDL’s debt.
Despite the growth in the electricity sector, EDL has repeatedly reported a loss over the years. In February 2023, the electricity tariff for industries was raised to improve EDL’s earnings and ease its financial burden. Nevertheless, such an increase remains insufficient to cover all the expenses of EDL. The company charges tariffs which are still lower than those of neighboring economies, especially in the household sector.
EDL’s financial position is also under increasing pressure owing to the various obligations stipulated in the Power Purchase Agreements (PPAs) with the IPP(d)s. For instance, EDL shoulders exchange rate risk because it buys the electricity in USD but sells the electricity in Lao Kip to domestic consumers. As the Lao Kip has depreciated sharply in the last few years, the valuation loss has become a major financial burden for EDL. In terms of the mode of power generation, EDL’s dependence on hydropower means that it is susceptible to seasonal factors, as it has to pay higher costs during the dry season by importing electricity from neighboring economies, mainly from Thailand, to meet the domestic demand.
In contrast, the remaining 75 percent of the total electricity generated in Lao PDR is produced by independent power producers for export use [IPP(e)s] and exported to the neighboring economies. A major customer is the Electricity Generating Authority of Thailand (EGAT), which is able to sell the electricity in the Thai market at a higher price and is in a better financial position than the EDL.
IPP(e)s generally maintain stable revenues and enjoy a sound financial position as the sales of electricity are made in USD under the PPAs. Since IPP(e)s’ export earnings are estimated to be sufficient to cover their operating costs and debt interest payments, these companies have managed debt repayments well despite their rapid accumulation of external debt during the development boom in the 2010s.
From the Lao government’s point of view, the IPP(e)s are set to significantly benefit the public coffers in the medium to longer term. In the early stages of the power plant operations, the government receives minimal royalties and tax revenues from the IPPs due to the generous tax incentives. Once the tax holiday period is over, the IPPs will make significant contributions to the country’s fiscal revenues.
In summary, the electricity sector presents a mixed narrative to Lao PDR. There are risks but also opportunities. On one hand, the domestic market faces several structural issues such as the low electricity tariffs, that impose a huge financial burden on the government. On the other hand, the IPP(e)s demonstrate sound financial performance and are expected to benefit the Laotian economy in the medium to longer term. Since the IPP(e)s are three times bigger than the IPP(d)s, the overall benefits seem to exceed the costs. Hence, the key issue is how to support the domestic market group in tackling various structural challenges.
In the short term, the government should consider raising the electricity tariffs to a cost recovery level. Over the long run, the dichotomy between the domestic and export groups will become irrelevant as the assets owned by the IPP(e)s and IPP(d)s will be eventually transferred to the Laotian government under the Build-Operate-Transfer scheme. It will allow the government to reap all the benefits that the IPPs have produced such as export earnings. Although it will take roughly 20 years for each IPP project to return to government ownership, the authorities can start to plan on how to maximize the benefits of such asset transfers and address the structural issues. When that happens, the Lao PDR’s electricity sector will not only claim its title of the “Battery of Southeast Asia”, but it will also brighten up the Lao PDR economy.