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Laos aims to be the hydropower battery of Southeast Asia
Laos, a landlocked country in Southeast Asia has one goal - to become the hydroelectric battery of a power-hungry region.
"Southeast Asia faces huge energy requirements, where growth will average 5-7 percent over the next 10 years," Francois Perrin, Head of Asian Socially Responsible Investment Equities at BNP Paribas Investment Partners told CNBC.
And Laos has a plan in place to meet this demand.
Under the country's Seventh National Socio-Economic Development Plan for 2011-2015, the government intends to build 10 hydropower plants generating 5,015 MW of electricity, adding to its already growing stable of plants.
"In 2006, the country had 10 hydropower plants producing 700 MW. Today it has over 16 plants producing north of 2,540 MW," Xavier de Nazelle of Aloe Private Equity, an investment company that focuses on clean energy and eco-processes, told CNBC.
Foreign investment has also been pouring into this sector. According to data from the Ministry of Planning and Investment, between 2001 and 2009, $4 billion worth of foreign direct investment went into electricity generation. The investment makes up 34 percent of all FDI into the country.
"The amount of foreign investment coming into the country is almost twice that of GDP, and the majority is for hydropower," De Nazelle said.
What makes Laos a good location for hydropower projects is its landscape. Although landlocked, Laos is capitalizing on its abundant water sources, including the Mekong River. Plus its mountainous terrain, which allows relatively quick water flows, provides constant and reliable currents.
Laos has the potential to produce approximately 26,500 MW of hydropower according to De Nazelle. The Asian Development Bank has projected electricity demand in Laos to grow at an average 7.7 percent annually until 2030, while electricity generation will grow at a faster 12.1 percent.
This means that Laos needs buyers for its surplus production. Thailand, its long-term export destination is expected to continue buying power from Laos and new markets that it is looking to tap are Vietnam and Cambodia, according to the ADB's Energy Outlook.
The flurry of partnerships signed over the last few years for its hydropower projects shows that investors are keen. Among them is Thailand's publicly listed Ratchaburi Electricity. "Of the 10 plants Laos intends to build over the next 5 years, 6 are already underway and most of them are by Ratchaburi, the largest Thai independent power plant," Perrin said. He estimates the internal rate of return for these projects to be 12 percent.
Apart from regional investors, other companies investing in the sector are Japan's Chubu Electric Power and China's Sinohydro.
Despite the huge potential of this sector to address the region's power needs, environmental concerns have plagued its development.
In July, the Laos government agreed to halt the building of the Xayaburi Dam, which has come under fire from Cambodia, Thailand and Vietnam, three of the four-country Mekong River Committee, on concerns that the environmental impact studies being done were not enough.
Environmentalists are worried its construction could open the gates for more projects that could damage the ecosystem and harm related fishing industries.
Ame Trandem, Southeast Asia Program Director of International Rivers, a non-profit organization based in the U.S., told CNBC, "The environmental and social impact has not been fully identified and dealt with."
She added that poor planning, inadequate studies and unsatisfactory enforcement of existing legislation ensured benefits generated from the projects were not fairly distributed.
Another problem, according to de Nazelle was that the sector was growing too fast and a small country like Laos may not be able to manage or absorb burgeoning FDI.
But Anthony Jude, Director of the Southeast Asian Department's Energy Division at the ADB stresses that the power sector is integral to Laos' growth and poverty alleviation plans. "It generates close to 30 percent of total exports and provides the much needed revenue for socio-economic development," he said.
CNBC
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