Pursuing Greater Diversification in the Lao Renewable Energy Industry

By Isaac Flake, Research Intern

Southeast Asia is currently undergoing rapid change in the development of renewable energy. Laos is among the region’s renewable energy aspirants and is well known for its ambition to become the “battery of Southeast Asia”.

Electricity is one of Laos’ largest industries, accounting for twenty percent of its exports in 2019. However, this industry faces some long-term challenges. Laos’ renewable energy production currently relies heavily on hydroelectricity, which has been the subject of much ecological and societal controversy.

Laos’ energy exporting endeavours are also largely centred on Thailand, which accounted for 94 percent of Laos’ total electricity exports in 2019. If Laos aims to create a more sustainable path for growth, it will first need to pursue greater diversification in its methods of energy production and trading partners.

Laos’ hydropower ambitions are not sustainable

Although Laos has invested heavily in developing hydropower, it is predicted that its capacity to further develop hydropower will reach its limits in the near future. Environmental constraints limit Laos’ ability to build the required infrastructure, as damming would force the relocation of villages along the river and pose threats to Laotian heritage sites.

These issues are not limited to domestic impacts. The Mekong River, which generates much of Laos’ hydroelectricity, is shared by neighbouring countries Myanmar, Thailand, Cambodia and Vietnam.
 The resultant variations in the river water level create ecological and food security issues downstream, threatening the livelihoods of citizens. This could lead to further international political tension, as seen before during the construction of the Xayaburi Dam in northern Laos. Concerned about the dam’s foreseen environmental and socioeconomic consequences, civilians and environmental groups in Thailand and Cambodia led protests against the project, and Cambodian and Vietnamese government officials urged Laos to suspend its construction.

The difficulty posed by the negative consequences domestically, as well as the impact on Laos’ relationships with its neighbours are likely to render its hydropower endeavours unsustainable.

Laos’ reliance on its bilateral trade relationship with Thailand is another issue of concern, leaving the energy industry vulnerable to potential changes in Thailand’s energy demand. Currently, Thailand already has an energy surplus, which has expanded with decreases in demand caused by the COVID-19 pandemic. Laos’ energy industry may soon face difficulty if it continues to rely on a trade partner with such a limited need for its exports.

There have already been signs that Thailand’s enthusiasm for Lao hydropower is waning, seen by a greater hesitance in signing power purchasing agreements for such projects. This is in part due to a realisation of the costs and negative impacts of further hydropower development.

In November 2020, the Secretary-General of the Office of National Water Resources of Thailand (ONWR) commented on the delay in agreement-making for the hydropower project in Sanakham, Laos, stating that Thailand will choose to buy energy first from sources without negative impacts. Not long after, in January 2021, the ONWR rejected the technical report for the Sanakham dam, claiming that the report included insufficient information concerning the social and environmental impact of the hydropower project. If Thailand continues to move towards an attitude of greater caution concerning Lao hydropower, the growth of Laos’ renewable energy industry will be slowed.

Laos faces a growing opportunity cost by maintaining such a limited view in its energy trade partners. While Thailand’s energy demand growth is uncertain, neighbouring countries such as Vietnam, Cambodia and Myanmar are experiencing rapid increases in power demand.

The amount of energy exports sent to Thailand rather than other countries in the region not only keeps Laos’ energy industry in a vulnerable position, it also greatly limits its potential partners in a market of growing demand.

Developing hydropower alternatives with regional partners

There is some emerging interest in alternatives to hydropower in Laos. Japanese firm Mitsubishi has joined with two Thai firms in investing in the Monsoon Wind Farm Project in southern Laos. Expected to start construction in 2022, the project will be one of the largest onshore wind farms in Southeast Asia, and will also be the region’s first wind power facility to send electricity between countries.
Sun-rich countries in Southeast Asia have great potential in developing solar energy capacity. In Vietnam, the amount of rooftop solar installed during 2020 alone has a greater energy capacity than all the hydropower projects Laos has constructed in the last fifteen years.

Vietnamese firms have also helped to develop some solar power projects in Laos. The Wealth Power Group of Vietnam has recently joined Laotian partners Power Company Limited Thepvonsa and National Consulting Group Sole Company in joint-venture large-scale solar farms in the Lao provinces of Sekong and Champasack.
Despite the progress indicated by these projects, hydropower still dominates the renewable energy industry in Laos, with several large-scale dams already planned or in construction. In order to transition from just a handful of wind and solar projects to a definite shift away from hydropower, much greater support will be required.

One potential source for this support is through multilateral development banks such as the Asian Development Bank (ADB). The ADB has expressed commitment to accelerating the transition towards clean energy in Southeast Asia, and has already cooperated with the private sector in Laos on hydropower projects, including the large-scale Nam Theun 2 Dam.

Moving forward, the ADB should aim to assist in financing other forms of renewable energy, such as wind or solar. The ADB could also help finance investment in energy transmission lines, which would create more opportunities to export energy to surrounding countries.

Australia can support Laos in its renewable energy diversification

Laos has notably long-standing ties with Australia, with a longer unbroken diplomatic relationship with Australia than with any other country. Supporting Laos in this transition towards hydropower alternatives will help to further strengthen the ties between the two countries.

Australia understands the benefits of renewable energy initiatives, namely solar. It has experience in both rooftop solar as well as large-scale solar energy production. From 2016-2021, Australia’s  large-scale solar capacity expanded by more than twenty times. This experience and success puts Australia in a prime position to push for solar power development in Laos.

Australia is also aware of the importance of trade diversification, having seen its own challenges with many of its export industries exposed to risk due to a reliance on Chinese demand. Understanding this importance, Australia ought to be supportive to Laos in decreasing its dependency on exports to Thailand and increasing its trade resilience. Australia can assist Laos in developing new energy production projects targeted towards markets outside of Thailand. As a member of the ADB, Australia should push for developmental financial assistance for initiatives which promote such diversification for Laos.

By supporting such initiatives and making the benefits known, the Lao energy industry will be motivated to diversify its methods of production and trade partnerships. This will ensure a more sustainable path for growth in Laos and assist its progress towards truly becoming a battery for the entire region.

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