Hydropower is back
Thursday, August 09, 2018
After announcing high-profile gas-fired power projects earlier this year, the Ministry of Electricity and Energy is now focusing on a string of hydropower dams – most with Western developers – to meet Myanmar’s growing energy needs.
By THOMAS KEAN | FRONTIER
AT A CEREMONY in Nay Pyi Taw on July 5, the Ministry of Electricity and Energy signed a power purchase agreement with Great Hor Kham Public Co, Ltd for the Nam Paw hydropower project in northern Shan State.
The signing didn’t get much media attention. The project is only 20 megawatts; Myanmar needs to add something like 300 megawatts a year of installed capacity just to keep up with rising demand. Although it may power up to 40,000 homes in Muse Township, Nam Paw is the proverbial drop in the ocean.
But the agreement is symbolically important, not least because it appears to be the first PPA for a new power project signed since the National League for Democracy government took office in late March 2016.
There is another, bigger subtext, though. For the past seven years, hydropower has been in policy purgatory. Since President U Thein Sein’s decision to suspend the China-backed Myitsone dam project in September 2011, there has been little progress on either state-backed or private projects, and government’s appetite for any hydropower – let alone controversial projects – has been uncertain.
The Nam Paw project was just the start. On July 12, the ministry signed another PPA, with Chipwe Nge Electric Power Co, Ltd, for the Chipwe Nge hydro project in Kachin State, which was completed in 2011 and provides power to Myitkyina.
More is to come. The ministry is negotiating the financial terms for as many as half a dozen hydropower projects, totalling several thousand megawatts, with Western project sponsors from France, Norway, the United Kingdom and Austria. Several of the sponsors confirmed to Frontier that they were in advanced negotiations with the ministry.
“It’s clear there has been a push toward hydropower, though very little has been publicly announced just yet,” said Mr Jeremy Mullins, research director at Myanmar Energy Monitor. “I understand serious negotiations are currently ongoing with a few hydropower projects possibly moving forward soon. The Ministry of Natural Resources and Environmental Conservation has also been looking at environmental and social impact assessments for hydropower projects.”
The Ministry of Electricity and Energy declined to comment to Frontier. A senior official said that while answers had been drafted to our questions, he had not been given approval to release them.
Mr Edwin Vanderbruggen, a senior partner at advisory firm VDB Loi, which is advising several of the developers, said negotiations on two projects are quite advanced, with another two “not far behind”.
Public announcements could be made within weeks, he said. “[We are] closer than most people think.”
New momentum
Myanmar has seen hydropower development before, but not like this.
The projects in line for approval share similar characteristics. They are mostly small to medium in size, and are not on mainstem rivers, such as the Ayeyarwady, Chindwin or Thanlwin. They have Western backers, nearly all of whom are experienced hydropower developers. The project proponents have already signed memorandums of understanding with the ministry.
These developers include Électricité de France (Shweli-3, 1050MW); SN Power of Norway (Middle Yeywa, 700MW); Andritz of Austria (Deedoke, 60MW); Energize Myanmar of Singapore (Middle Paunglaung, 152MW); and Engie Glow of France (Leymro 1, 600MW). Another in the mix is Upper Yeywa (280MW), which although still officially state-financed has been tendered and may proceed as a public private partnership.
Most of the MOUs were signed three to four years ago, when the lifting of sanctions, a cooling of relations with China, and growing awareness of the need to better manage environmental and social impacts encouraged the ministry to engage with Western developers.
“The trend for hydropower project implementation is to turn to Western companies,” deputy minister for electric power U Maw Thar Htwe was quoted as saying in 2014. “We are going to work only with international-standard companies who have reliable construction quality and financing.”
While some work continued behind the scenes, the projects were left in limbo by government indecision on power planning, and the lack of a clear policy direction on hydropower specifically. Both the Union Solidarity and Development Party and NLD governments sent mixed signals on the extent to which hydropower was part of their plans.
The appointment of Minister for Electricity and Energy U Win Khaing in August 2017 has been a game-changer for the power sector. He immediately made it clear that his focus was on meeting electricity demand over the short-to-medium term, and that doing so would require some decisive steps.
In January, he issued notices to proceed for four gas-fired projects totalling 3,000MW, including two liquefied natural gas to power projects with an estimated price tag of US$2.5 billion each.
While this move generated headlines, the minister was also quietly pushing his ministry and hydropower sponsors towards finalising PPAs for their projects, which stipulate what rate the government will pay for the power generated. PPAs are an essential step in the development process and enable the sponsor to begin to seek financing and move closer to beginning construction work.
Promoting hydropower is a logical next step for Win Khaing. The LNG-to-power projects – if they materialise – can be brought online relatively quickly and will provide the base load generation that Myanmar needs in the years ahead. This electricity though will be much more expensive than the government presently charges most users. Hydropower is cheaper but will take longer to develop; once hydro projects come online they will help to balance the higher costs of LNG, putting some downward pressure on power generation expenses.
“Hydropower and gas power can complement each other if undertaken effectively,” said Mullins. “Hydropower can be a cheaper source of electricity, and it has obvious benefits from an energy security point of view, as it doesn’t require fuel imports.”
The ministry is now reviewing tariff proposals submitted by the project sponsors. More recently the Department of Electric Power Planning has asked for their financial models, so that it can assess whether the tariff can be negotiated down further.
Several industry sources questioned the capacity of the DEPP to properly analyse the proposals against the specifics of each project, such as the power generation potential for the particular site and the costs of development.
Instead, they said, it is essentially checking there are no mistakes in the financial models and trying to get the lowest possible price per kilowatt hour.
Still, Vanderbruggen said there had been “impressive progress” on negotiating hydro PPAs over the past six months.
While there will be “sticking points on commercial terms” because the government is seeking the lowest possible tariff, “there are not so many important legal issues left where parties are far apart”.
One important development has been the drafting of a model concession agreement and PPA for hydropower projects by the International Finance Corporation, which is part of the World Bank Group.
Because Myanmar has had only limited foreign investment in the sector, it has never had templates for project documents, such as the PPA and concession agreement. These documents need to be robust enough so that project sponsors can use them to secure financing, such as from development banks or commercial lenders. To date they have mostly been negotiated on an ad hoc basis, but the IFC-drafted templates should become the standard for future projects.
Meet the developers
Among all the sponsors, Energize Myanmar stands out. It has never developed a single megawatt of power. It’s registered in Singapore, most of its senior management are from Europe, but it’s exclusively focused on Myanmar.
Mr Billy Harkin is the high-energy, high-charisma chairman of Energize. Over breakfast in a Yangon hotel, he is quick to dismiss those who say his company lacks the track record or financial standing to complete Middle Paunglaung.
“We’re very happy that people underestimate us,” he says. “We don’t care what anyone thinks, except the international funders. That’s what matters – do they view us as reliable?”
With 152MW of installed capacity, Energize Myanmar’s Middle Paunglaung project would produce around 500 gigawatt hours of electricity a year. It could also be completed relatively quickly – as little as three or four years, according to Harkin – because it’s designed as a run-of-river project.
Mr Billy Harkin, chairman of Energize Myanmar, which is developing the 152 megawatt Middle Paunglaung project. (Thomas Kean | Frontier)
Mr Billy Harkin, chairman of Energize Myanmar, which is developing the 152 megawatt Middle Paunglaung project. (Thomas Kean | Frontier)
Instead of storing a large volume of water in its own reservoir, Middle Paunglaung would effectively piggyback off the dam further upriver at Upper Paunglaung. When it releases water to generate power, Middle Paunglaung would also harness the energy from that water as it flows down towards the Sittoung River.
“From an ESIA perspective, it’s often referred to as the sweetest hydro project in Myanmar,” Harkin said. “What they mean by that is we’re not asking anybody to move, there are no environmental issues that are considered problematic to the point you shouldn’t build the project.”
It’s also not in a conflict area, and it requires just 30 kilometres of high-voltage transmission lines. A highly respected environmental consultancy, Environmental Resources Management, has already completed the ESIA; AF Consult from Switzerland was commissioned for the feasibility study. Harkin said Energize Myanmar even has financing in place from three European development banks, and German and British commercial banks. The company is in the process of choosing an EPC contractor, from a shortlist of five companies.
The only thing that’s stopping Energize Myanmar from moving forward, he said, is the negotiations over the PPA and concession agreement. The IFC drafts are with the Ministry of Electricity and Energy, but will also have to be approved by the economic committee, Attorney General’s Office and the national parliament.
“The challenge next is how long will that process take? The sooner the better, because then the sooner foreign direct investment can come,” Harkin said. “But Myanmar has got to make sure the balance is right – that it’s paying enough for electricity to attract billions of dollars of investment but not paying too much that it’s putting too much of a burden on businesses or households in Myanmar.”
But he thinks Middle Paunglaung can be the game-changer for how hydropower projects are developed in Myanmar.
“We can show that this is the new Myanmar and this is the new way of developing power stations. We can safely, reliably, responsibly set a flagship standard to attract the US$40 billion [in power-related investment] that the World Bank and others believe Myanmar needs by 2030.”
Shweli-3 is a very different project, and Électricité de France a very different company. Majority owned by the French state, it has 120 gigawatts of installed capacity worldwide and more than 60 years of experience in the field. It boasts more than 430 hydropower stations, comprising 17 percent of its installed capacity.
At 1050MW, Shweli-3 is bigger than any existing hydropower plant in Myanmar. It’s also in a conflict zone, close to territory controlled by the Shan State Army-North, Kachin Independence Army and Ta’ang National Liberation Army.
It would entail significant resettlement – potentially up to 2,000 households. The government has already begun construction; as of January 2017 it was 11 percent complete. And it requires hundreds of kilometres of high-voltage transmission lines across Shan State and Mandalay Region. As one industry observer noted with a hint of understatement, “It’s a complex situation.”
But that hasn’t dissuaded Électricité de France. The company’s business development director for Asia, Mr Yacine Chouabia, said managing the environmental and social impacts would be crucial for the success of Shweli-3.
That could also mean “optimising” its design – in other words, significantly downscaling the project. As he talks, Chouabia picks up a glass of water. If the flow of water from the Shweli River will only fill the glass two-thirds, why build the glass so high? Making such an assessment depends on acquiring more data and conducting further studies, he said.
“With our experience in hydro energy, we are confident about our capacity to bring a real added-value in terms of optimising the project’s key parameters, such as the size and installed capacity, making it cost-efficient while reducing as far as possible environmental and social impacts,” Chouabia said.
“It is now in the hands of the ministry. We’re ready, together with our partners, to step in and launch the activities that are needed. We’re just waiting for the green-light from the government to tell us when.”
Among the local players in hydropower, Shwe Taung Group is a clear leader. It already operates one project, the 52MW Baluchaung 3 in Kayah State. It’s involved in the Deedoke consortium alongside Andritz and Kansai of Japan, and is the preferred bidder for Upper Yeywa.
“It doesn’t mean that we have got the project yet,” CEO U Aung Zaw Naing told Frontier, referring to Upper Yeywa. “We have received the official letter from the government saying that our proposal was selected … but we still need to proceed with a lot of discussion and negotiations.”
But Aung Zaw Naing, who also leads the Hydropower Developers Working Group, said there was “a positive momentum” in the sector, pointing to Great Hor Kham’s recent PPA signing as an example.
“That’s a clear indication that the government is willing to move forward,” he said.
“Hydropower is a very sustainable source of renewable energy in the mid term and long term. These projects have a lot of positive value for the economy and for the government’s ability to provide a very reasonable electricity price, which is a key competitive advantage we have compared to other ASEAN countries.”
The green light
Some of the developers are seeking notices to proceed like those issued earlier this year to the sponsors of the four gas-fired projects.
Proponents say that the NTPs confirm the sponsor’s right to a particular project in a way that the MOU does not. They provide the security they need to invest money – potentially millions of dollars – in assessments and surveys, and to begin to shop the project around to prospective financial backers.
The big picture
Chouabia of Électricité de France told Frontier that there was no doubting the significance of the NTP.
“It is our understanding that the NTP officially designates the developer of the project on an exclusive basis, and that it officially allows the appointment of the consortium members,” he said. “Such a signal from the government will create favorable conditions for the designated companies to engage further steps of project development. That is why it is so important.”
The NTPs are somewhat controversial. Following the signing ceremonies in January, the ministry was criticised for the lack of transparency surrounding the decision to award them. It was unclear how the four projects had been chosen, or even what the NTPs meant. Some suggested they violated a government instruction requiring tenders be conducted for most projects. Win Khaing was forced to front parliament to respond to these complaints.
In the private sector, though, the NTPs have been broadly welcomed as a signal that the ministry is committed to resolving Myanmar’s looming power crisis. There’s also an argument that they increase transparency, because it reveals to the public who the government is negotiating with and for which project, and then opens the projects up to public scrutiny. But importantly it does not entail a major commitment from the government.
The NTP also addresses one of the major difficulties that project sponsors and the government faced in Myanmar. Previously, they would sign a Memorandum of Agreement before the PPA. Because the PPA typically takes longer to negotiate, the idea was that concluding the MOA first would help bring projects online faster. But it also created the unusual situation where a concession was given without the commercial and legal terms having been finalised.
The NTP replaces some of the commitments previously made in the MOA, while leaving both sides with a significant degree of flexibility.
Not all developers see the NTP as meaningful. Harkin of Energize Myanmar said it depended on the project – and, in particular, the terms of the MOU that the developer has signed.
Energize is not seeking an NTP because its MOU enabled it to conduct all of the studies necessary to make the project attractive to financial institutions. “We knew what we would need [to include in the MOU] and made sure all that was included,” he said.
But Vanderbruggen said the NTP was “commercially very significant”.
“Investors need some commercial reassurance that we are moving in the right direction with the project, or else they lose their enthusiasm. The NTP does that, while keeping quite a lot of options open for the government,” he said.
‘Now is not the right time’
The legacy of hydropower development has been severe. The manner in which deals were cut in the past, and the way that affected communities were largely ignored, has created resentment, fear and distrust.
Even measures that are supposed to encourage more sustainable development of hydropower, such as the Strategic Environmental Assessment of the Hydropower Sector in Myanmar (see sidebar), have proven controversial.
The government once developed most of Myanmar's hydropower dams but the private sector is expected to undertake the majority of projects in the future. (Teza Hlaing | Frontier)
The government once developed most of Myanmar's hydropower dams but the private sector is expected to undertake the majority of projects in the future. (Teza Hlaing | Frontier)
Consultation events in Myitkyina were picketed by people who had been displaced by the nearby Myitsone project, while Shan activists boycotted a similar event in Taunggyi in January.
The aim of inviting Western developers was to avoid some of the environmental and social impacts that have plagued earlier projects.
But Sai Thum Ai from Action for Shan State Rivers said foreign investors should stay away from hydropower completely and instead pressure the military and government to focus on the peace process, particularly the implementation of a federal political system.
He noted that under Myanmar’s constitution, state and region governments are only able to implement power projects under 30MW, a limit that gives regional administrations little say in even relatively small projects.
“If they respect local communities, they should stop these kinds of big projects for now,” he said. “If they do that, local people will welcome them to build these investments after a federal system is fully implemented.”
He said that because most of Myanmar’s potential hydropower resources are in ethnic minority regions, it was an issue that could be used to pressure the government effectively. And if foreign investors don’t halt their plans?
“For sure our local organisations and local people will keep saying that this is unfair and abusing the local people. We will keep fighting.”
‘Not enough projects’
In just a few years, Myanmar has come a long way. The country is on the verge of seeing the first foreign hydropower projects that are selling power to the government. This would be a milestone, and could pave the way for billions of dollars in further investment.
“Having to deal with internationally acceptable documents and bankability requirements is totally new to Myanmar as far as hydro is concerned,” said Vanderbruggen.
The “enormous” gap in terms of understanding and expectations between the government and foreign private sector is “slowly receding”, he added.
But that doesn’t mean that these projects will eventuate. A whole range of factors could derail them, from armed conflict and social opposition to changes in government policy or an inability to secure financing.
“There have been cases of projects receiving PPAs and not being built, so just because a PPA is signed doesn’t mean it will move forward,” said Mullins. “Many of these projects are also complex engineering undertakings, and it’s important not to lose sight of how challenging they can be.”
For Harkin of Energize Myanmar, the problem is that there are simply not enough projects in the pipeline. The half-a-dozen that the ministry is examining now might add 1.5GW of generating capacity – if they all proceed – but Myanmar needs much, much more to not only electrify all households but drive industrial development.
“The wave of hydro I think is fantastically positive for Myanmar … every country that has a fantastic hydro resource, they always do majority hydropower,” he said. “For me now, there’s just not enough companies, not enough projects.”
SIDEBAR: Reserving the main rivers
Another factor that has provided a boost to hydropower is the looming completion of the Strategic Environmental Assessment of the Hydropower Sector in Myanmar.
The SEA provides a bird’s eye view of the sector, examining each basin and assessing the likely environmental and social impacts of hydropower development. It is designed to not only guide government planning but also be used by the private sector – for example, to better understand stakeholder groups, assess the environmental and social risks attached to projects, and see which river stretches or sub-basins are preferred for development.
“The SEA provides a basin-wide perspective, and considers how individual projects will cumulatively impact on the environment and the people. It also provides the most comprehensive and up-to-date information on the environmental and social risks at the basin scale,” said Ms Kate Lazarus, a senior operations officer at the International Finance Corporation responsible for hydropower in Myanmar.
In May, the government and IFC released the draft final report for stakeholder review. Based on feedback received, it will be completed and submitted to the government in mid-August, and then released to the public.
But the key recommendations are not expected to change: to restrict development on five mainstems, including the Ayeyarwady, Chindwin and Thanlwin (Salween), Mekong and the lower Sittoung.
Shan activists hold a press conference to protest plans for dams on the Thanlwin River. (Steve Tickner | Frontier)
Shan activists hold a press conference to protest plans for dams on the Thanlwin River. (Steve Tickner | Frontier)
The report warned that proceeding with five large planned dams on mainstems, ranging in size from 1,200MW to 7,000MW, would “completely alter the river system’s hydrologic, sediment transport, and geomorphic functioning … These projects would break river connectivity, trap sediment, and alter the flow regime at a basin scale.”
Instead, the SEA calls for the prioritisation of projects in the “low zone” – those deemed to have the smallest environmental and social impacts. Conveniently, the projects that the Ministry of Electricity and Energy is now considering are in low zones, with the exception of Leymro 1, which is in a medium zone.
Significantly, all except Leymro 1 are also on rivers that have already seen some hydropower exploitation. This means that, in effect, much of the environmental damage has already been done. The SEA says that further development of these rivers – creating a series of dams known as a cascade – is preferable to damming a free-flowing river, even one that is in a low-impact zone.
The projects though would still require their own environmental and social impact assessments, as well as a cumulative ESIA if there are multiple projects on a cascade.
Asked whether the IFC would consider financing hydro, Lazarus said it would “consider supporting sustainable development in the low zones as identified in the SEA report”.
She added that the IFC understood announcements would be made on two or three hydropower projects but did not yet have specific details on which ones.
Not everyone is happy with the SEA, however – least of all Chinese and Thai developers that have proposed dams, and in some cases begun constructing them, on the Ayeyarwady and Thanlwin rivers.
This is evident from the comments submitted on the draft final report, which can be read on the IFC website. While anonymity has been preserved, some seem to have been submitted by the developers in question or groups close to them, and they are not pleased.
“In Chapter 7 Hydropower Business-as-Usual Development Impacts, only negative impacts and no positive impacts have been mentioned,” reads one comment.
“In SEA report, a large number of qualitative statements and colourable views lead to a negative conclusion on the development of hydropower stations on the mainstream of Myanmar’s major rivers.”
“Throughout the entire report, it gives the impression that ‘Environment Protection far outweighs Development’.”
Vanderbruggen said the SEA was “a tremendously helpful study” and the perception there were winners and losers was unfair.
“The SEA just highlights which areas are easier than others, and where you can optimise cascades. That does not mean you must cancel everything that is not at the top of being easy. You can take proper mitigation measures, and there are many reasons – not only environmental and social – why a project is selected to proceed.”
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