Economic Evaluation of Hydropower Projects in the Lower Mekong Basin
This brief summarises the key findings of an Economic Evaluation of Hydropower Projects in the Lower Mekong Basin (LMB) recently carried out by Natural Resources and Environmental Management Research and Training Center
(NREM), Mae Fah Luang University, Chiang Rai, Thailand (Intralawan, Wood, and Frankel 2017). There are eleven dams planned for the Lower Mekong mainstream (see Figure 1). Xayaburi and Don Sahong are under construction, and a third, Pak Beng Dam, is expected to begin construction in 2017.
Commonly cited economic benefits of Lower Mekong mainstream dams include electricity for export, primarily to Thailand and Vietnam, and revenue for Lao PDR to develop the country and raise living standards. However, our study finds that project justifications seem to have ignored or underestimated the economic costs of environmental and social impacts such as capture fisheries loss and reduction in sediment/ nutrients and overestimated the economic
benefits from hydropower. By changing and updating some of the economic assumptions and values, we find that the overall economic impact of planned Mekong hydropower projects would be negative.
The overall economic impact of planned Mekong hydropower projects would be negative. The negative economic impact is mainly due to the economic value of capture fisheries loss being much larger than benefits from hydropower.
Social mitigation costs and loss of sediment/nutrients also have a significant economic impact. The economic impact on Lao PDR and Thailand is forecast to be positive, with Thailand being the main beneficiary. Vietnam and Cambodia are forecast to suffer large negative economic impacts.
Methods and Assumptions
Our study (hereafter referred to as NREM Update) evaluates the ‘eleven dams scenario’ which comprises the 11 Lower Mekong mainstream dams (nine in Lao PDR, and two in Cambodia) plus 30 dams planned for the tributaries; the total capital investment is approximately US$50 billion (see Table 1).
Table 1: Lower Mekong Hydropower Projects - eleven dams scenario
Table 2: Economic values and assumptions applied in NREM update
This scenario was chosen because it is consistent – and allows comparison – with Mekong River Commission’s (MRC) “Assessment of Basin-wide Development Scenarios – Basin Development Programme, Phase 2” (hereafter referred to as BDP2) (Mekong River Commission 2011).
NREM Update evaluates the costs and benefits of planned hydropower projects in terms of Net Present Value (NPV) for a 50-year period, using 2016 prices, and applies a ten per cent discount rate which is typically used to evaluate major infrastructure projects and is the same rate applied in BDP2.
Key differences between BDP2 and NREM Update
The BDP2 estimated that the net economic benefit of the eleven dams scenario would be US$33.4 billion. However, the NREM Update estimates that the overall economic impact will be negative, the NPV is approximately minus US$7.3 billion. Table 3 below shows the differences in the overall results of economic calculations between BDP2 and NREM Update.
Table 3: Summary of NPV calculations for 11-dams scenario
- Hydropower: NREM calculation of hydropower benefits is much lower than the BDP2 figures, mainly due to BDP2 using low capital investment data, high electricity price and a different electricity trading model.
- Capture Fisheries: NREM estimates of the NPV of the fisheries are much higher mainly because it assumed a fish value of US$3.5/kg compared to BDP2 which assumed $0.8/kg. The price used in NREM Update is less than recent MRC estimates which reported US$4.8/kg (Nam , et al. 2015).
- NREM estimates of the NPV of the fisheries are much higher mainly: BDP2 did not take into account the mitigation costs of social and cultural impacts, whereas NREM Update assumes mitigation costs to be equivalent to 5% of capital investment.
- Sediment/nutrients: BDP2 did not take into account economic losses associated with loss of sediments and nutrients. Drawing on data from the Mekong Delta Study (MDS) (Ministry of Natural Resources and Environment; Government of Vietnam 2015), NREM Update calculated economic costs associated with loss in sediments and nutrients. NREM figures are conservative – the MDS forecasts that decreased sediment and nutrients could reduce long-term rice production in Vietnam by 2.4 million tons/year, which is equivalent to an economic loss of approximately US$8 billion.
Distribution of costs and benefits by country
The distribution of costs and benefits between individual Lower Mekong Basin countries is difficult to estimate as other countries (e.g. China, France, Korea, Malaysia and Norway) are involved in project funding and operations.
BDP2 concluded that all Lower Mekong countries would benefit, with Lao PDR, where most of the dams will be built, being the largest beneficiary. NREM Update finds that while Lao PDR and Thailand still benefit, the benefit is much
lower than estimated in BDP2. Cambodia and Vietnam would suffer large negative economic impacts (see Figure 2).
Figure 2. Cost and benefits by country: BDP 2 and NREM update
- The overall economic impact of planned Mekong hydropower projects would be negative. Using updated data and assumptions for project economics, NREM Update estimates that the NPV will be minus US$7.3 billion. This is mainly due to the economic value of capture fisheries loss being much larger than benefits from hydropower; and also the inclusion of economic costs associated with mitigating social impacts and loss of sediments and nutrients.
- Thailand is the main beneficiary of the planned hydropower projects and the net economic impact for Lao PDR is positive (but much lower than forecast in BDP2). Cambodia and Vietnam would suffer large negative impacts. This is contrary to BDP2 which concluded that all LMB countries would benefit from hydropower development and that Lao PDR would be the main beneficiary.
- The forecast profitability of Xayaburi is modest even assuming no impact on capture fisheries and the environment. A small percentage loss of capture fisheries caused by Xayaburi would result in a large, negative economic impact. The justification for Don Sahong is even more contentious as it is not essential for the security of Lao PDR electricity supply and the potential capture fisheries loss far exceeds the hydropower benefit. The forecast profitability of Pak Beng is also modest.
- The 11 mainstream projects would provide about 8% of forecast LMB power demand (Intelligent Energy Systems Pty Ltd (IES) and Mekong Economics (MKE) 2016). If the mainstream projects are not pursued, there would be minimal risk for electricity security in the LMB countries and the forecast electricity demand could be supplied by alternative energy sources such as solar and biomass and improved energy efficiency (Intelligent Energy Systems (IES) 2016).
The following recommendations are proposed for further consideration:
- Delay construction of other mainstream dams until Xayaburi is completed and the effectiveness of mitigation measures including fish passes and sediment sluice gates has been demonstrated.
- Require hydropower projects to include full-cost accounting of social and environmental conservation mitigation measures in the committed capital investment.
- Re-assess the net economic impacts and forecast benefits to Lao PDR based on a ‘likely scenario’ for mainstream hydropower projects, which have a high probability of going ahead.
- Develop a new LMB energy strategy taking into account less hydropower income than previously anticipated, updated forecasts for LMB power demand and technology developments for improved energy efficiency & renewable energy.
- Intelligent Energy Systems (IES). (2016). WWF report Power Sector Vision 2050 toward 100% Renewable Energy by 2050 Greater Mekong: Power vision overview.
- Intelligent Energy Systems Pty Ltd (IES) and Mekong Economics (MKE) (2016). Alternatives for Power Generation in the Greater Mekong Subregion: Volume 1 Power Sector Vision for the Greater Mekong Subregion, World Wild Fund for Nature.
- Intralawan, A., D. Wood and R. Frankel (2017). Economic Evaluation of Hydropower Projects in the Lower Mekong Basin, Natural Resources and Environmental Management Research and Training Center Mae Fah Luang University, Chiang Rai, Thailand.
- Mekong River Commission (2011). Assessment of Basin-wide Development Scenarios – Basin Development Plan Programme, Phase 2. Vientiane, Lao PDR
- Ministry of Natural Resources and Environment; Government of Vietnam (2015). Study on the Impacts of Mainstream Hydropower on the Mekong: Final report.
- Nam, S., S. Phommakone, L. Vuthy, T. Samphawamana, N. H. Son, M. Khumsri, N. P. Bun, K. Sovanara, P. Degen and P. Starr (2015). Catch and Culture, Mekong River Commission, Fisheries Research and Development in the Mekong Region. 21.
Photo by: Savann Oeurm/Oxfam