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September 8, 2014

The lack of an electricity sector strategy will stymie Myanmar's growth

By Masahiko Tanaka

As Myanmar builds its record of strong economic growth, the demand for electricity will increase sharply. According to the on-going National Electricity Master Plan study, which is supported by JICA, by 2030 it will reach 5 to 8 times the level in 2012. Dramatic as this may seem, it is consistent with the experiences of other countries. Given the low access to electricity today (about 30% of households), the demand for electricity is certain to expand much faster than the economy. Failing to meet this rising requirement for electricity will be disastrous.

Nepal's experience illustrates this point vividly. After the restoration of democracy in 1990, Nepal too undertook sweeping economic reforms and its growth prospects brightened. Yet, GDP growth (per capita) has averaged only 2.4% since 1990, and exceeded 5% only once. Political instability is to be blamed for much of this disappointment, but a shortage of electricity has also been damaging. In 1995, a major hydropower project (Arun III) was cancelled because of the pressures from environmental lobbies and inter-party politics that ignored national interests. The successive governments never devised an alternative to fill the large gap, and power generation capacity has increased by only about 3 times in the last 25 years, falling far behind the growth in demand. In the dry season, Nepalese industries and households now often receive only 8 hours of electricity a day. No economy can thrive with such a severe handicap. It will take decades to undo the egregious error.

Unfortunately, Myanmar too seems to lack a coherent energy strategy. With much public support, the controversial Myitsone Dam project was suspended, but how will the large gap thus created in the future supply plan be filled? Many gas-fired power stations are planned, but where will the additional gas supply come from? The Government sees the private sector as the main solution to the power supply problem. It has signed some 50 ‘memoranda of understanding' (MOUs) with ‘independent power producers' (IPPs) to develop hydropower and thermal-power plants. In reality, however, most are moving so slowly that they will not assure steady increases in electricity supply.

Yet, in the current plans of the Ministry of Electric Power, IPPs will account for 80% of the future supplies, a level of dependence on IPPs few other countries have. This exposes Myanmar to serious risks. First, since the priority of many IPPs in Myanmar is exporting electricity (with relatively small amounts set aside for domestic users), the pace of investment is dictated by the convenience of the importing countries, not the necessities of Myanmar. Second, IPPs will typically pass on any cost fluctuations to the users. When they are based on oil or gas, this could lead to disruptive surges in price, as seen in Cambodia.

Every country's strategy will be different, given its resource endowment and other circumstances. Thailand has favored gas-fired thermal power plants and IPPs, while Vietnam has used hydropower and natural gas more evenly and relied on IPPs sparingly. In defining its own approach, Myanmar will be well served to consider the following issues.

  1. In the past, the natural gas reserves and hydropower potentials tended to be seen as ready sources of foreign exchange. Now, their development should be geared toward the domestic energy needs. Where possible, the Government should amend past agreements to increase supplies for domestic use.
  2. In defining the optimal mix of electricity sources, the Government must consider energy security, cost to the users, environmental impact, and social implications. It should be open-minded about all possibilities, including coal. Today's advanced technologies (e.g. super-critical coal-fired power plants) can limit CO2 emissions significantly. Although solar energy remains costly, it is clean and renewable. Along with micro-hydro, it is also useful as an off-grid power supply option. In this process, many difficult issues need to be settled. But, they must be decided promptly, lest Myanmar too faces a crippling power shortage.
  3. The Government should review its approach to IPPs. The high risks involved in IPPs must be appreciated, and a policy decision reached on a judicious balance between public investment and IPPs. Public investment requires immediate funding, but gives the government greater control over the investment phasing and electricity pricing. Previously, IPP was the only financing open to Myanmar; now it has more public financing options, including concessional loans from ADB, the World Bank, and JICA. Also, MOUs need to be more carefully designed and executed to ensure IPP projects are in fact implemented without delay.
  4. The Government must delineate a comprehensive long-term investment plan. Since the cost of investment and actual power generation must one way or another be borne by the consumers, expected adjustments to electricity rates and possible increases in general taxes should be publicly debated and well understood by the people. Without it, the Government could easily encounter blind opposition to what is patently necessary for the country. Furthermore, a predictable and steady investment stream can stimulate healthy growth of domestic industries that supply key inputs to power projects (e.g., cement).

Myanmar can avoid the blunder that Nepal had made in the power sector, for the problem is entirely predictable. Still, actually meeting the rising electricity needs will take a serious and sustained commitment by the whole nation. Political leaders, both inside and outside the government, must promote public debate on the right strategy, help forge a national consensus on bearing the burden of heavy investments, and ensure implementation of effective public policies in a sustained fashion. There are no easy solutions. Nevertheless, guiding the nation to make important but difficult collective decisions is the job of the country's political leaders, is it not?

Mr. Tanaka is the Head of the JICA Office in Myanmar

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