Nam Theun 2 Hydropower Project, Laos

The Project

The "Nam Theun 2" (NT2) is a major hydroelectric power project in Laos. The EIB has signed a loan agreement of EUR 45 million with the Laos Government to help finance the project. The EIB is co-financing the project with the World Bank, the Asian Development Bank, the Nordic Investment Bank, bilateral agencies (AFD and Proparco) and syndicates of international and Thai banks. The Bank's loan closes the gap in the Lao Government's financing of its equity participation in the project company.

The project consists of the construction 48 m high, 325 m long dam creating a 450 km2 artificial water reservoir with an average depth of 7 meters (with an active water storage of 3,530 Mm3, and with a related catchment area of about 4,000 km2) and hydro power plant with an installed generating capacity of 1,070 Mwe. This lake is located in the mountainous centre of Laos in the Nakai Plateau, through which the Nam Theun River flows. The area impacted by the lake is mostly poor quality agricultural land, degraded forest, some permanent and seasonal wetlands and a few areas of untouched rainforest.

The project will be built and operated by "Nam Theun 2 Power Company" (NTPC), a special purpose company which is 35%-owned by Electricité de France (EDF), 25% by the Electricity Generating Public Co Ltd (EGCO) of Thailand, 25% by the Government of the Lao People's Democratic Republic (Laos) and 15% by the Italian-Thai Development Public Co Ltd.

The hydropower scheme will help the development of Laos through hard currency revenues from the export of electricity to Thailand and though the provision of power to the Laos grid. Revenues are assured through two 25 year fixed-price power purchase agreements signed with respectively EGAT, the largest power supply company of Thailand, and EDL, the state-owned power company of Laos.

The Laos' Interest

Laos is one of Asia's poorest and most underdeveloped countries, with limited strategic options to develop and generate the revenues needed to reduce poverty. For Laos, the NT 2 project currently represents an opportunity not to be missed to contribute towards its own sustainable social and economical development in a significant way.

Laos and Thailand have a long history of bilateral electricity trade. Thailand began importing hydropower from Laos in 1971 and for many years Laos has been relying on medium voltage electricity from Thailand to supply its border provinces. Based on a common understanding since 1993, both governments have developed hydro power plants in Laos for the supply of electricity to Thailand, including the Theun-Hinboun and the Houay Ho hydro plants, which already use the Nam Theun river.

EIB's decision for the financing of the project

EIB lending in Laos is based on the Asia and Latin America (ALA) lending mandate which authorises the Bank to lend in ALA up to EUR 2.5 billion between February 2000 and January 2007.

The Bank is supporting the investment because of the project's high development impact and the enhancement of regional integration. The project will reduce Laos' dependence on external development assistance,and promote the sustainable use of renewable natural resources. The project represents common interest for the European Union and Laos because EDF, a prominent European power company, plays a key role in the design, construction and operation of the project.

Overall the project will generate a net environmental benefit for the region, improve living standards and economic development for the local population.

Environmental and social issues

The NT 2 project has been submitted to careful preparation by its sponsors and to thorough due diligence by the project financiers; it will be subject to extensive and stringent project and structural conditionality ascertaining the implementation of important mitigating and compensating measures, in order to generate overall net environmental benefits to the region and improved living standards and economic development for the local population.

The main environmental impacts of the artificial water reservoir will be the loss of + 28 600 ha of primary forest and approximately 1 000 ha of productive agricultural land. There will be some disruption to wildlife habitats (including for several threatened species) and potential loss of biodiversity, including several threatened species. The transfer of water flow from the Nam Theun river to the Xe Bang Fai river will cause some changes in the aquatic ecosystem and the reduction in fish stocks, loss of riverbank agriculture, river bank erosion and flooding downstream; and deterioration in water quality.

The EIA for the project was carried out under the Laos' the Environment Protection Law. A review concluded that the process satisfied the requirements of the country's Environment Protection and Resettlement Laws. The required notifications were issued to the countries of the Lower Mekong Basin through the Mekong River Commission Secretariat.

The EIA confirmed that the project does not have any significant negative impact on protected areas and cumulative impact studies indicate that there is no significant impact on the Mekong basin. In contrast, positive impacts include the renewable nature of hydropower generation, the opportunity provided by the project to fund conservation measures to reduce existing threats to forest resources, and the reduced cost of pumping for irrigation due to higher river levels along the Xe Bang Fai.

The environmental and social impacts and corresponding mitigation measures have been reviewed against the relevant policies of the EIB and the principles underlying related EU legislation. For non-EU countries, EIB policy states that projects must comply with the principles and standards set by EU policies, subject to local conditions and law' as is stated in EIB Environmental Statement 2004. The EIA and design of mitigation measures are considered to have met EU standards.

Environmental and social management plans for the project include the establishment of long term watershed protection and management systems for the Nakai Nam Theun National Protected Area and associated corridors; compensatory forestry to offset loss of primary forest in the reservoir; livelihood development initiatives for people to be resettled with clearly specified poverty reduction objectives; reservoir fisheries managed by local people with extensive independent monitoring including penalisation of non-compliance. Resettlement village and farms have been established and compensation for livelihood losses resulting from the river diversion included. The project should help reverse the trend towards unsustainable exploitation of natural resources, and help to improve ethnic minority protection. I.a. given these aspects, the project was deemed environmentally and socially acceptable.

Since 1997, a Panel of Experts and an International Advisory Group have regularly reviewed the planning of the project. The Panel of Experts, which reports directly to the Government, monitors compliance with environmental and social safeguards throughout the project implementation and at least three years after start of operation. The International Advisory Group reports to the World Bank.

Both the Panel of Experts and the International Advisory Group undertook an assessment of the project in relation to the report of the World Commission on Dams (WCD) and considered that the project has gone a long way to meeting the WCD recommendations. Taking the WCD recommendations in to account, the EIB loan is conditional on mitigation measures for directly affected people going beyond mere compensation but also providing a share in project benefits.

Finally, the project complies with the EU's and the Bank's environmental policy, by tackling climate change and promoting sustainable use of renewable natural resources. The project will avoid thermal generation and the associated emissions of greenhouse gasses and other air pollutants in Thailand. The project will also make a material contribution to the conservation of one of the remaining regions of outstanding biodiversity in South East Asia, which would be endangered should the safeguard measures designed under the project not be implemented.