Although it has one of the lowest electrification rates in the world, currently at about 30%, Myanmar is targeting total coverage by 2030. Despite the significant progress needed, the goal is seen as reachable, with Myanmar holding abundant hydro and solar resources, and considerable hydrocarbons potential. The country is also likely to be able to attract the capital to build the much needed capacity. Since liberalisation began in 2011 Myanmar has transformed itself into an attractive investment destination for some of the world’s largest and most competitive players in the sector (see analysis). While much still needs to be done in terms of legislation and implementation, and transparency is still a work in progress, the country has established a good foundation on which to deliver another 20 GW of electricity by 2030.
The challenge is expected to be in balancing interests. Hydropower is proving controversial, as it has a significant impact on the environment and local populations. The authorities must work cooperatively with those potentially affected and, importantly, they must ensure that international investors and relevant NGOs are satisfied that the efforts on the power side meet global standards. Coal power, also controversial, must be added, as the country has major energy needs, though this must be done in tandem with strengthening environmental protection. Tariffs will have to be adjusted upward without causing social instability, while the right mix must be achieved in terms of energy exports versus energy sold domestically, as the country needs to use electricity for both local growth and raising funds for the national budget. In addition to boosting installed capacity, Myanmar needs to develop an integrated plan that satisfies local interests, addresses the concerns of international organisations and utilises new technologies.
Despite the low levels of electrification, the country has been active in the sector for years and has built a sizeable installed base. As of January 2015 Myanmar had an estimated total capacity of 4456 MW, according to the Ministry of Electric Power. While local demand for power was once low, economic liberalisation has seen demand accelerate, bringing a new challenge to the country. “Before, the electricity situation was not so bad because we had no industry,” said U Win Kyaing, a member of the Energy Development Committee. “But now our development is quick, so it is difficult.”
The government, along with its donor partners, is working to increase output, close the gaps and make the whole sector more sustainable. At the time of publication, most of the country’s generation capacity comes from 39 power plants, including 25 hydro, 13 gas-fired and one coal. Hydro generates 65% of the total electricity produced (down from 71% in 2011), gas 33% and coal 2%. By 2020 the goal is for hydro to account for 54%, with gas and coal each providing 22%, and renewables 2% (up from zero presently). By 2030 the mix is expected to be even more diverse, with hydro at 38%, gas 20%, coal 33% and other renewables at 9%.
“The key issues for electricity generation are capital investment and technology,” U Thet San, managing director at Alpha Power Engineering, a local operator, told OBG. “The ageing transmission lines cannot load all electricity generated from power stations. Myanmar needs to install transmission lines, but at the same time we are developing new generation plants,” he added.
A number of plans and programmes have been initiated to meet these ends. Under the National Electricity Master Plan, which was prepared by the Japan International Cooperation Agency (JICA), the country will add 23,594 MW of installed capacity and build 41 new power plants. Meanwhile, the National Electrification Plan, which was developed with the help of the World Bank and the UN, lays out a comprehensive upgrade, expansion and overhaul of the system. It is being rolled out in two phases: an immediate phase which targets “quick wins”, and a second phase to tackle long-term targets and capacity building. The World Bank’s role commenced in 2013, with $400m in financing approved in 2015 for 32 years at 0% interest. The first phase is taking place from 2015 to 2019.
The programme has a number of components. The grid extension involves a transformation of the transmission system with the support of $300m in funding. It will involve the expansion of existing medium-volt substations and the building of new medium-volt substations; the installation of another 20,761 km of new low-voltage lines; and the addition of 11,600 community connections, 750,000 household connections and 132,000 public lights. The responsibility for financing will be split between international donors and local utilities, with the former financing materials and goods, and the latter providing logistics support.
The programme also has an off-the-grid component, which will receive $80m in international funding. Communities that are unlikely to be brought onto the power network within a decade are targeted. Areas that have been the site of conflict, or which have lingering ethnic tensions, will be especially of interest. Included in the programme will be photo-voltaic solar, mini-hydro, wind and diesel. Mini-grids will be developed. Other components of the programme include $20m for project management and technical assistance.
An upgrade of the national grid is seen as politically important. Not only will it help to unify the country, but it will also encourage inclusive development. At present, the cost of electricity is much higher for people off the grid, as they have to use small generators which are far less efficient than power plants. The improvement of generation is also vital to economic stability and foreign direct investment. Without consistent power and without widespread accessibility, it will be hard to maintain economic growth and it will be difficult to attract international capital, as factories and offices require a predictable and steady supply.
The regulatory environment has been improving quickly. Myanmar passed a new Electricity Law in 2014, replacing the previous law of 1984, which was designed for a more centralised system that did not consider private participation. The new law, which was drafted with assistance from the Asian Development Bank (ADB) and supported by an $850,000 grant from Norway, is written to international standards and allows for a private sector role. The law has been in the works since 2006, while ADB assistance was requested in 2011.
Significantly, the new electricity law establishes the Electricity Regulatory Commission (ERC), which has some power to regulate the sector and control rates in the event of a local monopoly in the sector. The Ministry of Electric Power (MOEP) and local governments are given the authority to grant licences, with the ministry retaining responsibility for all projects above 30 MW and state and regional authorities approving projects that are between 10 and 30 MW and not connected to the national grid. Foreigners are permitted to invest, but generally only for projects over 10 MW – smaller projects may be considered on a joint-venture (JV) basis.
The situation with hydro power and coal is not altogether clear. Notification No. 1 published in 2013, outlined that projects of this type must be built on a JV basis. Technically, Notification No. 1 was repealed in 2014, but there is some ambiguity remaining and legal groups advise caution. Nevertheless, the law was seen as a landmark for the sector as it ended the state monopoly on electricity, specifically by permitting foreign investment. Likewise, it deals with the contentious issue of pricing.
In The Works
Some privatisation has already been taken place. In 2010, most state-owned petrol filling stations were sold, as the sector was opened up to private players. Following on this, the government has decided to transform Myanma Petroleum Products Enterprise (MPPE) – which imports and sells gas and diesel – into a private company. Japanese, Swiss and Thai interests have been considered as possible investors. Given that Myanmar lacks refining capacity, it must import most hydrocarbons, which exacerbates the country’s trade imbalance. It is hoped that the new enterprise will bring capital and technology to the sector.
One point of contention is the price of electricity. In order to pay for an effective and modern grid, utility players are going to have to charge a market price for power. In 2013 the authorities attempted to raise the price per unit above 100 KWh a month from MMK35 ($0.03) to MMK50 ($0.05), but held back due to concerns about social instability.
The government has indicated that it currently loses MMK185bn ($170m) a year on electricity, with the ADB and World Bank both advising a price increase. Reform was achieved in April 2014 when those using more than 100 KWh per month were required to pay MMK40 ($0.04) per KWh and those using more than 200 KWh per month started to pay MMK50 ($0.05) per KWh. However, some view this increase as too modest and are calling for a bigger hike. “Our price should be at least MMK100 ($0.09),” said U Win Kyaing, a member of the Energy Development Committee. “It is too cheap.”
Power purchase agreements (PPAs) in Myanmar are not standardised, according to Northon Rose Fulbright, a global law firm. Myanma Electric Power Enterprise (MEPE) negotiates directly with each project, resulting in a wide range of PPAs. Despite the lack of a standard PPA model, legal observers are noting progress on this front. In 2014, lawyers at London-headquartered Latham & Watkins said that recent PPAs address some of the weaknesses of pre-2012 agreements and bring PPAs largely in line with international standards. PPAs are now generally seen as “bankable”, i.e. that they are reliable enough to justify taking out long-term debt based on the expected revenues.
Most agreements include a few common elements, such as a take-or-pay clause and under-supply penalties. Most agreements also have a force majure clause, protection against a change in the law and a termination provision built in. While the agreements are usually covered by Myanmar law, foreign arbitration is permitted. Experts note that due to the country’s legal history, and its Common Law foundations, many of the basic forms of security that exist are familiar to foreign investors. An independent power producer (IPP), for example, can offer a mortgage over land as a form of security to lenders.
One of the biggest sticking points is tariff adjustments. Pre-2012 PPAs relied on fairly simple benchmarks such as local inflation rates and renegotiation, albeit creating risks for both Myanmar and the investor. While newer PPAs employ more sophisticated structures, such as tariff escalation ceilings and established harmonised tariffs across the country, in the process reducing the potential for disagreement and increasing transparency, the lack of a model PPA suggests some investment risk and requires careful evaluation of the agreement.
In early 2015, Singapore’s Sembcorp Industries reached an agreement to build and operate a 225-MW gas-fired plant at Myingyan in Mandalay Region. The project was awarded after an international tender was conducted with advice from the International Finance Corporation. A 22-year PPA was concluded with the MOEP as the absolute guarantor. The project, which is due to be completed by 2018, is expected to cost $300m and will be the largest gas-fired independent power station in the country. In addition to the considerable size of the deal, it was also significant given that the winner was chosen by open tender and that the transaction was conducted in a transparent manner.
According to the World Bank, however, the process still had space for improvement. Official tender regulations had not been published, although international best practice was followed. Furthermore, while Myanmar is a signatory to the New York Arbitration Convention, it is not yet supported by domestic legislation.
Despite the country’s economic troubles since the late 1990s, renewables have been growing faster than in almost any other part of the world. As a percentage of total power generated, hydropower went from 23% in 1998 to 72% in 2012, according to World Bank figures. Perhaps not unsurprisingly, this has not been without controversy. Complaints about environmental damage, displacement and the mistreatment of Chinese labour led to the cancellation of the Myitsone dam in 2011. In 2013, two more hydropower projects, Htamanthi and Shwezaye, were dropped for similar reasons. The projects were to be financed by India, which would have received 80% of energy output.
Myanmar has set a renewables target of 15-20% by 2020, and according to the ADB, the country has huge renewables potential. An estimated 60% of the country is well-suited for solar electricity generation, with an average direct normal irradiation level of about 1400 kWh per sq metre per year. However, no major projects have been undertaken to date, though three pilot projects are being developed: the Solar Photo-voltaic Battery Charging Community Enterprise; Demonstrative Research on a Photo-voltaic Power Generation System in Myanmar; and the Solar Power Village Electrification Scheme.
“There is a lack of understanding about solar power in the country and, because of the traditional way of thinking, it is difficult to get the necessary financing locally. Fortunately there are international agencies that are supporting renewable energy initiatives in the country,” Benjamin Frederick, head of operations at Myanmar Eco Solutions, told OBG. Major projects in the pipeline include a collaborative venture by Thailand’s Green Earth Power and the US’s Black & Veatch to build a 220-MW solar plant in Minbu in Magway Region. This has been reported as South-east Asia’s largest solar power plant, and construction is set to commence in early 2016. In October 2015, Sunlabob Renewable Energy, a Laos-based company, said it had been awarded a contract for 11 solar micro-grids in remote communities, funded by the Japanese International Cooperation System. The sites will be in the Shan and Chin States. Furthermore, in March 2015, ABB, a power and automation technologies group, signed a deal with American NGO Pact to bring solar power to 3500 people in rural areas near Mandalay.
Wind & Biomass
With a theoretical potential capacity of 33 GW, wind resources could also be promising. However, much of the country is not windy enough to support turbines, with average wind speeds of less than 6 metres per second. Furthermore, given the limitations of the electrical grid, the ADB estimates the segment’s technical potential to be between 86 MW and 343 MW. In addition to solar and wind, biomass development is another area of interest. The country already gets most of its energy from burning solid fuels such as firewood, coconut leaves and bamboo, and many of the agricultural products could be better utilised and transformed into cleaner and more efficient fuels. Myanmar has been intensely pursing biomass projects since 1980, with more than 1000 projects initiated. More than 200 are still in operation.
Despite no incentives specifically targeting renewables, foreign investors can still have general incentives applied to renewable projects. According to the ADB, these include: five-year tax holidays; tax reductions of up to 50% for exports; research and development expense reductions; and exemptions from Customs duties for certain imports. Significantly, Myanmar has no feed-in tariff.
While the burning of coal is seen by the authorities as an inexpensive way to boost electricity generation, it is very controversial. In 2010, a total of 11 coal-fired plant deals were signed by the MOEP. However, the projects have faced stiff opposition that has led to protests and civil unrest. As of late 2015, the government had stopped meeting with coal developers. Of the projects, four are in Yangon Region, three in Tanintharyi Region, one each in Shan and Mon States, and one each in Ayeyarwady and Sagaing Regions, according to The Myanmar Times.
In April 2015, Toyo-Thai signed an agreement with the Ministry of Power to build a 1280-MW coal-fired facility in Mon State and operate it for 30 years. However, according to press reports, 5000 people in Ye Township challenged the plan. Local residents have been against the agreement since negotiations began, with complaints centred on the environmental impact and effects to local health as well as the project’s transparency. It has also been argued that the land compensation being offered is far lower than the material and cultural losses that will be experienced by members of the community.
One plant in Yangon has been cancelled altogether, according to The Myanmar Times. The 279-MW plant in Htantabin Township, which was to be developed by Huaneng Lancang and the Htoo Group, was cancelled in 2015. The government decided not to proceed with the plant due to port problems, and under the terms of the memorandum of understanding (MoU), if progress is not made within 30 months of the signing, the MoU automatically expires. Two other coal-fired plants in Yangon (Kungyangon and Kyauktan Townships) were signed later and are still on schedule. The Mon and Shan State projects (the latter being a 500-MW plant) are the only two of the original 11 that have moved beyond the MoU stage.
Coal plants on the board in the country include: a 500-MW plant being developed by Orange Powergen of India, Global Adviser of Singapore and Diamond Palace Services of Myanmar in Kyauktan Township, Yangon; a 300-MW plant by Virtue Land, a subsidiary of Myanmar’s Asia World Group, in Kwan Chan Gone, Yangon; a 2460-MW plant in Myeik being built by RATCH and Blue Energy and Environment, both of Thailand, and Vantage and Kyaw Kyaw Phyo, both of Myanmar; a 500-MW plant in Boat Pyin by Cwave Global and 24 Hours Mining & Industry, both of Myanmar; a 600-MW plant at Nganyoutkaung Township, Ayeyarwady Region by India’s Tata Power; and a 270-MW plant in the Sagaing Region by ISDN of Singapore and Tun Thwin Mining of Myanmar.
The government has been arguing vigorously in favour of coal, saying that it is the only way to meet the country’s energy needs in a practical way. Although renewables have significant potential within the country, the lack of consistent power from renewables means that they can never account for more that 10% of the total. The private sector is therefore pushing for coal, as it does not see any other way for the country to meet its growing energy deficit. “There is no more gas unless there is a new discovery,” U Kyaw Kyaw Oo, a director at Barons & Fujikura EPC Co., a local power construction firm, told OBG. “The only solution for the country in terms of power is coal.”
OIL & GAS: Myanmar was one of the world’s first oil-producing countries. It started exporting oil in 1853, and a well from 1887 is still operating today (Ychaugyaung field). From 1886 to 1963, the sector was dominated by Burmah Oil Company, a Scottish firm which was the first foreign enterprise to drill for oil in the country. Standard Oil arrived in 1901.
After the nationalisation of the sector, MOGE was formed. Foreigners were kept out for 25 years, but were finally permitted to enter the market in 1988. Chevron and Total participated, but most of the others investing were regional (from Russia, China, Korea, Vietnam, Malaysia, Indonesia and Singapore). The Yadana gas field was discovered in 1982 and Total signed a contract for the field with MOGE in 1992. It is a venture between Total, Unocal, PTTEP of Thailand and MOGE, and the vast majority of production goes to Thailand. In 1993 the Yetagun gas field was discovered, and it is operated by a venture between Petronas, Nippon Oil Exploration, PTTEP and MOGE.
Since the economic and political reforms of 2011, a number of bidding rounds have been held. The first was in 2011, with 18 onshore blocks being made available and half of them being taken by foreign investors. Interest was light due to the remaining international sanctions. Another set of onshore blocks was offered in 2013. While the sanctions had eased, interest was still limited.
In the next round, also in 2013, international majors did inevitably rush in, as blocks were available offshore and local JV partners were not required for the deepwater blocks. Winners included Royal Dutch Shell, Total E&P, Statoil, ConocoPhillips and Eni. The country has a total of 104 blocks, 53 onshore and 51 offshore. Of these, 16 onshore and 19 offshore blocks are in operation, according to a report published by The Myanmar Times.
PSCs for hydrocarbons projects are being negotiated to consider Myanmar’s future needs. When the country’s economy stalled and foreign investment was sparse, it made sense to export as much as possible. However, the priority is now on domestic development, which will require fuel. Newly negotiated contracts are starting to reflect new priorities and focus on ensuring that the country is guaranteed fuel for its growth, and at a discount to the market price. PSCs also include training budgets and a social responsibility component.
The recently completed deepwater PSCs allow for a three-year exploration period, with one two-year extension permitted and a 20-year development period. For deepwater wells, the state’s share currently ranges from 70% to 90%. For shallow water wells, it stands at 60% to 90%. “According to the PSCs, the first to benefit is the domestic market,” said U Aung Ye Soe, managing director at the Machinery and Solutions Company, a local group.
In 2014, the country produced a total of 21,000 barrels per day (bpd) of liquid fuels, according to the Energy Information Administration. As Myanmar consumes 29,000 bpd and also lacks refining capacity, it is currently a net importer of oil. The country also produces around 463 bn cu ft (bcf) of natural gas per year. Historically, natural gas demand has been far lower than production, and most output has been exported to Thailand.
The lion’s share of gas exported to Thailand (304 bcf per year) comes from the Yadana and Yetagun fields. A third field, Zawtika, came on-stream in the second half of 2014 and produces about 100 bcf per year. In 2013, Myanmar started exporting natural gas to China under the Shwe natural gas project. A total of 108 bcf was sold to Myanmar’s northern neighbour in 2014, with peak production from phase I of the project expected to hit 193 bcf per year.
In January 2015, the Myanmar-China Oil Pipeline commenced operations. It runs from Maday Island in Kyaukphyu, Rakhine State to Ruili, Yunnan Province, and has a 22m-tonne annual capacity. The line was constructed so that China could import oil from the Middle East without having to pass through the Straits of Malacca.
According to Interfax Natural Gas Daily, in 2014 the gas pipeline was carrying only 20% of its full capacity and questions have been raised whether the pipeline was necessary given China’s cutback on refining capacity and its slowing growth. Locals have also protested developments in the area, saying that their lands were taken in an unlawful manner and that the project threatens the environment and well-being of the local population.
Given the events that have taken place since 2011, the outlook for energy in Myanmar is promising. The country has become more open, which has led to considerable foreign investment from large companies and fast development in the sector. Offshore blocks will be explored and ultimately exploited and plants will be built, and all in a competitive environment that should ensure good pricing and the use of the best technologies.
A number of challenges do remain. Myanmar is going from a country with little domestic economic activity to one that is starting to grow rapidly. Deals will need to be structured carefully, taking into account domestic demand without ignoring the need for hard currency that exports provide. The country is also dealing with serious legacy issues with respect to deals done during the waning days of the old establishment.
The managing of these deals will be central to the sector’s outlook, as some of them are needed, but the terms and conditions must be updated to account for political change. While Myanmar needs to balance capacity challenges with transparency and environmental protection, it may be forced to make some strategic compromises in order for output to be increased on schedule and efficiently.