Cambodia’s LNG Ambitions: A New Chapter in Energy Generation
In October 2024, the Royal Group, a prominent Cambodian conglomerate, made headlines by breaking ground on a 900-megawatt (MW) electricity generation project in the Botum Sakor district of Koh Kong province. This ambitious initiative, if completed as scheduled by 2027, is set to become the largest operational power plant in Cambodia and the first to run on natural gas. However, this foray into liquefied natural gas (LNG) presents a complex web of challenges and opportunities for the nation’s energy landscape.
The Challenge of Fuel Supply
Despite its ambitious plans, Cambodia faces a significant hurdle: it does not produce its own natural gas. Consequently, the project will necessitate robust infrastructure to import LNG in its cold, liquid state and reheat it for combustion within the power plant. Analysts predict that LNG could play a pivotal role in shaping Cambodia’s energy future, yet this comes with inherent risks. Many countries in the region that rely on imported LNG have grappled with energy security and affordability issues due to market disruptions and soaring costs.
Strategic Planning for Energy Security
Cambodia’s entry into the LNG market demands meticulous planning and strategic foresight. The country needs to minimize energy costs while simultaneously bolstering reliability and facilitating economic growth. However, numerous uncertainties surround the costs and procurement strategies for LNG, as well as its role within Cambodia’s energy mix. The potential reliance on LNG could expose the economy to the volatility of global markets, raising critical questions about affordability and availability.
Procurement Strategies: Spot Markets vs. Contracts
Newer entrants like Cambodia generally have two primary options for acquiring LNG: buying it from spot markets or entering into multi-year contracts. Each approach carries its risks concerning energy security and pricing.
Purchasing from spot markets allows Cambodia the flexibility to import shipments as needed without committing to fixed contracts. The catch? Prices fluctuate dramatically, reflecting market conditions at the time of purchase. Recent years have seen spot LNG prices swing from as low as US$1 per million British thermal units (MMBtu) to more than US$100/MMBtu, translating to staggering costs for individual shipments.
On the other hand, contracts can stabilize pricing by linking costs to oil price percentages, which minimizes volatility. Yet, they also come with rigid terms that bind Cambodia to pay for LNG, regardless of its need. Given that the role of LNG in Cambodia’s energy strategy remains uncertain, this inflexibility poses a financial risk.
The High Cost of LNG
Regardless of the procurement method, LNG is poised to be costly. Current market analyses indicate that LNG prices under both contracts and spot arrangements are two to three times higher than those for coal. For instance, a recent study by the Institute for Energy Economics and Financial Analysis (IEEFA) estimates that operating a single 900MW LNG power plant could cost as much as US$722 million annually for fuel alone—an amount that far exceeds Cambodia’s coal import bills for 2022.
As a new player with limited negotiating power in the LNG market, Cambodia may find itself paying a premium, struggling to secure affordable supplies. This situation is exacerbated by geopolitical factors, such as the Russian invasion of Ukraine, which has severely disrupted global LNG markets. Countries that have already heavily depended on imports have faced dire consequences, including energy shortages and economic instability.
Impact on Electricity Pricing
Integrating this expensive LNG into Cambodia’s energy mix will inevitably impact electricity prices, complicating government initiatives aimed at reducing consumer costs. Current estimates suggest that LNG-fired electricity could reach prices more than five times higher than recent solar projects and approximately double that of coal and hydroelectric power. For example, while IEEFA notes LNG-generated electricity might cost around US$0.17 per kilowatt-hour (kWh), solar projects are being developed at just US$0.026/kWh.
To remain competitive with coal and renewables, LNG prices would need to drop below US$4.8/MMBtu. However, with most producers aiming for a minimum selling price of US$8/MMBtu or higher, this competitive landscape appears unlikely.
The Constraints of Renewable Energy Integration
Countries in Southeast Asia, including Vietnam and the Philippines, are already grappling with the repercussions of expensive LNG imports, impacting their electricity costs and dampening the growth of sustainable energy initiatives. Given that Cambodian consumers already contend with some of the highest electricity rates in Asia, incorporating LNG could further hinder affordability in a market where the government seeks to reduce prices while ensuring reliability.
Moreover, addressing Cambodia’s energy objectives—primarily transitioning to 70% renewable energy by 2030—requires a critical evaluation of LNG’s role. The perception that LNG is essential for energy security to ensure a reliable supply amid rising demand must be scrutinized.
Exploring Alternative Options
Cambodia’s leadership must engage in careful consideration of the need for LNG-to-power projects. While the argument for natural gas rests on its ability to provide consistent, dispatchable power that may not be available from wind or solar, the nation still has room for growth in these renewable sectors. Currently, with wind contributing minimally and solar accounting for only 5% of the electricity mix, the potential exists for significant expansions without disrupting grid stability.
To achieve the ambitious goal of generating 70% of power from renewables, a balanced approach that allows for growth in both wind and solar energy is essential. This would prevent the over-reliance on LNG, which could compromise Cambodia’s energy aspirations if long-term contracts with stringent obligations are signed.
As Cambodia navigates its LNG aspirations, prioritizing energy security and economic viability will be crucial. By aligning procurement strategies and infrastructure plans with broader energy goals, the country can position itself for a balanced and sustainable energy future.