Cambodia’s shift to coal is harming the country and pushing away foreign investors

5 Jun, 2021

Written by Gaia Lamperti

Up until 2018, Cambodia had been generating most of its electricity from hydroelectric dams. However, the fast-tracked approval of two new coal power plants last year signals a dramatic shift in its energy policy. A wave of investments from international investors, including the Industrial and Commercial Bank of China (ICBC), has made this possible.

In 2019, Cambodia also signed a memorandum of understanding with the Lao Government licensing 2,400MW energy imports from two proposed coal plants in southern Laos. 

This energy shift will fuel Cambodia’s rapidly growing export industry. The goal is to bring close to 2GW of coal power online before 2025. However, many of the country’s biggest clients in the manufacturing sector have called on the government to shift towards renewables.

With over 800,000 jobs on the line, if the country hopes to remain competitive in a Net Zero world, the government and investors’ must commit to renewables. The question is whether demands from brands such as Nike, Adidas, Puma and the H&M Group will make that shift happen. 

The coal plants

Cambodia has one of the world’s smallest historic global footprints. However, its transition towards coal can be linked to one of the global heating’s clearest symptoms: drought. In 2012 and 2015, Cambodia suffered some of its worst droughts in over half a century

These events caused widespread crop losses and threatened the feasibility of the country’s reliance on large dams. Then, in 2019, a prolonged dry season caused severe power shortages and threatened Cambodia’s farmers and its booming textile industry.

The economic damages caused by power shortages led to the fast-tracked approval of two new coal-powered plants, located in Koh Kong and Oddar Meanchey provinces. They have a net capacity of 700MW and 265 MW respectively. The projects signified a total investment of 1.7 billion USD. 

Botum Sakor Energy Company, an affiliated company of Royal Group finances the Koh Kong project. The coal plant is located in a protected area. The Oddar Meanchey coal power plant is a 294.3 million USD project funded by Han Seng Coal Mine Co (HSCMC). Operations will begin in early 2021. 

A source who has fifteen years of experience tracking private and state-backed Chinese investment in Southeast Asia prefers to remain anonymous. “Local people don’t really know much about the Botum Sakor coal power plant. Some of them think it’s a sugar factory,” they said.  

The newly approved coal plants would add up to Sihanoukville CIIDG Power Station 2, authorised in 2020. Sihanoukville is already under construction and will have 700 MW capacity.  According to the anonymous source, the ICBC funded 50% of Sihanoukville CIIDG Power Station 2 with an investment of 600 million USD.“I assume there are other actors involved but it’s not clear who,” they added. 

“It’s quite a common strategy for Chinese banks in Cambodia to spread out financial risk. Sometimes there are three to five Chinese banks involved in a project to distribute the risk.”

China is one of Cambodia’s largest investors and a key political ally. In the past, Chinese aid and state-backed investments for energy and transport infrastructures have facilitated Cambodia’s expansion in the manufacturing sector. 

Chinese financial institutions’ role in Cambodia’s energy sector has been very extensive. So much so that, as of 2018, Chinese banks financed almost three-quarters of Cambodia’s domestic power supply.

However, much of the banks’ engagement in Cambodia focuses on aggressive fossil fuel investments, like in the case of ICBC’s coal plants. 

Lack of financing alternatives

The International Energy Agency estimates that Cambodia has the second-lowest electrification rate in Southeast Asia. Without significant up-front investment in alternative energy opportunities, electricity access will continue to hold the country back and leave many of its people in the dark.

In its National Strategic Development Plan 2014 – 2018 the Cambodian government did agree on the importance of decarbonising energy production. However, the action plans focus mostly on improving energy efficiency to increase competitiveness with peer export economies like Bangladesh and Vietnam. 

According to a Nexus for Development’s report, local financial institutions do not consider renewable energies a potential market to assist the country’s energy needs. Therefore, the lack of investments and targets towards renewables undermines the potential of a sustainable energy transition.

“There’s a mixture of a conservative, traditionalist development approach on one hand; and vested interests and nepotism connected to fossil fuels projects on the other hand. This is holding Cambodia back a lot,” the anonymous source commented.

Competitiveness in the manufacturing sector at risk

Heavily relying on fossil fuels will further aggravate Cambodia’s exposure to the impacts of climate change. Cambodia is already highly vulnerable to seasonal risks of flooding and droughts and struggling with widespread poverty and rapid urbanisation. 

In addition, the planned coal investments from ICBC and others could threaten Cambodia’s export-oriented manufacturing sector. A number of multinational clothing brands have publicly committed to shift to 100% renewable energy through initiatives like RE100 and the Science-Based Target initiative (SBTi).

“Finding alternatives for coal, gas and fuels is increasingly important for the garment sector, so renewable energy sources are key,” H&M Country Manager Cambodia Christer Horn af Åminne said. “The H&M Group is publicly committed to this task.”

The Swedish H&M Group is one of the world’s largest clothing brands. The Group runs 28 factories and works with 12 suppliers across the country. Indeed, most of its garments have been made in Cambodia in the past 20 years. While the brand is committed to more sustainable production cycles, in 2016, H&M came under fire for underpaying its workers and violating labour rights

“Increasing the percentage of renewables in the grid beyond the current 15% limit set by the [Cambodian] government requires investment, both in grid technology and in the technical skills of those running it,” Horn af Åminne commented. “But it is certainly possible, and its prioritisation is key to protect domestic health, the environment, and the country’s sourcing attractiveness,” he continued.

International brands will potentially seek out low-carbon alternatives in the region in the next few years. The economic and social impacts of this shift could be huge for Cambodia, where the manufacturing sector captures the lion’s share of the country’s GDP. Indeed, the garment industry alone employs over 800,000 people of the 15 million national population.

The push is arriving from the garment sector

In the summer of 2020, brands like H&M, Adidas, Gap and Nike, among other over 150 signatories, sent a letter to the Cambodian government. The document called for further investment in renewable energy and a move away from coal power, in order to fulfil the country’s commitment to the Paris Agreement

“The letter aimed to clearly set out the situation today, the energy needs of brands who have made sustainability commitments, and to highlight the impact that not using renewable sources will have in the future,” an industry insider, who asked for his identity not to be revealed, commented. 

In the last five years and for the time to come, environmental sustainability and greenhouse gas emissions has and will continue to strongly impact the business decisions of brands with sustainability commitments. “It [this business] used to be about how quickly it [garments] could be made and at what price. Now, price and speed have to be balanced with carbon emissions,” the industry insider, who works for a European company, explained. 

EDC, Cambodia’s state energy company, banned private companies from producing their own energy sources. This decision was due to the desire not to be cut out of any revenue-generating opportunity. These types of projects could have become a significant competitive advantage in a future low-carbon economy in Cambodia too. Some commercial enterprises are already carrying out energy production initiatives in countries like Kenya

“There’s a very real risk that if a country like Cambodia does not allow for better rooftop solar and green policies, factories will have to pay to offset the negative balance. That simply adds a cost to production that would be cheaper somewhere else,” the industry insider commented. 

In the early 2000s, Cambodia may well have been able to power its entire manufacturing economy from coal, and faced little to no external pressure. In 2021, however, brands like H&M, Nike and Puma are subject to both client and investor pressures and move towards more sustainable supply chains.

If genuine, this shift threatens the future of Cambodia’s coal-fired energy plans and challenges the entire manufacturing sector to seek out alternative energy supplies. The move towards renewables should also be seen as a wake-up call for investors like ICBC, who may be in significant risk should the country’s biggest clients pull out.

About the author:

Gaia Lamperti, Italy/Cambodia

Gaia is a multimedia journalist. Born in Milan, after living in Spain, the US and Australia, she’s now based in London. She holds a master’s degree in International Journalism and reports on climate, sustainability, finance and technology across several platforms. 

Gaia has been awarded the IMF Youth Fellowship in 2020 and is currently working on solutions stories about sustainable innovation that tackles the climate crisis with the Solution Journalism Network. She looks forward to working with a team of international journalists on exposing the environmental and social risks associated with coal investments.

This story was made possible through the support of Climate Tracker.