Understanding the opportunities and challenges in Cambodia’s LNG ambitions

LNG plans may threaten energy security, affordability, and renewables targets without careful consideration of market and infrastructure risks

November 26, 2024 (IEEFA Asia): Over the past two decades, rapid economic growth and electrification have driven substantial changes in Cambodia’s electricity system. Although the country has historically relied on oil, hydropower, and coal for electricity, official energy plans envision a new phase of development focused on renewable energy and the introduction of liquefied natural gas (LNG).

Despite high expectations for imported LNG, exposure to global gas markets and infrastructure risks could threaten the affordability and security of Cambodia’s energy system without a careful strategy, finds the latest report from the Institute for Energy Economics and Financial Analysis (IEEFA).

“The case of Cambodia reveals the clear challenges of developing an LNG-to-power value chain from scratch,” says Sam Reynolds, co-author of the report and IEEFA Asia’s LNG/Gas Research Lead. “Since gas has historically not played a role in the country’s energy system, the introduction of imported LNG and its associated infrastructure could result in high fuel and power bills for the Cambodian economy.”

Cambodia’s official energy plans target generating 70% of Cambodia’s power from renewable sources by 2030, up from 50% in 2023. In addition to new solar and wind capacity, the government aims to complete at least 900 megawatts (MW) of LNG-fired power capacity in the 2030s to meet electricity demand growth and balance renewables generation. There are currently 2,000MW of proposed LNG plants in the country, with some forecasts projecting LNG-to-power capacity to reach 8,700MW by 2050.

Navigating volatility in global LNG markets

IEEFA’s report highlights several key considerations for Cambodian policymakers and industry stakeholders regarding LNG importation. First, LNG prices have skyrocketed in recent years due to volatility in global markets, with disproportionate impacts on emerging Asian economies.

“Extreme market volatility and price spikes since 2020 have left many South and Southeast Asian countries unable to afford LNG shipments, resulting in fuel and power shortages and thereby undermining energy security,” says report co-author Christopher Doleman, IEEFA’s LNG/Gas Specialist, Asia.

“Cambodia, as a potential new market entrant with limited bargaining power, uncertain LNG requirements, and a lower demand profile, may also struggle to access affordable supplies in the global market,” adds Doleman.

High LNG costs could rapidly increase Cambodia’s fuel import bill, as recent LNG prices have been two to three times those of coal. IEEFA’s report finds that operating one 900MW LNG-fired power plant at baseload levels could result in an annual fuel bill of up to US$721 million (KHR2.95 trillion). This does not include the facility’s capital, operating, or financing costs and already exceeds the country’s total coal import bill in 2022 of US$555 million.

High LNG prices would have a knock-on effect on power costs in Cambodia, hindering government efforts to reduce rates. At current fuel prices, the cost of LNG-fired electricity could be more than five times that of recent solar projects in the country, where consumers already pay among the highest rates for power in Asia.

Moreover, LNG prices in global markets are highly unlikely to fall low enough to compete with renewables or baseload coal plants in Cambodia, leaving the role of LNG plants in the power mix uncertain. Case studies in the report show that other Asian countries, such as Vietnam and the Philippines, are grappling with the impact of uncompetitive LNG imports on electricity costs.

Balancing LNG tradeoffs for energy security and affordability

The uncertain role of LNG power plants in Cambodia’s power mix will make it difficult to scale infrastructure and contracts in a way that ensures both energy security and affordability. Achieving a 70% penetration rate of renewable energy could yield utilization rates at LNG-to-power plants that are too low and variable to support a long-term LNG supply agreement at affordable rates.

“Given the high costs and uncertain role for LNG-to-power plants, the government will likely face challenging decisions for LNG procurement and infrastructure development,” says Reynolds.

For example, Cambodia may buy LNG on a short or long-term basis, but each entails important tradeoffs for energy security and affordability. Spot markets can be highly risky during periods of global market volatility, but long-term contracts can incur costly penalties if Cambodia does not need the LNG cargoes. Other contractual terms will pose similar tradeoffs.

In addition, Cambodia may opt for smaller-scale LNG infrastructure — including small-scale import terminals and containerized LNG configurations — given that LNG demand is likely to remain small in the initial stages of value chain development. Despite lower upfront capital costs, small-scale LNG infrastructure could result in significantly higher per-unit costs of delivered LNG due to diseconomies of scale.

Meanwhile, Cambodia's share of wind and solar has significant room to grow without jeopardizing the operation of the existing grid. However, ongoing LNG costs could detract from investments needed to expand grid and renewables capacity in the future, leading to a tradeoff between fossil fuel lock-in and clean energy integration.

“These decisions are critical to Cambodia’s LNG ambitions,” says Doleman. “Without a carefully planned strategy, the introduction of LNG could undermine the achievement of government macroeconomic and power sector targets and challenge Cambodia’s ability to meet its longer-term energy objectives.”

Read the report: Cambodia at a Crossroads - An economic assessment of LNG-to-power plans

Read the Fact Sheet: Key Considerations for Cambodia’s LNG Ambitions

Read this press release in Khmer

Author contacts: Sam Reynolds ([email protected]); Christopher Doleman ([email protected])

Media contact: Josielyn Manuel ([email protected])

About IEEFA:

The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. (www.ieefa.org)