any inquiries on this background note to Rome Chavapricha or Pajnapa Peamsilpakulchorn

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1 Public Disclosure Authorized This background note was prepared by World Bank staff to support the preparation of Thailand Systematic Country Diagnostic (2016: Please direct any inquiries on this background note to Rome Chavapricha or Pajnapa Peamsilpakulchorn 1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Context 1. By 2014 slightly over half of Thailand s primary energy supply came from domestic sources (53%) and supplemented by imports 1. The primary energy supply has increased on average 3.1% in the ten-year period until 2014, compared with an average 3.46% growth of the GDP. The largest energy sources are crude oil (37% of total), natural gas (34%), coal/lignite (10%), and renewable sources (7.8%). Compared to 1996, the share of crude oil has declined (from 45% of total), and the share of natural gas has more than doubled (from 16%), while the share of coal/lignite and renewables have remained similar. 2. Supply of crude oil reached 51.1 million tons in 2014, of which about 85% came from imported sources. Supply of natural gas amounted to 1.9 trillion cubic feet, of which one-fifth came from import sources. The share of renewable energy supply (in energy unit) has notably grown from 5.4% of total in 2010 to 7.8% in Also in 2014, the country uses 36.6 million tons of oil equivalent of petroleum products and billion kilowatt-hours of electricity. 3. The installed power generation capacity totaled 35,610 MW, with a peak demand of almost 27,000 MW. Domestic power generation totaled billion kwh, imported electricity totaled 10.7 billion kwh, and electricity export was a small 1.6 billion kwh. As for consumption, total consumption reached billion kwh. 4. Thailand s 2014 energy imports amounted to 10% of GDP or 17.7% of total import. The energy import bills were 1.3 trillion baht, of which 75% was for crude oil, 11% natural gas/lng, 7% petroleum products, 4% coal, and 1% for electricity. On the export side, total energy exports was 0.24 trillion baht, comprising mostly of refined petroleum products. 5. In 2015 Thailand put in place a long-term integrated energy planning that covers conventional, alternative and renewable energy sources, and energy efficiency plan. The main planning parameters are to: (i) Reduce overall energy intensity by 30% in 2036 compared to ; (ii) Focus on fuel diversification to lessen dependence of one particular fuel (e.g. natural gas) (iii) (iv) Maintain a minimum 15% electricity generation reserve margin; Increase the share of renewable energy in electricity generation capacity to 20% by ; 1 The share of domestic supply has gradually increased in the past ten years, from 46% in Target to reduce from ktoe/billion baht of GDP in 2010 to 10.7

2 2 (v) (vi) (vii) Reduce the share of natural gas in power generation capacity toward 30 40% by ; Cap electricity import at 20% of committed power generation capacity Increase the share of coal/lignite power generation to 20 25% and nuclear generation to 5% of installed capacity 5 Figure 1: Thailand s Final Energy Consumption Intensity (tons of oil equivalent/gdp constant prices) Source: Energy Planning and Policy Office, Ministry of Energy Diagnostic 6. The key energy challenges in Thailand are about ensuring supply security, promoting energy efficiency, enhancing integrated and environmentally sustainable energy sector development, and avoiding price and demand distortion. Energy Supply Security: To address energy supply security, the domestic exploration and production of oil and gas in Thailand has substantially increased since the early 1980s. However, the proven oil and gas reserves are running low, which call for increasing energy imports in the coming years to supplement domestic energy production. Electricity imports can also help enhance electricity supply security. 3 Targeted additional renewable generation capacity of about 21,000 MW (including imports), compared to 8,500 MW in Reduced from 64% in For coal, a slight increase from 20% share in For nuclear, 2,000 MW is planned to enter service toward the end of the PDP in 2035 and 2036.

3 3 7. Thailand has been increasing domestic exploration and production of oil and gas since the early 1980s. Oil production increased more than six-fold from 2.5 million tons (1990) to around 16 million tons (2014). Gas production has also increased by six-fold from 6.5 billion cubic meters (1990) to 42.1 bcm (2014). However, the level of proven oil and gas reserves to the production rate are running low (reserve-to-production ratio was below 4x for oil and below 6x for gas by end of 2014) 6. Therefore, Thailand has been working to secure the supply of energy imports through bilateral long-term supply contracts for gas and coal, in addition to participating actively in the global oil market 7. The latest 21 st bid round 8 for domestic oil and gas exploration was cancelled in February 2015 pending decision on the Petroleum Act amendments, suggesting that new production from this round will not take place in the near term. As such, the share of oil and gas import in the total supply is likely to increase further in the coming years. For electricity, Thailand has targeted a generation reserve margin of at least 15% over peak demand 9. Electricity imports will also increase and help address electricity supply security. 8. Focusing on electricity, Thailand has been a long-time proponent of regional electricity trade. Thailand is an active member of the ASEAN Power Grid initiative since 1997 and the Greater Mekong Subregion regional power trade coordination initiative since A September 2015 study by the Economic Research Institute for ASEAN and East Asia provides an updated summary of potential electricity connections (both bilateral and regional links) to further develop power trade in the GMS and in ASEAN. Broadly speaking, the benefits to Thailand and other participating countries are expected from optimizing capital-intensive investment and utilization of assets and tapping regional energy resources for electricity supply. 9. This SCD encourages Thailand energy authorities to address institutional issues to enable expanded electricity trade. In particular, Thailand may take a leading role in power grid code harmonization to address technical requirements to facilitate more power trade among countries. In addition, Thailand may also take a leading initiative in the design of power market rules to facilitate commercialization of power trade both bilaterally and multi-laterally. And, Thailand can help bring global good practice in developing power infrastructure projects in countries with less experience than Thailand. 10. For natural gas, this SCD encourages Thailand energy authorities to take an active role in optimizing natural gas procurement among the current regional gas trading countries namely China, Thailand, Indonesia, Malaysia and Myanmar and potential new countries such as Cambodia. As the demand for gas in Thailand is expected to increase toward 2036 (e.g. Power Development Plan 2015 estimated additional 14.9 thousand mega-watts (MW) combined-cycle power plants by 2026, and rising to 17.5 thousand MW by 2036, compared with installed capacity of 21 thousand MW in 2014) Thailand is in a unique position to optimize gas import via pipeline from neighboring Myanmar with LNG imports from other countries. 6 BP Statistical Review of World Energy 7 Two-thirds of oil import originates from the Middle East and 10% is from the Far East. 8 The preceding 20 th bid round was carried out in The 2014 reserve margin stood at 16.6%. The latest PDP suggests that the reserve margin will exceed 30% in the next ten years before declining to 15% toward the end of the PDP period.

4 4 11. For instance, Thailand may continue to increase the scale of LNG imports and expand the capacity of the required LNG import and gas distribution infrastructure which enhance Thailand s technical and commercial capacity as an importer of LNG. Thailand may also consider a collaborative LNG procurement in partnership with current gas trading partner such as Myanmar. Myanmar s gas demand is underserved as existing gas supply has been earmarked for exports. Thailand and Myanmar may cooperate on LNG by swapping imported LNG with some Myanmar s gas originally earmarked for export to Thailand. This scenario allows Thailand to scale up her LNG import and better utilize existing and planned LNG infrastructure. This also allows Myanmar to optimize investment in LNG infrastructure which currently does not exist and enables her to supply the underserved gas demand while awaiting the next round of gas exploration to bear fruits. 12. Thailand LNG import capacity is 5 million tons per year at present, and LNG import in 2015 totaled 2.6 million tons 10. An additional 5 million tons of capacity is scheduled for completion in 2017, with another 5 million tons have been planned and expected to start operation in Thailand procures LNG on spot basis and has a 20-year contract to import 2 million tons from Qatar beginning in Energy Efficiency Thailand is growing on an energy intensive path and high energy demand growth is expected to continue in the future. Making the economy more energy efficient will be important to cope with energy supply constraints. The government sets an ambitious target to improve energy efficiency in all sectors, which if implemented successfully could help shift the country toward a highefficient growth path. Challenges however lie in implementation and strong support from public and private sector will be key to overcome structural barriers to energy efficiency improvement. 13. Thailand s energy intensity has increased since 1990 while comparator countries 12 experienced decline. However, Thailand is working to improve energy efficiency comprehensively, targeting a 30% improvement by 2036 and a saving of 6% of GDP 13. Energy intensity level of primary energy (mega Joules/$2011 PPP GDP) was 5.78, lower than the levels in middle income countries (6.63) but higher than some comparator countries such as Mexico and Colombia. However, energy intensity has increased 20% since 1990 while all other comparator countries have reduced their energy intensities except Malaysia which also experienced net increase. On average, upper middle income countries have reduced primary energy intensity by 26% since Source: LNG World News, citing PTT 11 Source: Bangkok Post, 5 May 2016, 12 Comparator countries for SCD include Bulgaria, China, Colombia, Malaysia and Mexico GDP was 13,537 billion baht.

5 Energy Intensity Level of Primary Energy (MJ/$2011 PPP GDP) Thailand Bulgaria China Colombia Malaysia Mexico Upper middle income Figure 2: Energy Intensity Level of Primary Energy Source: World Development Indicators 14. Thailand s energy and electricity use per capita have increased more rapidly than most comparator countries and upper middle income countries. Energy use measured in kilogram of oil equivalent per capita was 1,884 in 2012, lower than upper middle income countries average of 1,954 but higher than other comparator countries except highly energyintensive China and energy exporting Malaysia. In addition, since 1990, energy use per capita has grown 154%, much faster than growth rate in upper middle income countries that averaged 97%. Among all comparator countries, this rate of growth is the second fastest following only China. Electricity use per capita was 2,465 kwh per capita, lower than upper middle income average at 3,031 kwh. Electricity use also increased quite rapidly during , but has grown at a slower rate since then. The growth rate is also higher than most comparator countries except for China and Malaysia. The fast growing energy and electric use per capita also indicates energy-intensive trend of the Thai economy.

6 Electric Power Consumption (kwh per capita) Energy use (kg of oil equivalent per capita) Thailand Bulgaria China Colombia Malaysia Mexico Upper middle income Figure 3: Final Energy Use per Capita Source: World Development Indicators Thailand Bulgaria China Colombia Malaysia Mexico Upper middle income

7 7 Figure 4: Electric Power Consumption per Capita Source: World Development Indicators 15. Driven by concerns over energy security and environmental sustainability, the government has adopted ambitious target for energy efficiency improvement. Final energy consumption in 2014 reached 75,804 thousand tons of oil equivalent (ktoe). The transport and manufacturing sector continue to be the top two sectors together accounting for 72% of total energy consumption compared to 65% in 1990, indicating no major structural shift in the last 15 years both in terms of the economy (stable share of manufacturing) and the transport sector (dominance of road mode). Thailand adopted the first energy efficiency target in 2011 and recently revised the target upward to accelerate energy efficiency improvement in line with APEC s target and international climate targets. Thailand sets the target to reduce energy intensity by 30 percent in 2036 compared to the 2010 level in the 2015 Energy Efficiency Development Plan (EEDP). To achieve this, structural transformation in how energy is consumed will be crucial. The full implementation of the plan is estimated to result in savings in energy consumption of 842 billion baht per year or 6% of 2015 GDP. Figure 5: Thailand s Final Energy Consumption by Sector Source: Department of Alternative Energy Development and Efficiency, Ministry of Energy 16. The proposed energy efficiency measures cover all energy-consuming sectors and thus have the potential to increase economy-wide efficiency and generate new green investments. Some of these EE measures will address long-standing issues that hinder energy efficiency improvement in Thailand such as fuel pricing reforms, and infrastructure investment to promote greater use of rail transport. Others represent significant scale-up of existing efforts

8 8 including more stringent regulations of large factories and buildings, more stringent enforcement of building energy code, scaling up standards and labelling of appliances. Others such as introducing energy efficiency resource standards among power producers, performance- and cost-based subsidies, promotion of green technology, emission-based auto taxes will be new to the country. 17. All of these measures have a strong potential to transform the economy across sectors to be more efficient and environmental friendly. These measures also offer opportunities for investment in green sectors and jobs creation for example investment in more energy-efficient machines and industrial processes, buildings renovation to meet new building energy code, innovation and product improvement to meet new performance standards for appliances, efficiency improvement in power sector, next generation automobiles based on environmental performance (fuel-efficient vehicles, electric vehicles), rail infrastructure and mass rapid transit. Shifting from input-based to performance-based and from voluntary to mandatory will mark quite a significant shift in the policy landscape and is hoped to increase effectiveness of past policies where weak law enforcement and a lesser focus on outcome and results have undermined effectiveness of past policies. Overcoming these implementation and institutional barriers will be a key challenge and getting the policy design right will be crucial to bridge plan, implementation and results. However, these changes are needed to transform energy consumption path of the country as well as contribute to broader structural transformation of the economy. Integrated and Environmentally Sustainable Energy Sector For the next twenty years Thailand s dependence on fossil fuels is expected to continue, although the use of renewable energy is targeted to increase toward 30 percent of final energy consumption by With clear policy framework in place to promote alternative energy, the challenge will be to translate policy and plans into actions to ensure sustainable development of renewable energy. Investment in renewables in the power sector have successfully taken off and contributed favorably to the economy and private sector development. Further effort to address barriers to renewable energy investment will be important to scale up investment in the future to meet long-term target. Future development of fossil fuel-based power plants should be pursued with careful consideration of environmental and social impact. 18. For the next twenty years Thailand s dependence on fossil fuels is expected to continue, although the use of renewable energy is targeted to increase toward 30% of final energy consumption by A little less than half of Thailand s primary energy supply is imported, the highest among comparator countries. Total energy import was 1.3 trillion baht in 2014, accounting for 17.7% of total imports. As in many import-dependent countries, this creates economic vulnerability to the external sector. The vulnerability and high carbon intensity of the energy sector is also attributed by the high reliance on fossil fuel sources in producing electricity. In 2012, the share was over 90% (declined to 85% in 2014) which was higher than upper middle income countries average at 74%.

9 Electricity production from oil, gas, and coal sources (% of total) Energy imports, net (% of energy use) Thailand Bulgaria China Colombia Malaysia Mexico Upper middle income Figure 6: Share of Energy Imports Source: World Development Indicators Thailand Bulgaria China Colombia Malaysia Mexico Upper middle income Figure 7: Share of Electricity Produced from Oil, Gas and Coal sources

10 Electricity production from renewable sources, excluding hydroelectric (% of total) 10 Source: World Development Indicators 19. The government has been promoting renewable energy in the power sector actively with the tariff premium adder program introduced in 2007, and the share of electricity generated from renewable sources has steadily increased. The share of electricity from renewable sources, including hydropower, was 8% in Non-fossil renewables (solar, wind, hydro) represented 14 % of the total installed power generation capacity in Solar and wind are the fastest growing sources with 1,437 MW added during Thailand Bulgaria China Colombia Malaysia Mexico Upper middle income Figure 8: Share of Electricity Production from Non-hydropower Renewable Sources Source: World Development Indicators

11 11 Figure 9: Thailand s Installed Capacity of Non-hydropower Renewable Electricity Sources Source: Department of Alternative Energy Development and Efficiency, Ministry of Energy 20. The government plans to pursue renewable energy development with an ambitious target to increase the share of renewables to 30 percent of final energy consumption by 2036 from 12% in The 20-year Alternative Energy Development Plan (AEDP) was adopted in 2015, which sets a strong target for the country to increase the share of renewables in the final energy consumption in power, heat and fuels. The AEDP has incorporated lessons learned from promoting renewable energy in the past and was developed as part of the Ministry of Energy Integrated Energy Blueprint where energy demand and supply (oil, gas and power) planning are fully integrated for the first time. The plan was also developed by integrating electricity grid planning and agricultural production zoning to address food and fuel concern. If the target is achieved, the plan is expected to lead to 39,388 ktoe total reduction of fossil fuel consumption or 591 billion baht saving in imports or 4% of GDP. It is also expected to result in 140 million ton of CO2e reduction in 2036 due to avoided energy use 14. For electricity, despite such target, fossil fuel-based generation will continue to comprise the major share of total installed capacity at 50 to 65 percent in This implies additional investments in environmentally or socially sensitive projects, including coal-fired power plants (additional 7,390 MW by 2036). This will be the key challenge to ensure environmentally sustainability power sector development. 14 Thailand s total CO 2 emission for 2014 is estimated at 218 million tons.

12 12 Share of Total Installed Capacity (%) Imported Hydro Renewables (including hydroelectric) Nuclear Clean Coal Natural Gas Diesel/Fuel Oil Figure 10: Thailand s Electricity Generation Mix Source: Power Development Plan Medium and long-term investment plan in the energy sector will help sustain infrastructure investment however the key challenge will be to ensure that future investment help transform the sector and the economy to be cleaner, low-carbon and more secure. Public and private investments in the energy sector have played a significantly role in past growth period either directly or indirectly. Thailand s electric power sector has a strong track record in service delivery with highly reliable electricity services, low transmission and distribution losses and relatively efficient oil, gas and power infrastructure. These are all results of sustained investment in the sector since the 1980s. The 1990s saw increasing role of the private sector in independent power producer (IPP) schemes while investment in the 2000s focused on renewable sector. For example, it was estimated that new investment in renewable electricity (biomass, wind and solar) up to 2013 could range between US$ 2,552 million and 6,325 million 15 with the majority of investment in solar. Looking forward, electricity demand, though hoped to be moderated with energy efficiency improvements, is expected to continue to grow and supply will need to further expand. Future investments in the sector will focus on adding new generation capacity (57,459 MW during ) and continued investment in the grid. Investment in the transmission and distribution system will focus on expansion, upgrading and reinforcement to serve growing demand, accommodate regional power grid development and electricity purchase from neighboring countries, as well as to further strengthen the system. Another crucial aspect of grid investment is to accommodate more renewables in the system. These investments will be done by both the public and private sector. 22. The energy sector has close linkage with climate change and the energy efficiency and renewable energy plan will contribute very significantly to Thailand s climate target. 15 Based on international cost estimate.

13 13 According to Thailand s Intended Nationally Determined Contributions (INDC) communication to the United Nations Framework Convention on Climate Change (UNFCCC), Thailand intends to reduce its greenhouse gas emissions by 20 percent from the projected business-as-usual (BAU) level by 2030 with a potential to increase up to 25 percent. The AEDP and EEDP will be the key mitigation actions to achieve the target together with the Environmental Sustainable Transport Plan, Waste Management Roadmap which aims to promote power generation from waste-to-energy technologies and mitigation actions through the REDD+ Readiness in the forestry sector. Energy Price and Demand Distortion: 23. Thailand has made a substantial progress in addressing energy price subsidies and addressing demand distortion across different energy products. In the past years, liquefied petroleum gas (LPG) and diesel were subsidized regardless of consumption quantity. Thailand utilizes the Oil Fund, established in 1979, and product taxes as the main vehicle to manage energy subsidies. Surcharges and contributions for different petroleum products/users are collected into the fund, and in return they are channeled as subsidies for other products/users. During the latest round of high oil prices environment ( ), the largest net outflow from the Oil Fund amounted to 22 billion baht in FY2011, or about 0.2% of GDP in that year. The latest data for FY2014 shows that the majority of Oil Fund outflow (87%) went to subsidize LPG. 24. By March 2016, subsidies for most petroleum products have been lifted, except crosssubsidies to promote high-ethanol content gasoline 16. LPG price differential for households, transport and industrial sectors have been removed. In addition, excise taxes have been reinstated for all petroleum products except compressed natural gas (CNG or NGV) for the transport sector 17. The subsidies for electricity are now more limited to a smaller life line consumption 18 for a small number of households who use less than 50 kwh per month, and there are no longer blanket subsidies for the majority of electric consumers. Free electricity for households accounted for only 1.5% of overall electricity consumption in Subsidies to promote renewable energy investment in the power sector is passed through to consumers under the fueltariffs price adjustment and currently stands around 0.10 baht per kwh compared to the base residential tariffs of baht per kwh. 16 Gasohol95 E20 and E The IMF indicated that the excise tax exemption on diesel was estimated to have cost 100 billion baht (about 1 percent of GDP) per year in terms of revenue shortfall. Source: IMF Country Report No. 15/114, May In 2014 free life-line electricity totaled 2.5 billion kwh, accounting for 1.5% of total electricity consumption.

14 14 Fiscal Year (A.D.) Fiscal Year (B.E.) Inflow Outflow Net Average Oil Price Mil. baht Mil. baht Mil. baht US$/barrel; Dubai ,453 38,349 (32,895) ,224 64,772 (48,548) ,032 8,296 33, ,923 6,181 44, ,657 5,929 15, ,781 16,985 17, ,645 31,298 6, ,955 62,099 (22,144) ,665 48,640 (11,975) ,603 54,741 18, ,259 63,271 (11,012) 96.7 Figure 11: Thailand Oil Fund Inflow and Outflow from Operations Source: Audited financial statements; World Development Indicators 25. The country has in place a financial support program for lower income households 19 and small-scale food vendors 20 for their use of LPG for cooking. The cost of this program covering September 2013 January 2016 was 962 million baht (compared to 55,357 million baht of LPG subsidies provided by the Oil Fund in FY2014). There is also a program for public transport operators (e.g. taxi, public vans), which provides a targeted price subsidies for a fixed cost of compressed natural gas (CNG or NGV) used in the public transport sector. The price subsidies are managed by the state-owned oil and gas company PTT, and financed from PTT financial resources not directly from the general government budget. Both programs are good examples of a well-targeted and cost-controlled subsidies mechanism. 26. In conclusion, Thailand is on the right track in addressing the key energy challenges of ensuring supply security, promoting energy efficiency, enhancing integrated and environmentally sustainable energy sector development, and avoiding price and demand distortion. The new integrated energy planning provides a solid pathway for implementation. Thailand s capacity and leadership commitment to implement the required actions is high. This SCD encourages the Thai authorities to systematically review implementation progress toward achieving the multiple targets. As positive progresses are made to improving energy efficiency, expanding alternative energy, and increasing regional energy cooperation, this may reduce the need for environmentally or socially sensitive energy options such as coal or nuclear power projects on the planning horizon. 19 The number of eligible households amounted to 7.6 million households, or about [40]% of total households in Thailand. However, recent statistics show that only 1.3% of households are using this program. Source: EPPO. 20 This program is more actively used, with about a 32% participation rate by January 2016.

15 15 Sources: Power Development Plan 2015 Energy Efficiency Development Plan 2015 Alternative Energy Development Plan 2015 Energy Balance of Thailand reports, multi years, Ministry of Energy Presentation for Consultation on Oil Plan, 17 August 2015, Ministry of Energy Annual reports EGAT, MEA, PEA, multi years South East Asia Energy Outlook 2015, World Energy Outlook Special Report, IEA Study on Effective Power Infrastructure Investment through Power Grid Interconnections in East Asia, September 2015, Economic Research Institute for ASEAN and East Asia (ERIA) BP Statistical Review of World Energy, multi years Note on Thailand Petroleum Concessions, December 2015, Chandler & Thong-Ek Law Offices Limited IMF 2015 Article IV Consultation Staff Report, May 2015, Country Report No. 15/114 A Citizens Guide to Energy Subsidies in Thailand, April 2013, The International Institute for Sustainable Development and IISD s Global Subsidies Initiative News report Qatargas Seals LNG Supply Deal with PTT of Thailand, December 2012, LNG World News News report PTT to set up FSRU duo, June 2015, LNG World News News report ptt-gets-nod-for-second-lng-terminal-in-2018, May 2016, Bangkok Post Press release IHI Awarded EPC Contract for LNG Receiving Terminal Expansion Project by PTTLNG, April 10, 2014, IHI Corporation