The Nam Ou hydroelectric plant, one of the largest power generation facilities in the country’s north by capacity, is a roughly two-hour drive from Luang Prabang along mountain roads.

The plant, which has seven dams, was built by the Power Construction Corp. of China, or PowerChina, at a cost of $2.8 billion and began full operation in 2021. Its annual generation capacity of 5,000 gigawatt-hours is equivalent to a small nuclear power plant.

“I’m grateful to the Chinese companies,” said a Hmong woman who runs a general store near the dam. Although dam construction forced many small villages, mostly of ethnic minorities, to relocate higher in the mountains, tourists are increasing, and the general store’s sales are brisk.

A man who runs a restaurant was also positive, saying that “new homes, roads and schools were built for us.”

Chinese companies invested $3.2 billion in Laos’ energy sector over the five years through March 2023, according to the American Enterprise Institute — up about 30% over the previous five years and roughly triple the tally for the five years through March 2013.

In addition to procuring renewable energy for its own use, China “also aims to improve the global competitiveness of its energy businesses,” said Toru Nishihama, chief economist at Japan’s Dai-ichi Life Research Institute.

China and Laos are historically close due to both their Communist and socialist systems and geographical proximity. Of the direct investment in Laos in 2022, 36% came from China — the most of any country.

Major power infrastructure investor PowerChina entered Laos around 2000 and increased large-scale investments after 2013, when China launched its Belt and Road infrastructure initiative.

The company plans to build a new hydroelectric power plant in Pak Lay in the western part of the country in 2032. It will invest 60% in the plant’s operating company, with Thailand’s Gulf Energy Development expected to take the remaining stake. Power generated is slated to be exported mainly to Thailand.

China General Nuclear Power plans to start generating solar and wind power in northern Laos. In 2022, Huawei Technologies formed a partnership with state power generation and transmission operator Electricite du Laos (EDL) to explore renewable energy opportunities.

China’s efforts extend to transmission. China Southern Power Grid (CSG) began full-scale power transmission in January through EDLT, which it jointly established with the state power provider. CSG controls the venture with a 90% stake.

EDL sold its power transmission network to EDLT, giving the Chinese-controlled company ownership of most of Laos’ power grid. EDLT will also handle connections to power grids in neighboring countries. Going forward, it plans to invest $2 billion to strengthen the international portion.

“EDL holds a large amount of debt,” said Toshio Nagase, former head of the Japan International Cooperation Agency’s Laos office.

EDL has been in the red because of factors such as the cost of maintaining the power grid and a weak currency. It lacked the money necessary to set up an international power transmission network. CSG gave it a critical boost with the establishment of EDLT.

The Mekong River, Southeast Asia’s longest, flows through Laos, making the country ripe for hydroelectric development. Laos’ borders with five countries give it easy access to those markets in transmitting electricity.

Laos has leveraged these advantages to boost electricity sales to 30% of all exports. It exports 80% of its annual output to countries like Thailand and Vietnam and positions itself as the “battery of Southeast Asia.” Exports to Singapore began in 2022, and transmission lines to Cambodia began to be laid in 2023. Hydropower accounts for 70% of its electricity generation.

Laos’ public debt had reached 125% of gross domestic product as of the end of 2022, according to the World Bank, and currency depreciation is exacerbating the deterioration of the economy. Electricity exports are a critical source of foreign currency.

China’s support is essential in these efforts. But “countries that rely on electricity imports from Laos may be handing over their fates to China,” Nishihama points out.

China is said to account for almost half of Laos’ external debt. If repayments are delayed, the country could fall into a debt trap, where rights and interests in critical infrastructure are handed over to the lender.