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In a desperate bid to attract investment in Cambodia's failing power sector, the government is offering guaranteed power revenues to Chinese companies willing to finance and build large hydro dams, and sell their entire output to the financially-strapped state utility, Electricite du Cambodge (EdC). First in line for the new guarantee was Sinohydro, the company that helped build China's Three Gorges dam and is now building dams across Africa, backed by China's state development banks. The Cambodian government approved its guarantee earlier this year, insuring payment to Sinohydro for electricity produced over its 44-year concession to build and operate the 193-MW Kamchay dam.

Then came the Chinese-owned Michelle Corporation. In October, Cambodian Prime Minister Hun Sen advised the National Assembly to ratify 'a guarantee of payment' for electricity produced over Michelle's 30-year concession, Cambodia Daily reported. In return, the company has agreed to finance, build and operate two large hydro dams with a total installed capacity of 338 MW.

In all, the Ministry of Industry, Energy and Mines has identified 14 potential hydro dam sites for development by 2018.

Prime Minister Hun Sen claims the government guarantees are necessary to "make [hydro] investors feel at ease." He also said "the government must aggressively pursue hydropower as a mechanism for growth" given the high cost of diesel and the country's rising demand for electricity.

But the strategy is controversial.

Noone disputes the country's need for cheaper electricity. About 95 percent of the country's power is supplied by diesel generators which can cost 30 to 60 US cents per kilowatt-hour, depending on the price of imported (or smuggled) diesel.

Kamchay and Michelle's two dams will more than double the country's generating capacity but at what cost to government and consumers nobody knows for certain. Some government officials insist prices will come down once Kamchay comes online in 2010. Others say there's no guarantee.

Ho Vann, one opposition politician who reviewed the Kamchay contracts, told the Phnom Penh Post last year the arrangement "is very weird because the profit goes to the company [while] the government pays [in the event of] accidents or natural damages caused by the dam."

EdC will pay Sinohydro eight US cents per kilowatt-hour for its output but the delivered cost to consumers may be more than double that once the cost of long distance transmission lines and backup power during the dry season are factored in. (The dams can only run at full capacity during the rainy season).

As for the dams' environmental liabilities, the guarantees shift responsibility onto the government, which represents a huge cost saving for the Chinese developers, effectively inflating their profits. Local residents, on the other hand, have been offered nothing in the way of guaranteed compensation in the event of a dam collapse or damage to their crops, fisheries, and water supplies. In a recent statement distributed by the Rivers Coalition of Cambodia, villagers threatened by large dams have demanded compensation but they also want electricity and other benefit-sharing arrangements, if the decision to build dams on their rivers is non-negotiable.

Scale is another issue. Ngy San of the Phnom Penh-based NGO Forum on Cambodia doubts the country's electricity demand warrants such large-scale additions of generating capacity. In most provinces, the daily electricity demand is only a couple of megawatts. Even in Phnom Penh, the current power deficit is only about 40 megawatts. This suggests that EdC could have difficulty finding enough customers for the dams' massive output, at least in the short-term.

Because EdC's service has been so unreliable over the last decade, most of the country's largest power consumers, especially hotels, have installed their own generators. The bulk of the country's power is supplied by private businesses, not EdC. In rural areas, where the vast majority of Cambodians live, hundreds of small enterprises supply power to villages using mostly second or third hand diesel generators and battery-charging stations.

According to the country's electricity regulatory authority, which is responsible for licensing private power providers, many are upgrading their distribution service to improve efficiency and lower their customers' costs. These entrepreneurs represent Cambodia's best hope for building a clean and efficient, decentralized power system – one capable of delivering appropriately-scaled power where needed and stimulating economic development. Sadly, they will probably get squelched by EdC and its backward-looking financiers, such as the World Bank and the Asian Development Bank.

Because of the risk that EdC could terminate their licenses and takeover their service territories at any moment, rural electricity enterprises and their urban counterparts have little incentive to invest in more cost effective and cleaner generation technologies (i.e., high efficiency micro turbines, biomass gasifiers, micro hydro and solar PV systems). The risk they could lose their investment is just too high. Sadly, that means Cambodian power consumers are losing out on the growing array of superior alternatives to diesel generators and big hydro dams.

The controversy over Chinese hydro concessions may be just beginning.