Published daily by the Lowy Institute
Outmoded electricity rules stand in the way of the kind of environmental progress investors want.
Two-thirds of Cambodian households endure frequent, unpredictable blackouts, yet pay some of the highest electricity prices in Southeast Asia. Electricity demand has soared far beyond supply. Partly this is a consequence of 20 years of economic growth and underinvestment in infrastructure. The result is an unreliable electricity supply that threatens to stall Cambodia’s development just as the country seeks to attract higher-value foreign investment.
To meet growing demand and drive development, Cambodia needs to harness its most abundant source of renewable energy – the Sun. Foreign investors will then consider Cambodia as an attractive destination.
Cambodia aims to draw 70% of its electricity from renewable sources by 2030, but a recent turn towards coal-fired power is hampering progress on that goal. Meanwhile, new hydropower projects will not be enough to meet future demand. They are also less effective in the dry season and have been linked to adverse effects on biodiversity and food security.
Cambodia has only so many options to meet increasing demand. The government has vowed not to build any more coal plants. The lack of large‑scale liquefied natural gas processing infrastructure make LNG expensive, even as the construction of a 900-megawatt LNG‑fired power plant continues.
Solar energy is the most cost-effective way for Cambodia to increase generation capacity. Cambodia has one of the highest rates of solar irradiance in the region, but less than 10% its electricity is produced by solar energy, generated by a handful of solar farms.
For manufacturers, rooftop solar lowers their power costs, avoids land‑use constraints, and provides certifiable green energy at the factory itself.
The biggest barrier to solar adoption in Cambodia is regulation that punishes rooftop PV panels. Until 2023, rooftop solar owners had to pay capacity fees for disrupting grid stability and were not allowed to connect their system to the grid. After some pushback from garment manufacturers, this policy was modified.
The Ministry of Mines and Energy says these restrictions aim to ensure a fair electricity price for everybody connected to the grid. Most of state-owned operator Electricite du Cambodge’s (EDC) electricity comes from independent power producers on long-term contracts and imports. This electricity is then supplied to customers at a fixed tariff. With supply locked in, tariffs fixed, and maintenance costs unchanged, sizeable rooftop solar projects decrease EDC’s revenue by reducing grid demand and put pressure on prices. The compensation fees are an attempt at managing prices.
The latest legislation has allocated a meagre 30-megawatt rooftop solar quota. It requires medium-to-large rooftop solar owners to pay compensation tariffs based on actual usage and allows them to feed excess electricity into the grid, without any price incentives. The compensation tariffs are reconsidered every 6-12 months, creating further uncertainty.
Removing the bottlenecks inhibiting rooftop solar is a necessary but difficult task. It involves a rethinking of EDC’s business model and the electricity market. EDC has to move towards more variable pricing and remove the compensation tariffs. Incentives, such as credits for feeding excess electricity into the network and tax breaks, should be considered to increase uptake. Most importantly, rooftop solar should be seen as a complement, and in some cases, a substitute for utility-scale solar.
The biggest gains will come from attracting foreign direct investment. For manufacturers, rooftop solar lowers their power costs, avoids land‑use constraints, and provides certifiable green energy at the factory itself.
With the United States and European Union requiring higher environmental standards in their imports, improving Cambodia’s green credentials is critical. More than half of Cambodia’s exports go to these two markets, dominated by the garments sector. Major fashion brands want to to improve environmental standards, making access to renewable energy a crucial factor in securing and retaining contracts. It is also essential for Cambodia to move away from garments by attracting higher-value manufacturing investors.
Neighbouring Vietnam’s pivot towards renewable energy is a great example of how foreign firms are increasingly demanding cleaner electricity. After calls from foreign investors, Vietnam offered incentives for solar and wind projects for a period and recently introduced direct power purchase agreements (DPPA) to allow companies to buy green electricity. The rollout has not been entirely smooth, marred by a corruption scandal. But progress made in the regulatory environment has sustained FDI inflows and enabled industrial upgrading.
The LEGO factory that opened in Ho Chi Minh City last year is a case in point. The billion-dollar investment makes use of 12,400 rooftop solar panels, in addition to a DPPA with a rooftop solar site and a battery energy storage solution nearby, all in an effort to use 100% renewable energy in its operations.The absence of a DPPA regime and nascent battery storage projects in Cambodia make such major investments less likely.
There are signs of progress. Cambodia’s Power Development Master Plan sets ambitious renewable energy targets, while grid upgrades are rolling out. The decisive factor for scaling investment will be whether the market can effectively absorb renewables including rooftop solar.
A more dynamic electricity market with policy certainty will unlock the capital Cambodia needs to climb manufacturing value chains. Without it, the country risks watching investment flow to regional competitors who have embraced renewable energy.
Get the latest commentary and analysis on international events from experts at the Lowy Institute and around the world.
The Interpreter features in-depth analysis & expert commentary on the latest international events, published daily by the Lowy Institute.
© Copyright 2026 Lowy Institute

source