President and Prime Minister must reduce electricity cost via cheaper LNG

 The power crisis is created by politicians, administrators, CEB and PUCSL not taking the correct decisions in time, causing huge damage to our motherland

If the new Government headed by the President and Prime Minister is to achieve rapid economic growth, reduction in the commercial and industrial electricity tariff rate is essential. The present commercial tariff rate of Rs. 23.65/ KWh is too high when compared with many countries in the South Asian region as shown in Table 1. 

As Sri Lanka has a good potential to be a service hub, this high tariff rate could be a detriment. Even though our industrial tariff compares well with the countries listed it is much higher than Vietnam which is attracting much FDIs at present. With this high tariff rate our country will not be an attractive destination to investors as the production cost will be invariably high. We have to be mindful that in addition to high electricity cost even our labour cost is comparatively higher in the region.

This article is an attempt to analyse the present situation in the electricity generation and to propose a possible way to increase generation capacity, without a financial burden to the Government and also pave the way for a 20% reduction in tariff rate. Bold and prudent decision making is what we need.

Power sector in precarious situation

Presently power sector is in a very precarious situation and all indications are that we are heading towards a major power crisis. This is due to not adding a single major power plant to the National Grid since 2014. The only short-term remedy will be emergency electricity purchases based on diesel power plants at exorbitant prices. 

It is to be noted that since 2016 CEB had to resort to emergency purchases every year, a situation welcomed by many at the Power Ministry and CEB for obvious reasons. Table 2 gives the installed generation capacity based on different fuels the total electricity generated and production cost during 2017.

Undoubtedly the cheapest source is hydro power. But as we have already developed all the major hydro power sources, we cannot increase the hydro power generation by significant amounts. Uma Oya and Broadlands with installed capacities 122 MW and 35 MW respectively are under construction. 

From Table 2 it is seen that 34.4% of power generated is from the most costly diesel generators. To reduce the generation cost the alternatives will be to add either coal or LNG Power plants and retire some of the very costly diesel power plants. 

Now in many countries coal power plants are being gradually phased out due to severe environment pollution As such increasing coal power generation may not be the best choice. From a RFP called in 2012, it is evident that cleaner LNG power plants can be established as an integrated solution with LNG supply, off loading terminal, storage and power plant to supply electricity to the National Grid at a cheaper cost of US Cents 7 per KWh (Rs. 12.60 at current exchange rates), as a BOO project. With such power plants if the diesel power generation can be reduced by 50% then the CEB can save Rs. 39 billion annually!

The second stage of Norochcholai coal power plant commissioned in 2014 with installed capacity 600MW was the last major power plant. Since then only 25 MW hydro power plant at Moragahakanda was added in 2018. Based on the growth observed in the past, it is estimated that the demand for electricity will increase annually by 6%. But with increased development even this estimated growth target of 6% is likely to be exceeded. The reason being our per capita electricity consumption is low when correlated to the per capita GDP of the countries in the region. Refer Table 3.

It is seen that India with per capita GDP of $ 1942.1 has per capita electricity consumption of 1122 KWh, whereas Vietnam with per capita GDP of $ 2342.2 has per capita electricity consumption of 1312 KWh. Both these countries have lesser per capita GDP but much higher electricity consumption than us. 

With per capita GDP of $ 4073.7 our electricity consumption is 494 KWh. This indicates a lower industrial base. When planning our future electricity demand, considering our relatively higher per capita GDP, it may be safer to assume the electricity consumption to reach at least 1000 KWh per capita in the near future. When this happens the power generation capacity will need to double. This means an additional 4,000 MW! Constructing power plants with installed capacity of 4000 MW will require a capital investment of minimum $ 4 billion. (Rs. 732 billion).

Private investments on large power plants 

For private investments on large power plants (over 25 MW) a major obstacle is the Section 9(c) of the Sri Lanka Electricity Act, No. 20 of 2009. As per this Section only a company incorporated in Sri Lanka in which; Government, a public corporation, a company with more than 50% shares held by Government or a company with a Government subsidiary holding majority shares, holds the number of shares determined by the Secretary to Treasury with the concurrence of Minister of Finance, can undertake a power generation plant exceeding 25MW.

If the intention is to facilitate private investment in power generation this Section with above restrictions should be suitable amended. As Sri Lanka is not the only destination for investments and other countries not having such restrictions, it is no wonder that to date there is not a single major power plant exceeding 25 MW constructed by a private investor, since this Act was enacted.

As such the Section 9(c) should be amended to allow any company incorporated in Sri Lanka and issued a generation license by PUCSL with the approval of the Government to undertake a power generation plant exceeding 25MW. With a favourable legal framework and a healthy investment climate there will be absolutely no difficulty in attracting investments for power generation with a lease of land and power purchase agreement.

The proposal made by Energy World International Ltd., which is a British owned company based in Hong Kong, can be cited as the best example for a private investment on a power generation plant of capacity 1,200 MW in four stages of 300 MW each at Hambantota Port. 

This proposal was submitted in response to a RFP, published in newspapers, maritime magazines, SLPA website, etc. giving wide publicity in July-August 2012 inviting investments for industrial ventures at Hambantota Port. It was one of the 10 proposals received at the tender opening on 27 September 2012 by the CANC.

After a detailed evaluation by the PC and CANC, which even went to the extent of checking financial credibility through an international accounting firm, five proposals were selected to recommend for implementation. 

Constructing a LNG hub terminal comprising of loading/unloading facility with 80,000 cm storage tank and combined cycle LNG power station with total capacity of 1,200 MW in four stages of 300 MW each at two-year intervals over a period of eight years with a total investment of $ 1,350 million was one of these proposals selected. As per this proposal SLPA will have to lease 30 Ha of land at Hambantota Port for 25 years. The investor will pay $ 1.5 million annually, increased by 3% every year for the land. CEB had to enter into a Power Purchase Agreement for 25 years. 

The initial rate offered was $ 0.09 (US cents 9) per KWh, later reduced to $ 0.07 (US cents 7) during negotiations. The investor did not insist on a capacity charge or any other charges. This rate of US Cents 07 means that electricity from this plant will be available at Rs. 12.60 per KWh, cheaper than even the rate of Rs. 18 at Norochcholai (including capital repayments).

The CANC report was first considered by the Cabinet of Ministers on 3 April 2014, at which it was decided to direct the Secretary to Ministry of Highways, Ports and Shipping to further discuss the proposal considering the various observations received from other Ministers with Secretaries to the Ministry of Finance and Planning, Power and Energy and Investment Promotion and submit a report.

On 30 October 2014 the Cabinet of Ministers considered the CANC report, the report submitted by Secretary to Ministry of Highways, Ports and Shipping prepared in consultation with the other Secretaries and observations received from different ministers and decided to accept the proposal of Energy World International Ltd. of Hong Kong to establish a LNG hub terminal and combined cycle LNG power station with total capacity of 1,200 MW in four stages of 300 MW each at two-year internals at Hambantota Port on a 30 Ha land leased for 25 years by SLPA, subject to the following:

a)First 300 MW generation plant to be operational within two years of award, by end of 2016.

b)JV to be established with 10% shares issued to Secretary to the Treasury, for the value of the land leased, to comply with Section 9(c) of the Sri Lanka Electricity Act, No. 20 of 2009. Secretary to Treasury to have full controlling power on the business and its assets with a Golden share of 10% given for the lease of land.

c)BOI to enter into an agreement with the JV to declare it as a strategic investment project.

d)Implementation Agreement and Land Lease Agreement to be entered between SLPA and JV.

e)Power Purchase Agreement to be entered between CEB and JV with an agreed pricing formula. The negotiated price to be between $ 0.065-0.07 (cents 6.5 to 7.0) per KWh with no capacity or other charges.

After the Cabinet Approval, SLPA issued a letter allocating 30 Ha of land. But when attempting to finalise JV agreement following problems cropped up. Naturally the JV could not be entered:

1.If the investor has to issue 10% shares in the JV to Secretary to Treasury for the value of land leased, why should there be any annual lease payment to SLPA. SLPA wanted the lease payments.

2.Who is the investor with a sound mind that will allow full controlling power to Secretary to Treasury, after investing $ 1,350 million? The total freehold value of the land may not reach even $ 50 million. These requirements came due to the Section 9 (c) of Sri Lanka Electricity Act, No 20 of 2009. The justifiable condition would have been for the investor to pay annual lease premium of $ 1.5 million annually, increased by 3% every year for the land as per the tender condition, without having to issue a Golden share of 10% with controlling power.

Some salient features of this proposal are highlighted below:

a)Energy World International Ltd. is a company formed by British nationals and based in Hong Kong. This company has majority shares in Energy World Corporation Ltd., which is a public company listed in the Australian Stock Exchange. 

b)It has extensive experience on LNG storage transportation and power generation. It owns gas production wells in Australia and Indonesia.

c)The company had paid Rs. 9.3 million as processing fees to BOI in 2008.

d)This Company also planned to export LNG and to supply for any domestic requirements. As such it could be used to supply LNG to other LNG power plants as well. Another objective was to supply Compressed Natural Gas (CNG) for heavy transport vehicles and ships.

e)The company will guarantee uninterrupted power supply from its generation plant, reserving only 50 MW for any maintenance at any given time. This means with first 300 MW installed in two years we will have guaranteed uninterrupted supply of 250 MW. With the second stage this will increase to 550 MW. On failure to supply uninterrupted power investor will compensate for any losses. This is a huge advantage when the bad experience with numerous failures at Norochcholai plant is considered.

f)The Government or CEB will have no burden on arranging the supply of LNG. Procuring LNG in international market for a single power plant could pose problems, with big players securing their supplies on long term basis.

g)Total investment will be transferred from abroad and nothing raised from local banks. 

h)The cost of electricity from this plant at US Cents 7.0 will be Rs. 12.60 per KWh at the present exchange rate. Cost of power generation from diesel plants is Rs. 30-32 per KWh. At Norochcholai it is Rs. 18 per KWh. With the introduction of 600 MW of LNG plant from this investor, the annual saving will be to the tune of Rs. 40 billion by reducing on diesel power generation.

i)This investor was willing to supply LNG for conversion of 300 MW existing thermal combined cycle power plant at Kerawalapitiya at a competitive rate. This would have generated further savings to CEB.

j)LNG is considered green energy unlike coal. In many countries now coal power plants are being either shut down or new coal power plants not started.

However, due to a change of policy by the previous Government, on 21 June 2016 the company was informed by SLPA that all the projects at Hambantota Port were suspended on a decision of CCEM. Subsequently, the previous Government entered into negotiations with China to handover the Hambantota Port on a long lease to settle the loan taken for constructing the Port. But the grave mistake committed by the previous Government was to abandon the good projects already negotiated for the Hambantota Port such as the LNG power project. 

If this project was included in the negotiation with the Chinese, most probably they would have agreed to accommodate as Energy World International Ltd. is a company based in Hong Kong and China Harbour Co. also has a strong presence in Hong Kong. Alternatively, the Government could have relocated this LNG project at Trincomalee Harbour, as the Sampur Coal Power Plant was also cancelled. Had it been implemented in 2015, by now CEB should be drawing 600 MW of power from this plant and it would have been possible to even reduce the tariff rates.

Apart from the LNG power project mentioned above, cancelation or indecision on many other projects has led to the present power crisis. These are: 

a)Cancellation of Sampur coal power plant. If coal is environmentally not acceptable why was an LNG plant not established?

b)Delay in finalising the investment proposal to establish a 300 MW combined cycle plant at Kerawalapitiya which was tendered in November 2016. Manipulating the tender procedure not to award the contract to Lakdhanavi Ltd which was ranked No. 1 by TEC four times and recommended by SCAPC in March 2018, on a decision by the PAB will further delay this project as it has gone to the courts now. Lakdhanavi Ltd. has offered to sell electricity at Rs. 14.98/KWh whereas the GCL, Windforce & RenevGen, the company favoured by the powers at that time, at Rs. 15.97/KWh. This will result in an extra cost to CEB of Rs. 2,125 million annually for 20 years, totalling Rs. 42,495 million. Who will bear this extra cost? It is the consumers, to fatten the purses of few decision makers. Even if this power plant is established how can it be operated on LNG without an arrangement to supply LNG? 

c)The parallel proposal being considered to supply LNG through a Korean company could be another disaster in waiting due to the commitment needed to buy a large quantity of LNG much beyond the requirements of our country. The most prudent proposal would have been to find an investor to put up a LNG power plant with LNG supply arrangement similar to the proposal submitted by Energy World International Ltd.

d)Delay in converting the existing 300 MW thermal power plant at Kerawalapitiya to use LNG which will result in huge savings.

In summary, the power crisis is created by politicians, administrators, CEB and PUCSL not taking the correct decisions in time, causing huge damage to our motherland. Because of these selfish acts, our commercial and industrial electricity tariff rates are high and act as an impediment to attract investments.

As such it is earnestly requested that the President and Prime Minister seriously consider:

a)To amend Section 9(c) of the Sri Lanka Electricity Act, No. 20 of 2009 as suggested above.

b)To proceed with the proposal of Energy World International Ltd (EWI) to establish a power generation plant of capacity 1,200 MW in four stages of 300 MW each complete with LNG supply terminal to supply electricity to National Grid at US Cents 7 per kwh (Rs. 12.60) at Trincomalee Port as it may not be possible to do so at Hambantota Port anymore. This was approved by the Cabinet of Ministers headed by Mahinda Rajapaksa on 30 October 2014.

c)To insist on this investor to commission 600 MW LNG power plant within two years with LNG supply.

d)To convert the existing 300MW thermal power plant at Kerawalapitiya to operate on LNG which can be supplied by the EWI

e)To consider reducing tariff rate when this 600 mw power plant is commissioned.

(The writer is the Secretary General/CEO of the Chamber of Construction Industry Sri Lanka.)