The Kerawalapitiya power plant is the first and only power plant in Sri Lanka capable of running on LNG or diesel
|The sale of the Kerawalapitiya power plant to an American company would give the country $ 350 million much-needed foreign currency. The sale to the American company was promoted by the US Ambassador in Sri Lanka and will enhance relations between the two countries, at a time when relations are in a poor state
In early July, media reported of a proposal to sell a share of the Kerawalapitiya power plant to an American company, the deal promoted by the US Ambassador in Colombo. Few days ago, news came out that the Finance Ministry has signed a definitive framework agreement with a United States based company to sell 40% of shares of 310 MW Kerawalapitiya Yugadhanavi Power Plant owned by West Coast Power Ltd.
According to the framework agreement, the Sri Lankan Government has assigned the US based New Fortress Energy (NFE), in addition, rights to develop a new LNG Terminal off the coast of Colombo and the pipeline system to supply Liquid Natural Gas (LNG) to Yugadhanavi, Kelanitissa and other power plants currently running on diesel, also power plants proposed to be built in the future.
It was informed that the Cabinet of Ministers had accepted the proposal to award the 40% share of 310 MW Kerawalapitiya power plant for a sum of $ 350 million, also LNG supply to New Fortress Energy. JVP leader Anura Kumara Dissanayake addressing the media informed public that the agreement was signed at 12.06 a.m. on Saturday (18) and the American who signed the agreement left the country at 2 a.m. Few hours later, the President too flew off to US. The happenings have raised a number of issues.
When the news spread, politicians within the Government, but from different parties, were shocked that the country’s assets were being sold to foreigners, as they would refer any foreign investment. But the President has left for the UN summit. The Prime Minister who left for a lecture in Bollonne, Italy returned after a week. The politicians had a discussion with the PM, but they need further explanations from the President himself when he arrives.
What’s special of Kerawalapitiya
The Kerawalapitiya power plant is the first and only power plant in Sri Lanka capable of running on LNG (Liquid Natural Gas) or diesel, but the production of power through diesel is expensive. Of all fuels, LNG produces lowest pollutants and the cost of production of power is lowest. Although more LNG based power plants were proposed over the years, none managed to get the acceptance for construction so far. Another serious issue is the import and storage of LNG.
An LNG-based power plant would require gas to be imported, unloaded, stored, gassified and delivered to the power plant. The unloading could be 1. Through a Floating Storage Regassification Unit (FSRU) located in the sea, 2. In a less sophisticated FSRU located in a small harbour, safe-guarding the ship from currents, typhoons or a tsunami or 3. Alongside of a jetty in an especially-built LNG port.
When the Kerawalapitiya power plant was established in 2006, it had the capability of running on diesel or gas. As power from LNG is much cheaper than producing with oil, the LNG unloading procedure, storage, regasificationn for power generation should have been discussed, planned and established over the past 15 years. Although a number of proposals were brought forward, CEB and the Power Ministry failed to establish an LNG supply mechanism.
An FSRU (Floating Storage and Regasification Unit) is a ship capable of storing LNG in liquid state (cooled to -160 degrees), anchored by a jetty or in the sea, getting supplies via delivery ships. LNG stored in the FSRU is gassified and delivered to the power plant through a gas-carrying pipeline located in the sea.
Who owns Yugadhanavi power plant?
With the Government decision to sell shares of power plant to an American investor, the question arises over the ownership of Kerawalapitiya Yugadhanavi Power Plant. The plant is owned by West Coast Power Ltd., a subsidiary of Lanka Transformers Ltd., a holding company with major shares owned by Treasury (CEB).
The company started in early 1980s as Lanka Transformers Ltd., by a couple of engineers who left CEB to manufacture of transformers to Ceylon Electricity Board, a joint venture between CEB and a Scottish company providing technology, with an investment of Rs. 8.5 million. With the success, in 1982 CEB invested Rs. 8.5 million to acquire 70% stake of the new company. The company expanded over the years with over 50% of production being exported mostly to African countries.
Over the years, LTL Holdings diverted into various fields as galvanised iron manufacture, producing towers for electricity transmission. In addition, a number of joint ventures with foreign companies. Each new venture was a Limited Liability company with majority funds coming from profits of existing companies (mostly Treasury owned). When the company had to advance, needed funds and CEB unable to provide, the employees moved in and currently own 37% of shareholdings of the company.
Lakdhanavi is a subsidiary of LTL Holdings and the power generating arm of the company, commenced with building a 24 MW diesel powered plant, having completed 100 MW Heladhanavi power plant at Puttalam in 2004, also in operation and maintenance of the plant.
In 2007, Lakdhanavi undertook to build and operate Yugadanavi 300 MW combined cycle power plant, the largest power plant project in Sri Lanka at the time, now under West Coast Power Ltd. The 200 MW phase one was commissioned in November 2008 in record 10 months and the 100 MW second phase in February 2010.
In 2011, Lakdhanavi won a contract to build two 100 MW power projects in Bangladesh and completed both projects within seven months. Since then, the company has built two more 50 MW power plants of their own in Bangladesh and supply electricity.
Sale of Kerawalapitiya plant
Although the details of the sale agreement to the American company, New Fortress Energy was not made public, parts have come to light. Through the agreement, the Treasury has agreed to sell 40% of the power plant’s shares to NFE, while granting the rights to supply LNG to power plants for five years.
The Ceylon Electricity Board Engineers Union (CEBEU) has objected to the move, claiming a harmful impact on Sri Lanka. CEB had already called tenders for an offshore FSRU terminal and the pipeline to supply gas to existing and proposed power plants. In response to the CEB’s tenders, Ceylex Engineering Ltd., connected to Lakdhanavi Ltd. and China Harbor Engineering Company have submitted bids.
The tenders closed on 18 June and NFE without presenting a bid, but had submitted an unsolicited proposal to Finance Ministry with conditions.
However, without considering the tender bids, the Presidential Secretary at a sudden meeting on 6 July informed that Cabinet approval had been granted to sell shares of the Yugadhanavi Power Plant to NFE.
When SJB Parliamentarian Nalin Bandara questioned the deal in Parliament on the 15th, Foreign Investment State Minister Ajith Nivard Cabral replied that the US company came to the Government as an investor and it was not a procurement; there was no need for a tender process.
CEB calling for tenders
CEB’s efficiency in calling for tenders is well-known. With the cancellation of Sampur coal-fired power project, need for more electricity became urgent and CEB proposed another 300 MW LNG power project in Kerawalapitiya and Request for Proposals (RFP) was issued in 2016. A total of eight applications for private investment were received by April 2017. The lowest bid was from Lakdhanavi at Rs. 14.98. The second-lowest bid China’s CL was Rs. 15.97. One rupee difference between the two tenderers generating 300 MW power at 75% capacity would result a potential loss of Rs. 2 billion per year. But the award dragged on for various reasons and is yet to be awarded.
Best ever power offer to the country
In July 2012, in response to a request for proposals, inviting investments at Hambantota Port, a submission was made by Hong Kong based Energy World International Ltd., for an LNG based power generation plant of 1,200 MW capacity in Hambantota Port. The best private investment proposal ever made.
The company offered to construct an LNG hub terminal comprising of loading/unloading facility with 80,000 cubic metre storage and a combined cycle LNG power station of 1,200 MW capacity with a total investment of $ 1,350 million. The plant proposed on a land leased from SLPA in four stages of 300 MW every two years, over eight years to produce 1,200 MW. First 300 MW plant to be operational within two years of award, by end of 2016.
The electricity was offered at $ 0.07 or Rs. 12.60 per kWh ($1 = Rs. 180.00), when Norochcholai power costing Rs. 18.00 and diesel power Rs. 25-40 per unit. Introduction of a single 300MW LNG plant from the investor, would have saved Rs. 40 billion annually, eliminating diesel generation.
The offer failed to materialise as the Secretaries entrusted with negotiations continued to make unreasonable demands or did the investor failed to offer the proper bribe? The company owning LNG production fields off New Zealand and Australia were intending to market LNG operating from Hambantota.
Role of CEB engineers
CEB engineers are the highest paid in the country and were able to attract most intelligent engineers passing out. Recently, in the middle of the financial crisis they managed to get a 25% salary increase claiming as part of a past agreement. They used their brains not for the improvement of the country or the organisation, resulting CEB among the highest lossmaking organisations in the country.
The CEB losses were due to its inability to establish power plants, keeping with the demand. CEB engineers loved coal-fired plants and ensured delays, non-construction of cheaper power plants. CEB purchased coal initially from a South African supplier and the same continues even today. Their tender procedure was able to knock off any competitors offering lower prices.
CEB engineers showed their ingenuity in manipulating tenders. When they wished a project to be abandoned or delayed, their tender documents included conditions of contract and specifications reaching 3 to 4,000 pages discouraging prospective tenderers. After the tenders were closed, evaluation needed years, also allowing scope for challenging the decisions in court. Same happened in Kerawalapitiya Stage 2.
Refusal to abide by President’s manifesto
The President’s election manifesto proposed 80% (later amended to 70%) electricity generation with renewable sources by 2030. But CEB engineers were not prepared to accept the President’s proposals. They accepted small roof-top solar projects, but solar projects around 10 MW proposed by locals as per CEB guidelines were set aside, with frequent changing policies. Meanwhile, the Secretary of Ministry of Power failed to gazette the 70% power generation with renewable energy policy of the President, possibly he may not have understood. CEB took advantage of the omission and their Long-Term Power Generation Plan continued to neglect renewable power and included coal power plants.
When the news of selling Kerawalapitiya plant to an American spread, politicians within the Government, but from different parties were shocked of the news. For them the country is being sold to foreigners, as they refer any foreign investments. They fail to realise under the same terms Singapore had been sold many times over.
Future of Sri Lanka
The country is facing a severe shortage of local and foreign funds. The biggest problem is paying Government staff salaries; the massive expenses in corona vaccinations further strained the country’s finances. The much-awaited Port City failed to make an impact due to the country’s health situation. But first construction is expected to commence before the year-end. Any new project needs a concept, purchasing land, architectural and structural design and acceptance, selecting contractors, consuming a long time period prior to commencing physical work on the ground.
Opportunities in investments
To overcome poor local funds for investments, the President was forced to look for foreign investments. The Finance Ministry has proposed ‘Investment Opportunities in Rising Sri Lanka 2022’; the document invited foreign investments in sectors such as power and energy, pharmaceuticals, textiles, real estate, urban development, and fisheries and aquaculture.
The President while attending the UN conference made use of the opportunity to meet various heads of state. He met the Prime Minister of Kuwait and drew the PM’s attention to investment opportunities available in Colombo Port City, solar and wind energy and oil refining sectors.
The offer of the Kerawalapitiya power plant and LNG supply to an American investor was on the same lines, considering the CEB’s failure to install an LNG procurement system even after 16 years, resulting in paying high prices for fuel imports.
The sale of 40% share of the Kerawalapitiya power plant to American New Fortress Energy company for $ 350 million is only for the shares of a company, would allow a Company Director but no impact on power plant or the power generation. The only advantage is NFE will get their share of massive profits made by selling oil-based electricity at Rs. 28 instead of LNG-based electricity for Rs. 18, a Rs. 10 additional profit for every unit of electricity sold to CEB. But the additional profit will end in two years when the proposed gas delivery commences as mentioned in the second agreement.
CEB was aware of LNG needs from 2007, when Lakdhanavi undertook to build the Yugadanavi 310 MW power plant. For 16 years, CEB failed to take proper steps to establish LNG supply. Meanwhile, a number of proposals brought in were all dropped due to various reasons, including a Korean investor supported by President Sirisena. If the tender called by CEB and closed on 18 June were allowed to continue, with CEB’s past record, the contract award would be several years away, if at all. Meanwhile, the public will be called upon to pay an additional Rs. 10 per each unit of power generated.
If the Government takes steps to award the contract for the Kerawalapitiya Stage 2, 350 MW plant based on tender called in 2016, to the lowest tenderer Lakdhanavi at Rs. 14.98 but dragged on, the company with an excellent past record will complete the project in two years when the FSRU comes on line. The low-cost production of power will allow CEB to discontinue expensive power purchases currently paid Rs. 28 to 40 per unit, reducing their losses.
The sale of the Kerawalapitiya power plant to an American company would give the country $ 350 million much-needed foreign currency. The sale to the American company was promoted by the US Ambassador in Sri Lanka and will enhance relations between the two countries, at a time when relations are in a poor state.
The Prime Minister or the President will need to explain to local politicians within the Government that at a time the country is facing shortages of local and foreign funds, the President’s vision is to encourage foreign investments into the country, thereby improving employment opportunities and technological enhancements to the society.