Kerawalapitiya LNG power plant on path to chaos

Lead Developer - Arc Development International which withdrew saying funding not possible, makes a come back

By Santhush Fernando

Although the construction of the 1,000 Mega Watt (MW) Liquefied Natural Gas (LNG) Power Plant at Kerawalapitiya commenced with the laying of the foundation stone recently, the viability of the project is in doubt as overall cost of operation is said to be remarkably high.
The LNG plant which is Sri Lanka’s first Liquefied Natural Gas power plant is also the largest power plant ever to be built in the country. Under phase one a generation capacity of 500 MW will be added to the national grid by 2011 while the remaining 500 MW would be added to the grid by 2012 under phase two.
The US $ 600mn project was a Foreign Direct Investment (FDI) and would be built in a record time period of 18 months, two months lesser than the time taken by 200MW Lakdhanavi Combined Cycle Power Plant at which is also located at Kerawalapitiya.
With the completion of this plant, Ministry of Power expects to lessen the cost of electricity generation, as Liquefied Natural Gas was the least expensive of all energy sources and as such was more cost effective than coal or fossil fuels.
The 500MW Stage One of the power project will add 20% additional capacity to the current Sri Lankan electricity generation capability, providing much needed supply to the Sri Lankan electricity system. 
LNG cheap or costly?
Liquefied natural gas or LNG is natural gas consists predominantly methane-CH4 that has been converted temporarily to liquid form for ease of storage or transport as LNG takes up about 1/600th the volume of natural gas in the gaseous state.
Although LNG pollutes less, its relatively high cost of production and the need to store it in expensive cryogenic tanks have prevented its widespread use in commercial applications, energy experts say. It can be used in natural gas vehicles, although it is more common to design vehicles to use compressed natural gas.
18 months Vs 4 years
LNG facilities have long construction times with the average construction time for a world-class LNG facility being approximately four years.
The construction of an LNG plant is said to be expensive costing at least US$ 1.5 bn for every 1 mmtpa (million metric tons per annum) capacity of the plant with the receiving terminal costing another US $ 1 bn per every 1 billion cubic feet per day (bcf/day) throughput capacity.
LNG facilities are said to be the most expensive of all energy projects. Sea-freight cost is also said to be very high as the average LNG tanker, with its built-in complex technology and safety features, will be more expensive than an oil tanker of similar capacity and age.
Controversial background
“Power generation from LNG is not included in the Long term Generation Plan of the Ceylon Electricity Board (CEB) as with the overall capital expenditure being very high. Furthermore a Letter of Intent (LoI) and Power Purchasing Agreement (PPA) had not been issued by CEB.” An energy industrialist told The Bottom Line on grounds of anonymity.
Directors of Lanka Aloka AB Pvt Ltd- Former Navy Commander Daya Sandagiri, H M Nawarathne, Rathnasena Katawalage along with Power and Energy Minister John Senevirathne and Minister of Investment Promotion, Anura Priyadarshana Yapa attended the function of laying off foundation stone.
Commercial pressure on CEB
Speaking to The Bottom Line, veteran energy expert Dr. Tilak Siyambalapitiya said that although the ideal energy source for Sri Lanka should have been a combination of hydro and coal, high-cost diesel had been promoted due to ‘commercial pressure’ and LNG in the latest move.
“Opting for LNG means that the Sri Lankan consumer would have to pay more for the electricity they consume. LNG is generally procured on Long Term Contracts, so its not easy to get details about its pricing.”
“Today if we had Norochcholai Coal Power Plant up and running, the cost of coal upto unloading point at Puttlam would be around US $ 90 a ton which is nearly Rs 10 a kilo in today’s prices. Since 2.5 Units can be generated with this, the cost would be only Rs 4 a Unit.”
Rs 10 Vs. Rs 2.50
Five units can be generated by using a litre of diesel costing Rs. 70 a litre, which means that a Unit would be nearly Rs 14. A Unit generated from LNG costs Rs 10, which is still 150 per cent more expensive than coal power. Hydro power costs Rs 5 to 6 a Unit but after 20 years the cost is just Rs 1 a Unit as the operating cost is very low.
Norochcholai is built in three stages with 300 MW added every under every stage. Stage One with all initial infrastructure is estimated to be around Rs. 450 mn, while both stages Two and Three, are projected to cost Rs. 300 mn each, so which means Rs 1,050 mn for 900 MW generated. Rs. 600 mn for a 1,000 MW LNG plant seemed modest in capital expenditure (Capex) terms, so might constitute only the power generation portion of the project, Dr. Siyambalaptiya said.
In thermal power, fuel cost makes up the dominant component and although some advocate conversion of diesel plants into LNG, it was not economical for Sri Lanka, though we need to diversify and cannot totally rely on coal.
No PPA
This was not included in the National Generation Plan and no competitive bids were called for its construction. The operating expenditure (Opex) would be very high and as these plants needed sophisticated re-gasification facilities and terminals which would be very costly Dr. Siyambalaptiya added.
“This project has not entered into a Power Purchasing Agreement (PPA) nor an Implementation Agreement with the CEB, which means that it would be not feasible to attract funding.”
Norochcholai and Upper Kotmale delayed due to politics
The power sector has seen long term economical power projects such as Norochcholai and Upper Kotmale delayed due to political meddling. If not we could have become a country with lowest tariffs in the world. So as far we expand with high-cost diesel and LNG plants Sri Lankan consumers will not be able to consume cheap electricity. LNG although not so expensive as diesel, would still be expensive for Sri Lanka in the long term.
Forced to withdraw
However earlier Arc Developments International said it has been “forced to withdraw” subsequent to “an irretrievable breakdown in relations with the project developer (Lanka Aloka AB).”

Arc said it was not possible to attract funds for the project as “the present project parameters have rendered attracting international investment and borrowings unachievable” and that it was breaking off contact with Lanka Aloka.
Kerwalapitiya is cheapest -ARC
However Arc Developments International Pty Ltd- an Australian registered company, being the majority partner in Lanka Aloka in a communiqué to The Bottom Line said that it “again got involved in this exciting project after it was able to agree terms with the Sri Lankan stakeholders that will ensure that the project is financially structured in a way which will make it attractive to investors, financial institutions and the local stakeholders.” 
“It would also be the lead project developer and arranger of foreign direct investment and project financing for the project.  I am a director of both Lanka Aloka and Arc Developments International. Mr. Paul McMahon, a Director of Arc Developments International, is the Chairman of Lanka Aloka,” said Tim Duignan, one of the two co-founders of Arc Developments International.
Although Arc Developments International claims that this “will be the cheapest power producer amongst the current IPPs contracted to the CEB and will assist in the economic growth of Sri Lanka providing cost effective electricity to the residential and industrial users across Sri Lanka.”  
Clean and Green Energy
Due to its low impact on the environment and recognition as a clean energy technology this project will be developed as a Clean Development Mechanism (CDM) project as Defined in Article 12 of the Kyoto Protocol. Initial in-country approval of the project as a CDM project (approval of Project Idea Note or “PIN”) has been achieved and the project has been listed with the UNFCCC. 
This project will be funded by Foreign Direct Investment with an initial investment of approximately US$ 600 million for the stage one power plant and has obtained a 25 years status with the Board of Investment. 
The electricity generated at this facility will be sold to the Ceylon Electricity Board under a power purchase agreement for a period of at least 20 years.  For the first time in Sri Lanka an IPP developed plant will be paid an all inclusive energy charge without a capacity charge component. 
ARC and Renewable Energy Business
ARC Developments is currently working on the creation of an Asian Renewable Energy Business.
“Currently there is a dearth of investment capital in Asia for renewable energy projects because the region and the projects are poorly understood (outside of India and China) by the US and European capital markets. The Asia capital markets are undeveloped with respect to the clean energy market. Thus it has been recognized that the provision of equity finance in this space within Asia is a good opportunity. Arc Developments is working on exploiting this opportunity.”
LNG volatile and expensive fuel-India
Earlier Indian Cabinet requested the petroleum ministry shed LNG as a fuel and to explore the possibility of long-term fuel supplies by domestic companies such as Reliance Industries (RIL), ONGC, British Gas to make power generated by the India’s Dabhol power plant affordable.
The government is now veering around to the view that the plant cannot be sustained on LNG as it would tend to be both a volatile and expensive fuel. Domestic gas on the other hand would be both cheaper and stable in supplies.
What is LNG?
Liquefied natural gas, commonly referred to as LNG, is natural gas that has been cooled to its liquid state. This is done primarily as a means to facilitate delivery of natural gas from the wellhead to consumers, particularly when the wellhead is remote from the end-user and the gas cannot practically or economically be transported in its gaseous state via pipeline. Thus, LNG provides a means of linking remote gas to markets.
Despite its rapid growth in recent years, LNG remains a relatively small contributor to world gas demand (under 7% of the total in 2005) and even to total internationally traded gas, (about 22% of gas trade).
Global LNG market demand and prices to go up
The global LNG demand is upward as traditional consuming natural gas markets in Asia (Japan, Taiwan and South Korea) have virtually no indigenous production, and, as a result, those countries rely principally on LNG for gas supply.
However, production in these regions has either begun to decline or slowed considerably in recent years. As a result, continued expansion of
demand has motivated an interest in expanding the role of LNG imports.
More specifically, in North America, production in the US, Canada and Mexico has remained almost flat.
LNG too close to populated areas?
Although the plant is located in high Security Zone is too close to populated areas.
“LNG re-gasification terminals are viewed as large, obstructive and generally displeasing to the eye for local residents and businesses.  Although designs to bury such large facilities underground have been forthcoming, one mitigant to that problem is sighting the terminal off-shore or aboard the LNG transport ship itself, far from residential or commercial areas.”
LNG not feasible for Sri Lanka
Three independent studies -- by USAID, 2002, the World Bank, 2004, Japan International Cooperation Agency, 2006 -- found that LNG was not an economical source for power generation for Sri Lanka, which was confirmed by CEB’s own studies.
Despite this, moves are being made “over the past several months by external agencies to push an LNG terminal and power plants on CEB.”