Kerawalapitiya LNG plant caught up in power struggle

Ministry rules out LNG power plant under new Act LoI: PPA not possible-CEB

By Santhush Fernando

Although the newly proposed 1,000 Mega Watt Liquefied Natural Gas (LNG) power plant at Kerawalapitiya is expected to generate cheap electricity, the project may not take off the ground due to regulatory barriers.
In its latest development, Ministry of Power and Energy has ruled out against the setting up of the LNG power plant as a private venture, stating that such a project would be inconsistent with provisions of the newly enacted Sri Lanka Electricity Act no 20 of 2009, The Bottom Line learns.
LNG Plant not possible under new Act
“The cabinet decision approving the project was based on the earlier Ceylon Electricity Act no 17 of 1969, which had provisions where anyone can set up a power plant without a license. So you could build a merchant plant to provide electricity to serve private purposes as long as you don’t transmit power. To transmit power, one has to apply for a license.” An official of the Ceylon Electricity Board (CEB) told The Bottom Line on grounds of anonymity.
“However under the new Sri Lanka Electricity Act even merchant type plants are not possible without a license. The present Act does not provide for the generation of electricity even for domestic purpose.”
“Furthermore, for a license for a plant with a generation capacity up to 10 MW should be procured through CEB while the CEB has to ensure tender process. If it’s more than 25 MW, the project has to undergo competitive bidding. Moreover the company should be incorporated in Sri Lanka, and the government or a government body has to own 25% of the shares. Since these criteria have not been met CEB is incapable of issuing Letter of Intent (LoI)” he added.
The project is being implemented by Lanka Aloka AB Pvt Ltd along with Australian-based Arc Development International- lead developer of the project.
Founder Director of Arc Development International, Tim Diugnan, in an exclusive interview with The Bottom Line said that the project has an agreement with the Board of Investment (BOI) of Sri Lanka and the project has been given cabinet consent.
“The PPA (Power Purchasing Agreement) negotiations have commenced and we hope that we will have an agreed PPA within eight weeks.” Diugnan said.
Arc’s withdrawal and comeback
However earlier in March 2009, 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.
Commenting on its withdrawal and comeback, Diugnan said that at the time his company withdrew they did not believe that the transaction expectations of the local project developer could be financed on the international market.
“Following our withdrawal the local partner (Lanka Aloka AB) reconsidered his position and invited us back in to the project and we were able to structure the transaction in a manner that we now feel can be financed through international investors and banks.”
Asked about the Company’s relationship with CEB, Diugnan said that “CEB is supportive of the project and we are progressing well with them at present.”
Green energy
“A lot has changed in the energy world over the last number of years. Sri Lanka has become reliant on high cost oil fired generation as the hydro generation opportunities have diminished and the climate has changed in a way that is limiting the output from the hydro plants.” He added.
“The Kyoto protocol has created opportunities for cleaner technologies that can displace dirtier generation systems. This is one such case and 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. We are confident that the project will be registered with the UNFCCC as a CDM project and as such will attract an important revenue stream from the sale of CER’s (Certified Emission Reductions).”
LNG not feasible for Sri Lanka- USAID, JAICA and World Bank
Three separate 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 research conducted by CEB.
Despite this, moves are being made “over the past several months by external agencies to push an LNG terminal and power plants on CEB.”
LNG Plant- Sri Lanka’s largest
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 also located at Kerawalapitiya.
Project not viable for funding?
LNG facilities have long construction times with the average construction time for an LNG facility in line with international standards, being approximately four years, though Arc anticipates completing the project in 18 months.
The construction of an LNG plant is said to be expensive costing at least US$ 1.5 bn for every one 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.
LNG- Cheap or costly?
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”  many experts believe otherwise.
Veteran energy expert, Dr. Tilak Siyambalapitiya believes 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’ with LNG being the latest such 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 it’s not easy to get details about its pricing.”
“Today if we had Norrochcholai 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.”
LNG to cost Rs 10 a Unit?
According to Dr. Siyambalapitiya, 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 250% compared with coal power. Hydro power costs Rs five to six a Unit but after 20 years the cost is just Rs 1 a Unit as the operating cost is very low.
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.
Arc Int. confident about funding
“In our opinion, this plant is viable when these revenue streams (Carbon trading) are included and therefore that is the reason that we are pursuing this project.” Diugnan said.