POWER PLAY The question still lingers over LNG power plant

The company drew the attention as it did not get the tender despite it being a lower bidder WCPL owns the Kerawalapitiya Combined Cycle Power Plant The Ministry of Finance would not allow CEB to borrow the USD 300 million or loan it to construct the plant

TL Holdings Ltd, as a power generating company, dominated the news in recent times after it was denied a tender to execute a power project using Liquefied Natural Gas (LNG). Such a power project is needed to deal with the power shortage expected by 2020 due to the increasing energy demand that is expected in Colombo when the Port City is completed.

The company drew the attention of media as it did not get the tender despite it being a lower bidder.

The incident took place at a time when Sri Lanka is in urgent need of the development of systems to ensure transparency and fair play in tender procedures to attract investment in its ambitious plan to become a trading hub in the Indian Ocean region.

In fact, German Ambassador Jorn Rohde voiced against the denial of tender to this company.

Afterwards, the attention was drawn to this company and its capabilities to undertake major power projects locally and internationally. It has its own holding companies and West Coast Power Ltd (WCPL) is one such subsidiary coming under this company.

The attention was drawn to this company and its capabilities to undertake major power projects locally and internationally. It has its own holding companies and West Coast Power Ltd (WCPL) is one such subsidiary coming under this company

In fact, WCPL owns the Kerawalapitiya Combined Cycle Power Plant. Situated in Kerawalapitiya, in the north of Colombo, this power plant came into being in 2009.

It is one of the largest power plants in Sri Lanka with 300MW capacity and is second only to the 900MW Noraichcholai Coal Power Plant. It uses Heavy Fuel Oil for power generation.

The company’s Chief Executive Officer

(CEO) J.A.S. Perera, in an interview, shared his views on power generation and the company’s ability to make strides in the field.

According to him, it was always intended to put up a Combined Cycle Power Plant by CEB. Several attempts were made by the CEB to build a power plant but due to various reasons none of them succeeded. The government that came to power in 2005 tried again. First, it wanted to select a contractor and build it for CEB.

A contractor was selected by a Cabinet Appointed Tender Board to build a 300MW Plant.

Lakdhanavi Ltd’s offer to build a power plant that can operate on LNG, Heavy Fuel and Auto Diesel was accepted at USD 222.5M. However, this attempt did not succeed.

Asked as to why it failed, he said the Ministry of Finance would not allow CEB to borrow the USD 300 million or loan it to construct the plant. He said Lakdhanavi would only spend about USD 222.5 million on the project.

“CEB will have additional costs such as initial working capital, loan interest during construction and insurance and costs of getting various approvals.

“So, for CEB it would have been an expense in that range. Finally, the Finance Ministry told the Power Ministry that it should be done outside the CEB.

“They wanted private investors to invest and Lakdhanavi to do the

construction contract at the same price it offered. This was at the height of the war and it was not easy to get such investors when CEB’S other power plants in Colombo were becoming targets of the LTTE.

“A new company was set up in the name of West Coast Power Ltd. It would have the same task of CEB to raise around USD 300mn-to be exact USD 294.8mn.

“Now the WCPL went to banks. No Sri Lankan Bank would be able to give such a large amount for a long term. Finally, HSBC-HONG Kong agreed to give it a loan for 70 per cent of the Project Cost but wanted a Government guarantee, since WCPL was a new company. The Cabinet of Ministers approved it. WCPL still needed to raise 30% of the cost by way of equity.

When asked about the final cost, he said when the project was finally completed in March 2010 (when commissioning tests started) it had cost WCPL exactly USD 292.9 million.

“There never was a cost overrun in the project. In fact out of the HSBC approved loan of Euro 152.2mn, more than Euro 1M was not utilized. How they come to USD 310M or 335mn is by using different exchange rates for EURO/USD and LKR/USD. “It is correct that exchange rates change all the time. But the fact is WCPL never had to spend more than its original equity of Rs. 12,425mn and Euro 152mn,” he said. The solution found was for a set of government agencies to fund the equity of WCPL. Rs. 12,425 mn had to be financed by way of equity. The EPF agreed to put Rs. 2,975mn. LECO agreed to put Rs. 2,000mn. The NSB and ETF also agreed by that they only would give loans. “Therefore they gave a loan to MOF and MOF invested that in WCPL as equity. Initially, MOF investment was split into Preference Shares and Ordinary Shares. On Preferential Shares, a very high interest was paid during the construction period to MOF so that MOF could pay interest on loans taken from NSB and ETF. This interest to NSB and ETF also included as financing cost of the abovementioned project cost (Which would not be there in a normal equity investment scenario). There was a shortfall and the EPC Contractor, Lakdhanavi also was asked to invest Rs. 525 million.

“The CEB was predicting a power crisis in 2009. This was early 2007. Equity Investment had to be made prior to the time loans were committed since construction had to be started immediately, so that by November 2009, Open Cycle Power would be available to CEB to avoid power cuts. Equity investors usually do not contribute equity until funds for the entire project is secured.

“In this case, the investors invested without achieving financial closure, therefore, taking a very high risk. WCPL used equity to make advance payments to General Electric of the USA which supplied Two Gas Turbines and the Steam Turbine you see here now.

“If the WCPL failed to get the loans, these equity investments of EPF, LECO, NSB and ETF would have been written off sparking a major crisis for those organisations. That was the kind of risk they took.

According to him, the HSBC gave a loan guaranteed by the Government. The Euro 152.2 mn loan was given by the HSBC Plc-united Kingdom and France to finance the Project Cost by way of debt. Debt consisted of four different tranches of 12 years and one tranche of 10-year debt. Capital Recovery Charge in Euro was determined to secure loan repayment with a requested safety margin of the Lenders.

“There is many an eyebrow raised in regards to the raising of this loan in Euro. He cited the reason that most of the equipment was purchased from Europe. The two Gas Turbines, Heat Recovery Boiler, Fuel Treatment System, Transformers were priced in Euro.

Commenting on the contribution to avoid power cuts, he said:

“We did it not once, many times. Firstly we came online in 2009 and avoided the predicted power cut. Then there were several dry years for CEB. During those years, this power plant did the bull work for CEB. Then there were many failures of Noraichcholai Power Plant. We have always helped CEB to manage those difficult situations. If you take last two years, we actually completed our annual quota in just 10 months and operated two extra months just at the cost to CEB.

“It is one of the very few Combined Cycle Power Plants in the entire world running in Heavy Fuel Oil, which is cheaper than diesel. In fact, CEB only wanted a diesel operated power plant. Operation in diesel, which is much cleaner fuel, is a lot easier. However, by operating on Heavy Fuel Oil, we save this country more than Rs. 10 bn a year,” he said.

“No other power project has been unfairly criticized as this one. Now that it is operational and making profits it is easy for people to criticize. Nobody now appreciates the situation that prevailed when this power plant was constructed. There was a Global Financial Crisis. Banks would not lend any money. Many big banks failed. There was a war. Even the engineering drawings of this very power plant were found in an LTTE camp.

“There were many nationalities from many companies were working here. All of them took enormous risks. However, let’s not talk about it. This is the typical Sri Lankan mindset.

“Firstly there is a Power Purchase Agreement with CEB. That was signed in 2007. We have not changed anything, not even a dot or a comma from that. As per that, there are two basic components in our tariff. The Energy Charge and a Capital Recovery charge.

Energy Charge is a variable. It varies with Fuel Cost. Fuel Cost consists of about 85% of Energy Charge.

“We buy Fuel only from Ceylon Petroleum Corporation (CPC). We have no control over it. For example, these days if we are allowed to import from Singapore we can buy Fuel about 40 per cent cheaper and make our tariff lesser. We, however, cannot do that as per agreements. Then there is the spares and maintenance cost. That also varies with exchange rates and inflation since almost all spares have to be imported. However, Energy Charge is paid only if we generate power to CEB. For example, if on a certain month, CEB has enough generation from its own power plants, they would not buy any power from us. In that month our Energy Charge Invoice will be zero.”