Friday, March 7, 2008

Oil Mafia - 4

Need for timely decisions on power projects
By Dr. Tilak Siyambalapitiya
(These are extracts of a presentation make at a recent seminar on the power crisis).

The process of making decisions on new projects to generate electricity is most unnecessarily politicised in Sri Lanka. Even within the presently established rules, the Ceylon Electricity Board Act No.17 of 1969 says in Article 11(2),
".... It shall be the duty of the Board...
(c) to generate or acquire supplies of electricity.
(d) to construct, maintain and operate the necessary works for the generation of electricity by all means..."
However, what is seen in our electricity sector repeatedly are the following symptoms:

(1) Appointing various committees to oversee or co-ordinate the function of generation of electricity, while the accountability still appears to remain with CEB. Between 1992 and 2001, the mechanism of undermining the decisions on generation projects was known as the "Power Committee". Presently the mechanism of making decisions which should be made by the CEB and the Ministry of Power and Energy is known as the "Power Supply Committee".

(2) The Board of Directors of CEB keep watching passively when their functions are being taken-over by other ad-hoc committees, who are probably not accountable to the financial and technical consequences of such decisions. In simple terms, in the case of future power crises, such Committees will fade away with all parties refusing to assume responsibility.

(3) Politicians make decisions (or appear to be making decisions) on the size, capacity, location and fuel types used in power plants, usually different from what is required for the system.

(4) Politicians decide when and how the electricity prices should be adjusted, or increased. Presently, as a result of non-implementation of the new generation projects on time, the production and delivery cost of electricity is averaging around 8 Rs/kWh. The present average selling price is 5.60 Rs/kWh. Price increases to match these costs too are blocked by the political establishment.

Cost of decisions
There is no better method to examine the importance of timely decisions on generation projects, than to examine how the demand for electricity was to be served today, in year 2002 in the plans prepared ten years ago, and what happened to the decisions on each project. We will then examine the decisions required to be made today to meet the demand over the next ten years.

The two major projects in the plan of 1991 (Mawella and Trincomalee) were not implemented by the decision-makers. As it can be seen, even with non-implementation of the plan, the generating system still has surplus capacity, but the surplus is inadequate to:
(a) Meet the demand in a dry year.
(b) Allow for the outage of the largest generator and to allow for typical forced (i.e. unexpected) outages of other generators.

For the Sri Lankan hydrothermal system to operate comfortably, repeated assessments indicate that a capacity surplus of about 500 MW is required in the generating system, by way of thermal power plants. This surplus is presently not available, which is the reason for the capacity crisis in the generating system. This surplus capacity is not available because decisions were not taken on time and/or because wrong decisions were made.

Non-implementation
Let us consider one example of a decision, not made on time. Following the suspension of the Mawella project by the president in 1991, against all technical advice specifically on the costs of the delay, the Ministry of Planning shifted the site to Puttalam. That single decision is presently causing the losses to the electricity customer.

The long-term plan published seven years ago (in 1994), specified that the Upper Kotmale hydroelectric project should be operational by year 2001. The feasibility study for the project was completed by 1995, and a six-year construction schedule was feasible. The conceptual design of the project was challenged in a court action by Environmental Foundation Limited (an environment NGO), and has been recently approved for implementation, exactly on the original concept of 1995.

The clear sequence of events that caused CEB to enter a permanent financial crisis is as follows:
- Indecision on power plant projects caused a capacity shortage in the system
- Government and the CEB resorted to expensive thermal generation
- Government was unwilling to pass the high costs of expensive thermal generation to customers
- CEB goes bankrupt owing to high costs of generation
- CEB cannot raise any more finances for new generation projects owing to financial status.

The crisis in the power sector can be solved only with a series of decisions. Each decision is important and urgent. All decisions must be made immediately and simultaneously. These decisions are not mutually exclusive. They compliment each other, to ensure Sri Lanka;
(a) has no more blackouts in the future,
(b) provides electricity to the customers at the lowest possible cost,
(c) the fuel mix in electricity generation will be broad-based for security against supply constraints and price increases.

The viability of the use of coal for electricity generation in Sri Lanka and its contribution to hold electricity price low, has been established. However, there is a misconception that Sri Lanka needs only one coal-fired power plant, and that the debate is about finding a site for the coal plant. The optimal plan for the expansion of generation presently requires:

(a) The first coal power plant to be developed immediately, to produce electricity from January 2008. (It requires a total of six years to finance and build the power plant).

(b) The second coal power plant to be developed to produce electricity from January 2013.

(c) The third coal power plant to be developed to produce electricity from January 2016.

This development plan will support a GDP growth of 5% per year. If the economy accelerates further, the start-up dates should be advanced.

Therefore, the issue is that Sri Lanka needs to develop and produce electricity from three coal-fired power plants over the next fifteen vears, each rated nominally at 900 MW.

The actual decision to build a coal-fired power plant is now late by about fifteen years. This grave error and injustice to our economy and the society must be corrected now, without any further delay. Presently there is concern about four sites for coal power development.

Based on the status of sites and financing realities, it is inevitable that decisions should be made in the following manner, to ensure that coal power is added to the system as soon as possible. All projects have their strengths and weaknesses, and the underlying principle should be to add coal power to the system as soon as possible, through a secure financial package.

Decision 1: Immediate decision to implement Puttalam (Norochcholai) Coal-fired Power Plant to ensure that electricity can be produced from January 2008. Phase 1 must be implemented with Government participation to avoid delays in securing finances.

Concerns about the Norochcholai project
While several teams of international consultants have established that coal can be delivered to the site via a jetty or a barge transfer system, several individuals have expressed concern about the practical limitations of both options. This issue can only be resolved by calling for bids to deliver coal to the power plant, where the coal supplier would design and develop the delivery system, and the price will be known at the time of bidding. If the project overall economics do not fall within acceptable limits, bids should be rejected. The acceptable limits should be defined prior to the calling for bids.

Decision 2: Immediately confirm the siting area for the second coal-fired power plant, and complete the feasibility study and the EIA process. Complete this process not later than March 2004. Ensure construction begins no later than January 2005. The second coal-fired power plant should be producing electricity not later than January 2012.

The major issues to be considered in deciding on the siting area of the second coal-fired power plant are;
(1) Availability of coastal land and relocation issues.
(2) Coal unloading facilities.
(3) The site should be acceptable to prospective financiers, both state and commercial.
(4) If decided as an IPP, developers should be provided with a clear site.
(5) Should match with other infrastructure development plans of the government.
Hydroelectric
power plants
Decision 3: Expedite the implementation of the Upper Kotmale hydroelectric project with vigorous action to establish the staff, select contractors, finalise the design and proceed with construction.

The decision to proceed with the project was recently taken, six years behind schedule. The delay of the project is causing a loss of an average of 1.5 GWh/day, presently causing an expenditure of at least Rs. 6 million per day for fuel. The project is expected to cost about Rs. 27,000 million, and will save at least 1000 tons (typically 2000) of sulphur per year, presently released to Colombo air as Sulphur Dioxide.

Decision 4: Immediately review the status of Uma Oya and Broadlands Hydroelectric projects, and decide within six months. Uma Oya requires a decision about diversion Vs in-stream development. Broadlands requires finances, including a possible Government-private partnership.

Although coal power plants are essential to establish fuel diversity, fuel security and to stop the increase of electricity prices, it is unrealistic to expect coal power plants to be available before 2006, but typically 2008.

Therefore, interim power plants have to be established to ensure adequate supplies are available to meet the growth in demand.

Decision 5: Expedite the work to establish the Kerawalapitiya Power Plant, to be operational not later than January 2005.

The establishment of this power plant, which will operate on diesel, was required owing to the continuing delay in the decision to proceed with the Puttalam (Norochcholai) coal-fired power plant.

The decision to proceed with the project was recently made, two years behind schedule.

The project was required to produce electricity from January 2004, which is no longer realistic.

Decision 6: Calculate the new generation capacity requirements (these are already available in CEB planning documents) between now and 2005, and immediately establish emergency capacity to meet the demand.

The investment commitment for any coal-fired power plant out of the three sites (Puttalam, Trincomalee and Hambantota) will be about US $400 million for Phase 1.
For a BOT project in Sri Lanka, this will be the first such large investment. The currently largest BOT project in the power sector is estimated to have cost about US $100 million, which required about two years for financing and a larger portion of that being finally provided by the ADB. In fact, the delay of this BOT project caused the decision-makers to delay decisions of another similar project for which financing was available, and caused both projects to be delayed, which is the cause of the present power crisis.

Conclusions
Decisions on major power plants cannot be delayed. The costs of indecision are usually several thousand million rupees per year per power plant. All major decisions must be made simultaneously, and vigorously implemented with dedicated staff.

Three coal-fired power plants are required for development until 2016 to support a GDP growth of 5% and to ensure electricity price stabilise around 7.50 Rs/kWh.

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