ECONOMYNEXT – Sri lanka’s rulers are once again blocking coal, the cheapest source of electricity, driven by powerful lobbies outside established policy, without any evidence-based policy-making to change it as demanded by good governance.

Sri Lanka’s power sector has been dogged by bad political decision-making that has pushed up costs and loaded Ceylon Electricity Board with expensive power plants that are outside the Long-Term Generation Plan. CEB planners from the 1980s advocated coal as a key source of cheap base load power as hydro resources ran out. Religious – both Buddhist and Catholic – and environmental lobbies delayed coal plants.

When planned cheap coal plants are disrupted and delayed, other plants are brought by cabinet decisions outside the generation plan by politicians as emergency ad hoc stop gaps. These plants, ranging from diesel to furnace oil, have been expensive. The cost to the country has been huge. There have been power shortages and cuts, disrupting economic growth and causing people hardship.

Central Bank-financed credit (printed money) used to subsidize energy has repeatedly driven the country into balance of payments crises, causing the rupee to collapse.

Bad governance by high-powered committees

Sri Lanka’s electricity sector is governed by the Sri Lanka Electricity Act of 2009, the Public Utilities Commission Act of 2002 and the Ceylon Electricity Board Act of 1969. Hardly any plant in the CEB has come out of a technical planning process after the original Laxapana cascading plants on the Kelani river. Even the Mahaweli plants – which are cheap – came out of a political decision to accelerate multi-purpose reservoirs.

After coal plants were blocked by President Ranasinghe Premadasa, high-powered ‘energy supply committees’ pushed in IPP (independent power producer) plants that could be built quickly in the 1990s through a cabinet decision outside the generation plan.

Prime Minister Ranil Wickremesinghe blocked the Puttalam coal plants that were to have been built with Japanese aid. Chinese plants were built under the direction of President Mahinda Rajapaksa. While the Chinese plants have helped bring down the CEB’s operating costs and provide base load power during droughts, there are serious questions about the level of technology and whether better Japanese technology could have reduced pollution more.

The plants coming from high-powered energy committees included diesel-powered reciprocal engines and combined cycle plants, which pushed up costs to very high levels. These costs were not allowed to be recovered through political decision-making in pricing, leading to credit financed losses and balance of payment crises.

The Kerawalapitiya Lanka Transformers group plant – a big and costly IPP – was built without tender. It was also built without a guaranteed heat rate, may be a first in the electricity sector in the entire world.

There were a handful of good IPP plants. The 2001 United National Party-led administration called for competitive bids and plants like the ACE Embiliptiya were built.

When CEB planners tried to extend the ACE Plant as a deliberate planning strategy in a draft document after its contract expired (by some process that is not yet clear), it was taken out of the final generation plan. Now it has been reconnected at the same price by cabinet decision. There was a chance to connect it at a lower capacity charge earlier without political interference.

The Colombo Power barge mounted combine cycle plant built by Japanese investors has now been bought by the CEB itself after its IPP contract expired.

. LNG Lobby

The latest push to block coal plants has come from the liquefied natural gas (LNG) lobby. Very powerful business interests are behind this. They have reached out to the highest in the land. President Maithripala Sirisena himself has now requested India to stop the planned 2×250 MW coal plant in Sampur, Trincomalee, and make it into LNG. This move comes just before international tenders are to be called for the machines.

The Indian Trinco plant has been dogged with problems. It is supposed to be a joint venture with the state-run CEB and India’s National Thermal Power Corporation, which will sell power as an IPP to the CEB. A powerful economic policy committee has also indicated to CEB planners that there will be no more coal plants, according to sources in the know.

The CEB’s generation plan has LNG – but only after at least two other coal plants in Trinco are built. One by India – a joint venture IPP – and the second, a CEB-owned plant with Japanese aid. This is expected to be a very clean coal plant. Now it looks as if both plants are out.

Good governance

Good governance demands that high-powered committees no longer make such decisions. Sri Lanka already has a governance framework for electricity.

If the rulers made decisions to push up costs and favour certain business interests or their own genuine inclinations about the environment, at least it should be done according to a process, where the policy is changed after due consideration of evidence.

The sector is governed by several key pieces of legislation. These include the Electricity Act of 2009, the Public Utilities Commission Act of 2002 and the Ceylon Electricity Board Act dating back to 1969. The CEB acts gave the ruler-controlled company a monopoly status, preventing citizens from getting together to satisfy their own energy needs.

The newer Electricity Act has provisions that can create evidenced based policy and end the ad hoc acts of high powered committees and the head of state pushing in expensive plants into the CEB, which has been the bane of the country for several decades.

Section 5 of the Electricity Act says that the minister shall formulate policy guidelines after taking into consideration several matters, including “fuel diversity and the preferred fuel for” new power generators. It says all “amendments sought to be made to the guidelines approved by the Cabinet of Ministers shall also be required to be approved by the Cabinet of Ministers”.

The policy guidelines that are now in effect specifically mention coal in the larger context of having energy security. Non-conventional renewable energy is also mentioned in the context of energy security.

The renewable energy lobby has kept large hydros – a cheap source – out of the calculation and is pushing more expensive ‘non-conventional’ renewable energy, which is privately supplied, to have its own share. But it has at least come through some process. Renewables are admittedly clean.

Policy guideline 12 relates to energy diversity and security. It says: “The electricity sector shall rapidly move from the present (hydropower and oil) status to a multiple-resource status. To ensure maximum possible security against price and supply fluctuations, and to ensure the growing demand is reliably met, this third fuel shall be coal.

The first step in this direction has already been taken with the commencement of work on the Puttalam coal power plant. Non-conventional Renewable Energy (NCRE) that is inherently indigenous shall be the fourth resource in this diversification and security strategy.”

If there is good governancem and if this country wants to be a Singapore, policy has to be formulated through a transparent process and not by some high-powered committee or lobbying to the head of state.

Following research and a public consultation on the draft, a new policy can be devised. If LNG is to be the third fuel, then we must know that it was done with adequate forethought and regard to the costs, including possibly on competitiveness of merchandise exports and its benefits.

LNG: Unanswered questions

LNG is undoubtedly cleaner than coal. But fairly clean coal technology is available. LNG has more hydrogen compared to carbon, so more energyis made by creating water vapour than coal. There are also not much impurities like in coal.

LNG is also more expensive than coal and moves closer to crude oil prices. It is expensive for two reasons. First, because it is a liquefied gas under high pressure, handling requires pressurized storage and pipelines. All of this makes the background infrastructure more expensive.

If we become too depended on LNG, it will be the same as having diesel plants. This is the reason that planned coal plants should go ahead.

However, in the current monetary and economic turmoil, LNG prices have started to diverge from its long-term tandem movement with crude.

From about five to seven years ago, LNG started to move down, partly due to a sudden spike in US production and partly due to the general strengthening of the dollar, which has pushed down all commodity, oil and metal prices.

The divergence between oil and LNG is greater in North America. Prices in Japan or Asia for example are still relatively high, comparatively. Coal, on the other hand, is produced in Asia.

Whatever the reasons, LNG prices are now low enough to almost compete with coal, despite the terminal cost. There are also different technology in terminals including floating solutions. It must also be noted that the per unit costs that are being bandied about such as 7 or 9 US cents assume very long payback periods, running into 15 to 20 years.

In any case, there has been no proper study for anyone to make a clear judgement. But it is also true that, unlike in the past, there is no clear-cut large cost advantage over coal – at least on operating costs, as the gap is now narrower.

However, nobody knows how long the sudden divergence of LNG prices from crude will last. If the US Federal Reserve fires another commodity bubble and LNG moves up, Sri Lanka will again be exposed to crude shocks through LNG. ‘Energy security’ expected from fuel diversity will not come.

The question that needs an answer is whether the historically low comparative price of LNG is temporary or not. If prices are temporary, they cannot be used for long-term generation planning.

Furthermore, existing plans for LNG have worked around a terminal in Kerawalapitiya near Colombo in the Western Province. Feasibility studies have already been done. The Western Province is a large population centre and it is a better location for LNG. Existing diesel combined cycle plants could also be converted to run on LNG – at an unknown cost as of now.

Trincomalee, with its deep port, is ideal for landing coal even with bad weather. In that sense, Trincomalee is better than Puttalam for coal. The government also has plans for a heavy industry export zone for Trincomalee. If that is the case, coal is the ideal solution for cheap power.

The constantly delayed Indian coal plant

The Indian coal plant itself is a politically-driven project done partly to satisfy Indians. However, there have been long delays for which Indians have been partly to blame.

CEB engineers, after running the Chinese coal plant, found that the heat rates (how much electricity per kilo of coal) that the plant promised were too low. It took a long time to persuade Indians to tender internationally so that the most efficient technology can be bought.

Even then, there are concerns that, unlike 300 MW plants, the specified 250 MW will not have many top manufacturers competing to supply and it may anyway go to an Indian supplier since that is why 250 MW was specified in the first place.

There are some doubts whether the Indians actually want to build the plant or are simply sitting there to scuttle any attempt by another party to build it, given their alleged lack of urgency to respond to concerns raised by the Sri Lankan partner.

Already, the Indian plant is too late. There will be more opportunities for IPP diesel plants to supply the CEB because of this as stop gap plants with cabinet approval.

There is no doubt that LNG is clean. There are doubts whether current prices will prevail into the future.

One of the most powerful business groups pushing for LNG may be doing it to get an IPP deal. At least one other may be doing it simply to delay the Trincomalee plant and slip in combined cycles. Gas turbines, combined cycles and piston engine diesel plants can be built relatively quickly, unlike coal and LNG.

If energy security is to be maintained and good governance is to prevail, it is necessary for the policy guidelines to be revised through a transparent policy instead of committees and the head of state making ad hoc decisions.

Feeback: BellwetheECN@gmail.com

This column is based on ‘The Price Signal by Bellwether‘ published in the June 2016 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.