Sri Lanka: Coal power extension project to be pushed through under ’emergency’ COVID-19 situation

Cabinet has instructed the Power and Energy Ministry to direct the Ceylon Electricity Board (CEB) to expedite a joint venture agreement with China Machinery Engineering Corporation (CMEC) for a 300mw extension to the Lakvijaya coal power plant at Norochcholai.

The Cabinet decision contained several other measures to be taken in view of the ’emergency’ situation in the country created by COVID-19. The extension of the coal power plant was one of them. The order, however, could be a contravention of the Sri Lanka Electricity (Amendment) Act which makes it compulsory for competitive tenders to be called for power projects. The exceptions are if there is a Government-to-Government (G-to-G) deal or an emergency situation ‘as determined by the Cabinet of Ministers during a national calamity or a long-term forced outage at a major generation plant, where protracted bid inviting process outweigh the potential benefit…’

Cabinet-acting on a paper presented by the President’s office-has instructed that the joint venture agreement now be signed quickly. CMEC are the builders of all three units of the Lakvijaya coal power plant in Norochcholai and the offer for an extension did not come from China.

There is also no evidence of a national calamity although the Cabinet decision justifies the matter by saying the country faces socio-economic disaster owing to the protracted failure to erect any major power plant through the tender system.

The proposal for a fourth 300mw unit at Norochcholai came through a study by some CEB engineers in 2017. It explored the possibility of expanding Lakvijaya on the existing land. The justification was that some auxiliary facilities could be used, thereby reducing the capital cost by a significant percentage.

However, the suggestion was always for a CEB-owned plant with concessionary funding, officials said. The report also proposed a second 300ms plant in the adjoining land. ‘It was a preliminary study that did not go into details,’ an authoritative source said. ‘Then CMEC came forward and said it can carry out a feasibility study at no cost to the CEB. The utility gave its consent for such a study but there was no undertaking that the plant will be given to CMEC.’

However, after the new administration took over, the deal has evolved to a joint venture proposal with 49 percent equity for CMEC and 51 percent for CEB. And the equity component of the CEB in the joint venture is to be arranged by CMEC as a loan from the Exim Bank of China.

‘There are at least two major problems related to the legal situation,’ the source said. ‘One is that it is very difficult to imagine this as a G-to-G initiative. The other is that a coal power plant can’t be an emergency. As far as I know, ‘national calamity’ is well defined in law.’

There are also serious concerns about how much the extension will cost. The CEB has appointed a committee to negotiate with CMEC and it is reported that the estimate is around US$ 450mn (Rs 83bn). The general norm, however, is around US$ 1mn per megawatt. The cost will go down further some of the auxiliary facilities will be shared.

‘The test will be when this comes before the PUCSL for approval,’ the source said. ‘The regulator will ask whether it was procured at the lowest possible cost. In a competitive tender that is fairly easy to establish. The CEB will also have to justify to the PUCSL and the Attorney General that this qualifies as an emergency procurement.’