Handing over 40% of Kerawalapitiya Power Plant to a US firm: Controversial Cabinet Memorandum
Investments into the West Coast Power (Private) Limited (WCPL), to reduce the Cost of Electricity Generation
1. The Cabinet of Ministers by the decision No. CP 21/1230/304/106 and dated 05.07.2021 inter alia authorised the Secretary to the Treasury (ST) on behalf of the Government of Sri Lanka (GOSL) to enter into a Framework Agreement (FA) with New Fortress Energy Company, a company listed in the NASDAQ and its affiliates (Herein referred to as NFE). As such on 07.07.2021 the FA was signed between the GOSL and the NFE.
2. The main features of the FA are the sale of 40% of shares at West Coast Power Limited (WCPL), the execution of the Terminal Project which includes the Floating Storage Regasification Unit (FSRU), Mooring System and the Pipelines, and the supply of Liquefied Natural Gas (LNG) to WCPL and any other plant. (Hereinafter referred as "the Proposal")
3. The ST appointed two committees to discuss with the NFE and both committees consisted of officials from the Treasury, the Ministry of Power, the Ceylon Electricity Board (CEB) and experts in the field of electricity and gas.
4. Sale of Shares at WCPL
4.1. As agreed in the FA to purchase 40% of the shares at WCPL held by ST, the NFE offered USD 250 million for the sale of 40% of the shares at WCPL. This is in line with the valuation of approximately USD 250 million provided by the Government Chief Valuer.
4.2. The Share Sale and Purchase Agreement (SSPA) will have to be signed accordingly. SSPA will include the purchase consideration for the sale of 40% of the shares of the WCPL held by ST, the payment terms and mechanics of the agreed purchase consideration which could be in one or two tranches and the associated transfer of shares, the obligations of the Seller and the Buyer broad in line with the FA.
4.3. GOSL has undertaken to provide tax concessions set out in Clause 6.3 of the FA, the investment incentives available under Applicable Laws (including under the Board of Investment Law No. 04 of 1978 (as amended), the Strategic Development Projects Act No. 14 of 2008 and any other law).
4.4. Given that the entire Terminal Project will require a significant investment, and will result in the country's energy strategy undergoing a significant change with the introduction of LNG, the Terminal Project will change the landscape of the country and hence could be considered eligible to be provided the incentives under the Strategic Development Projects Act No. 14 of 2008. Other incentives under the Board of Investment Law No. 04 of 1978 could be provided once the NFE has requested for such incentives.
5. LNG Supply to Power Plants and the operation of the Terminal Project
5.1. The FA provides for the NFE to provide gas for a period of 5 years to the WCPL. However, as per the Cabinet approved Implementation Agreement (IA) signed on 19th July 2021 between the ST and the Sobadhanavi Ltd, which is due to build and operate another 350 MW LNG plant in close proximity to the WCPL plant at Kerawalapitiya, the said IA has cast a responsibility upon the government to ensure the supply of LNG.
5.2. As such, it is beneficial to also allow the NFL to supply LNG to the Sobadhanavi Plant as well. (this will be an amendment to "the proposal")
5.3. The GOSL through ST could enter into the Gas Supply Term Sheet (GSTS) a, part of the SSPA or even as a standalone document (Annexure 001). During the 5 year period of the NFE being the supplier of LNG, if another LNG Power plant is installed at the Kerawalapitiya premises, NFE will he given the right of first refusal to supply LNG for any other plants that may he developed at Kerawalapitiya to operate on LNG.
5.4. At the same time, in line with the FA while the Gas Supply Agreement's (GSA's) will be for a period of 5 years and the GOSL has the option to extend the GSA for another additional term which is to be informed prior to the end of the 4th Year.
5.5. The NFE's pricing will be based on the following two options with the GOSL/operators, being provided the option of choosing one of the formulae: =Henry Hub •115% +5.05/MMBtu or =JKM +USD 1.15/MMBtu or Any other suitable formula such as Brent based formula to get the best price. The GOSL will not be required to pay any charges including transportation charge, other than the above formulae to ensure the availability of LNG up to the FSRU.
5.6. The NFE will bear the total cost of the development of the Terminal Project as noted in the FA and which includes the Floating Storage Regasification Unit (FSRU), the Mooring system, the supply pipeline and the related facilities and infrastructure.
5.7. Any cost overruns at the Terminal will be borne by the NFE and will have no impact on the prices proposed. NFE also has agreed to provide Liquidated damages should the Terminal Project exceed 12 months as agreed in the FA.
5.8. At the same time, to facilitate the Proposal its amendments including the Terminal project, the GOSL will have to facilitate the NFE to procure including such authorisations, permissions as required.
6.1. This entire proposal and its amendments and the Supply of LNG, when analysed yields the following benefits:
6.1.1. NFE has offered Fixed Capacity Charge on the Terminal facilities at USD 1.45 per MMBtu for total gas volume of 175 MMBtu for 5-year term. This will result in the CEB incurring on average of around USD 50.75 Million per annum. However, if the announced fixed charge for the FSRU and the Pipelines from the existing tender that is being processed is taken into account the CEB will have to incur a cost of around USD 125.7 Million per annum as the fixed charge for first 5 years based on announced fixed charge at tender opening amounts to USD 3.11 /MMBtu. (for FSRU Terminal USD 2.3388 / MMBtu + pipeline USD 0.56998/ MMBtu + and additional fuel cost estimated USD 0.20/MMBtu at 60% usage of FSRU Capacity [at 80% this would be over 0.25 S/ MMBtul] ). As such the NFE proposal will result in a saving of on average USD 75 million per annum during the 5-year contract period when compared with the aforementioned proposal, thus saving USD 375 M for five years. CEB's FSRU Tender has guaranteed Minimum Guaranteed Off take (MGO) of 202 million MMBtu for 5 year period.
6.1.2. The Terminal Project which includes the pipelines, while at present is not envisaged to connect the Kelanitissa Power plants, NFE has however agreed to extend the Pipeline should the GOSL request the NFE to do so at no extra cost. As such, the fixed charge of USD 1.45/MMBtu for the NFE facilities, will also not increase due to the extension of the pipelin
6.1.3. The NFE has informed that including due to the deviations in the Heat rate from their assumption and having considering degradation taken place with HFO operations for 12 years, it could be difficult to adhere with Clause 3.1 (b) of the FA which will result in a deviation from the agreed USD 9.9 cents/kWh being the cost of generation (total tariff) at the WCPL
6.1.4. However, the NFE's proposal including the terms on the supply of gas and the Terminal charges has resulted in the 5-year average cost of generation at the WCPL (total tariff) being at USD 12.32 cents/kWh per annum, (at 55% plant factor and discounted at 5%), where the energy charge would he USD 8 cents/kWh. The 5-year average cost of generation (total Tariff) based current HFO prices (Rs 70/Litre), is USD 13.79 cents/kWh. Accordingly total tariff with LNG operation is 11% cheaper than operating with HFO. However, should the WCPL plant be provided LNG through the terminal of CEB's FSRU tender with the Fixed charge around USD 3.11/ MMBtu as noted in paragraph 6.1.1, then the WCPL will make no savings in energy charge with LNG and will be better to operate on Heavy Fuel Oil (HFO), where the only benefit would be that LNG will be a cleaner energy than HFO.
6.1.5. At the same time the NFE proposal has enabled the Sobadhanavi Power Plant to be able to operate with 5 year average energy charge of USD 5.83 cents/ kWh while cost of generation (total tariff) is around USD 7.18 cents/ kWh (at 55% plant factor and discounted at 5%). Above energy charge of USD 5.83 cents/kWh is comparable to Coal based generation cost.
6.1.6. When the average cost of generation of a unit of electricity is taken into account, subject to the current policy framework including the non-expansion of the Coal Power generation capacity in the country and the aggressive push for the expansion of the renewable capacities and the realistic inclusion of such electricity capacities in the national grid during the 2023-2028 period, it appears that the average cost of generation (total tariff) at the WCTL and the Sobadhanavi with a total generation capacity of 650MW, will stand around USD 9.75 cents / kWh per annum under the NFE terms. However, if the terms as in Paragraph 6.1.1 is imposed (supply through FSRU terminal to be procured from tender), then the average cost of generation (total tariff) of WCPL will be increased by USD 1.21 cents/kWh. Thus the savings envisaged if there are no significant market disruptions and volatilities if the NFE proposal is accepted will result in the country being able to save at least USD 125 Million for 5 years from WCPL operations alone.
6.1.7. It is also noted that the Gas supply period has been limited to 5 years which will provide the GOSL the flexibility to decide on the gas supply given that the market is quite volatile at present. This will allow the GOSL to not only get a better price on Gas but also decide on the entire gas strategy having taken into account the many variables that could arise at that point.
7. At the same time, certain provisions in the FA as noted in Annexure 2 and noted above have now changed due to the practical issues arising in execution. Hence, the FA will have to be amended to reflect the same.
8. As such, the approval of the Cabinet of Ministers is sought for the following:
8.1. To authorise the Secretary to the Treasury to enter into a Share Sale and Purchase Agreement (SSPA) as noted in paragraph 4 which will include the sale of 40% of the shares of WCPL for a purchase consideration as noted in paragraph 4, the payment mechanism and to enable the provisions of the PA as amended, with the SSPA being cleared by the Hon Attorney General. This SSPA once signed will be submitted to the Cabinet of Ministers for ratification.
8.2. To authorise the Secretary to the Treasury to revise the PA as noted in paragraphs 1-7 with the clearance of the lion Hon Attorney General.
8.3. To authorise the Secretary to the Treasury enter into a Gas Supply Term Sheet as noted in paragraph 5.3 as part of the SSPA or as a standalone document and Gas Supply Agreements to enable the supply of Gas to WCPL and Sobadhanavi as noted in Paragraph 5.1 and 5.3.
8.4. To provide the Terminal Project the tax incentives as agreed in the FA and noted in the paragraphs 4.3 and 4.4.
8.5. To direct the relevant Ministers, Ministries and other agencies to facilitate the expeditious provision of the authorisations, licences and other approvals as noted in the CA and the SSPA to ensure the implementation of the Proposal and its amendments including the Terminal Project.
Basil Rajapaksa, MP Minister of Finance