08 April 2010

Sri Lanka's Largest Power Plant, $650mn, 1000MW LNG Power Plant by Lanka Aloka Ltd to be Finalised

04th April 2010, www.nation.lk

In a bid to jumpstart Sri Lanka’s largest power plant - the 1,000 MegaWatt (MW) Liquified Natural Gas (LNG) private power project at Kerawalapitiya, the Lanka Aloka AB Pvt Ltd., has bade farewell to its lead developer of the project - Australia based Arc Development International, opting for an alternate funding source. The study on LNG’s feasibility is yet to be completed.

“There will be some groundbreaking developments with regards to the LNG plant in the very near future. The government hopes to expedite the project as energy security is vital for the country’s economic growth. Hopefully, it will be finalised by May,” a highly placed official of the Ministry of Power and Energy told The Nation Economist.

“As lead developer, Arc Development International had been unable to muster the necessary finances and was making too many demands from its local partner - Lanka Aloka. Accordingly, the Australian directors would be asked to step down while a new investor had expressed willingness to fund the project. This is not the first time Arc has created a problem,” a source close to the project said.

Earlier, in March 2009, Arc Developments International said it had been ‘forced to withdraw’ subsequent to ‘an irretrievable breakdown in relations with the project developer (Lanka Aloka AB).’

Arc said it was not possible to attract funds for the project as ‘the present project parameters have rendered attracting international investment and borrowings unachievable’ and that as such it was breaking off contact with Lanka Aloka.

Commenting on its withdrawal and comeback, Founder Director of Arc Development International, Tim Duignan, in an earlier interview with The Nation Economist, said that at the time his company withdrew they did not believe that the transaction expectations of the local project developer could be financed on the international market.

“Following our withdrawal the local partner (Lanka Aloka AB) reconsidered his position and invited us back in to the project and we were able to structure the transaction in a manner that we now feel can be financed through international investors and banks.”

Asked about the company’s relationship with Ceylon Electricity Board (CEB), Duignan said that the ‘CEB is supportive of the project and we are progressing well with them at present.’

Arc Development International said that Power Purchasing Agreement (PPA) negotiations commenced by May 2009 and although they hoped to close the deal by July 2009, the project never went through. With both parties unable to forge ahead even after a lapse of nearly one year, Lanka Aloka is speculated to have asked Arc International to step down recently.

However, raising the colossal Rs. 74,750 mn. (US $ 650mn) needed for the project would be a nightmare although the authorities are optimistic that the new lead developer would be capable of doing so.

Meanwhile, three independent studies by USAID, 2002, the World Bank, 2004, Japan International Cooperation Agency (JICA), 2006 found that LNG was not an economical source for power generation for Sri Lanka which was confirmed by research conducted by CEB.

Furthermore, the Ministry of Power and Energy opined that no merchant plant (such as the LNG plant) can proceed without the approval of the country’s utility watchdog - the Public Utilities Commission of Sri Lanka (PUCSL) as per the new Sri Lanka Electricity Act enacted in 2009 March, and sought the Attorney General’s opinion on it. However, with the Attorney General giving an opinion to the contrary, the project was given the green light.

The plant which is Sri Lanka’s largest power plant so far planned, would add a generation capacity of 500 MW under Phase One by 2011 while the remaining 500 MW would be added to the grid by 2012 under Phase Two.

Directors of Lanka Aloka AB Pvt. Ltd., are Former Navy Commander Daya Sandagiri, H. M. Nawarathne and Rathnasena Katawalage.

However, The Nation Economist learns that a feasibility study conducted by a Japanese technical expert on behalf of CEB is yet to be concluded.

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