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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Coal Power

Coal Power

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1Coal Power  Empty Coal Power Fri Sep 02, 2011 8:47 pm

themask

themask
Manager - Equity Analytics
Manager - Equity Analytics
http://www.lankabusinesstoday.com/index.php?option=com_content&view=article&id=273:energy-talks&catid=43:opinions&Itemid=96

Will Norochcholai Reduce Electricity Bills?Sadly, the answer is NO price electricity reductions, or at least, NOT YET.

The first phase of the Puttalam Coal-fired power plant, more widely known as the Norochcholai power plant, will be officially commissioned today. Two more identical generating units are still being built on the same site, which will raise the total electricity production in Puttalam to a nominal 900 megawatt by year 2013. The first phase of the power plant commissioned today will produce at least 1500 million units of electricity this year, to serve 14% of the estimated total electricity production of 11,000 million units in the country. The power plant will now assist the operations planners to make the best use of the hydroelectric generating system, saving the water to meet the peak demand every evening, and to run the reservoirs at high storage levels to maximise their electricity output.

Arguments are many, as to whether the coal power plant is actually cheap and whether it will cause a reduction in electricity bills. Much has been said and written by professionals and politicians about power generation and its costs, in justifying or otherwise, of the coal power development program. Sri Lanka is still a country with relatively high electricity prices, even with government subsidies on fuel oil used for power generation, and a generous debt moratorium granted by the Government to the sector. Besides, Sri Lanka is one of the few countries that secure a high share of electricity from renewable sources of energy, particularly hydropower. In 2010, Sri Lanka produced 53% of her electricity requirements with hydropower and other renewables, thanks to significantly above-average rainfall that had other economic costs too. For year 2011, the forecast for renewable energy share is about 38%, and with the good rainfall seen in January, we may reach about 40%. There are some very significant issues with the cost of small renewable energy-based power plants built by the private sector, which must be dealt with sooner than later, to ensure the benefits of renewable energy would truly flow to the society.



So the question is, what is the cheapest way to produce the balance 60% of electricity ? At this moment, the world oil prices are in the range of USD 100 per barrel. It costs a further USD 4 for freight and handling into Sri Lanka. Even if the Ceylon Petroleum Corporation (CPC) does not charge for storage and delivery, and when port charges are added, it would be about USD 110 when a barrel of oil lands in the country. At these prices, even with the favourable exchange rates, a litre of fuel oil used for power generation costs Rs 68 per litre. This is a most conservative price estimate, neglecting many charges and costs of CPC. If this litre of fuel oil is input to the most efficient oil-fired thermal power plant in Sri Lanka, it will produce five units of electricity: this means a fuel cost of Rs 13.60 per unit.

As reported in the media, coal has been delivered to Puttalam at prices ranging from USD 110 to 160 per tonne. Coal prices have been fluctuating significantly over the past few months owing to flooding in Queensland, Australia. Since reaching a peak in the last week of January, the prices have been gradually declining. However, let us assume the highest price reported of USD 160 per tonne delivered. This means a kilogram of coal will be Rs17.60. This kilogram can produce only 2.5 units of electricity. So, the coal-fired thermal power plant at Norochcholai will produce electricity at a fuel cost of Rs 7 per unit. This is about half the cost of production from our most efficient oil-fired thermal power plant.

I have not added the capital recovery costs, which are generally higher for coal than for oil, provided both are CEB owned. The gap is typically about Rs 1 per unit of electricity, which is not significant when compared with the gap in fuel costs to produce a unit.

What is more ? Fuel oil carries about 2% sulphur, whereas coal carries a maximum of 1.2% only, and that too is planned to be cleaned before the combustion air is released to atmosphere. Emissions from 2% sulphur fuel from oil power plants is released in the vicinity of Colombo at low elevations of about 50 meters at most, whereas even the lower emissions at Norochcholai are released at a height of 150 meters.

After the current volatility in international coal prices owing to Australia flooding and oil price volatility owing to the incidents in the middle east settle down, and Sri Lanka’s own volatile political landscape infested with elections to administer oil prices that do not reflect the costs, too, settles down, the benefits of Norochcholai would be clearer.

Daily savings

Within 24 hours of HE the President declaring open the power plant, Norochcholai would deliver 6.8 million units of electricity. CEB will shutdown a number of its most expensive oil-fired power plants, and use electricity from Norochcholai. Based on the above costs for the cheapest (not the most expensive) oil power plant, just for 24 hours, Sri Lanka would save (13.60 – 7.00) x 6.8 = 45 million rupees. The actual saving would be much higher, because what will be shutdown would be the most expensive power plants, not the cheapest.

Can these enormous daily savings be passed on to electricity customers ? Sadly, this is not possible because at present, the electricity industry (under true oil pricing conditions and average rainfall) is still a loss making industry. Short-term cash surpluses are possible with good rainfall as recently experienced, but the electricity industry economic fundamentals are wrong, and yet to be corrected. With below average rainfall which is sure to come within a few months, we should still be prepared to see significant gaps between income and expenditure, and if reported accurately, CEB will have to report significant losses for year 2011. A solid and longer lasting solution to the power sector would require not only the full capacity of Norochcholai but the Trincomalee power plant too to be commissioned as soon as possible, for the sector to gradually move to profitability, while electricity prices would decline in real terms, giving benefits to customers. For that transsition to a truthful state of profitability, a road map is already in place and it remains to be seen whether politicians and officials will actually allow the financial recovery plan to be implemented.

Thus, if fuel oil was honestly priced at a very conservative price of Rs 68 yesterday, and if all customers were paying the true cost of electricity, then today, it would have been possible to give a price reduction of about Rs 1.50 per unit of electricity. Unfortunately, that is not possible: Fuel oil is priced at Rs 40 per litre, and out of the 5.1 million electricity customers in the country, nearly 4.5 million are paying below the cost of production and delivery. In terms of sales, 37% of electricity is sold significantly below the cost of supply. The subsidy enjoyed by customers paying below the cost, is Rs 38 billion this year, which is about three times the fuel cost savings this year owing to Nororchcholai. So, although a price reduction is not possible owing to these distortions, the country will have Rs 45 million or more saved per day, amounting to about Rs 16 billion for the year, which can now be used to reduce taxes or to invest on other infrastructure or services.

Project with the largest number of cancellations !

Sine 1980, a small group of engineers pursued the tasks of studying and responding to public concerns for 30 years on the concept of coal-fired power generation in general, and for 15 long years about Norochcholai itself. The project has been approved and cancelled many times over by various Presidents, Prime Ministers and Cabinets of Ministers. The most hilarious piece was aired on a Government television channel on 31st March 2002: “CEB Engineers have misled the previous Government and the present Government too, about the power project in Norochcholai. The Hon Prime Minister has called the Japanese Ambassador to his residence to inform him that the Government has cancelled the Norochcholai coal-fired power plant project and that Japanese funds are no longer needed”. The next day, the Prime Minister “ordered” CEB to call for offers from the private sector to finance, build and operate 200 megawatt of oil-fired thermal generating capacity. After facing such humiliation repeatedly for 15 years, and after humiliating friendly Governments who were willing to provide concessionary financing to build the power plant, at the end of a long 15 year struggle, the project is now a reality, to serve electricity to the country for at least another 35 years.

Norochcholai is a power generation project that nobody wanted, many politicians of all shades included ! Mentioning names would not be very pleasant. However, it must be stated that among the nine ministers who held the energy portfolio since 1980 to date, four were clear in their mind and actions about the importance of the concept and the project, and have always remained ardent and active supporters of the project, even when they move back to the opposition. I trust all the four of them will visit the power plant today. They have never cast doubts about the viability and economics of coal-fired power generation, and the need to forge ahead. In spite of many political, commercial and professional pressures to change the long term plans, Ceylon Electricity Board too has stood ground and strongly supported the concept and projects, with dedicated engineers doing a lot more than strictly official deeds, to ensure that electricity is available for this country in the longer term, at the lowest possible cost.

On this historic day, let us not forget Engineer E Carlo Fernando, the engineer, visionary and campaigner for coal power, who is no more. Let us also remember the resident of the area, who was misguided by various external elements and died after being shot at by police during a protest march, sometime in 1997. Let us also remember the three Chinese workers who died in construction accidents at the power plant site between 2007-2011.

By Dr Tilak Siyambalapitiya

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