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Shedding some light on the Yugadanavi deal

10 Nov 2021

  • The good, the bad, and the ugly of the agreement between the Government and the US
BY Sumudu Chamara Sri Lanka is going through one of its toughest times in recent memory, and the ongoing pandemic has worsened the economic hardships that the country was dealing with before the pandemic. While the people are clearly sacrificing their comfort to face this difficult time, the Government is also seeking new ways to save and make money. According to the Government, the agreement entered into by the Government of Sri Lanka, and the US-based energy infrastructure firm New Fortress Energy Inc. to convert the Yugadanavi Power Plant, which is also known as the Kerawalapitiya Power Plant, is also a measure taken to address the drawn out financial crisis the power sector has been facing during the past few decades. In return for this investment, 40% of the stake of the said power plant will be given to New Fortress Energy Inc. and Sri Lanka will refrain from purchasing liquefied natural gas (LNG) from any party apart from New Fortress Energy Inc. for a period of time. However, it is not that simple, as according to a number of groups that have opposed this deal, several clauses of this agreement can be used in a manner that is unfavourable to Sri Lanka. Moreover, despite the agreement not being publicised yet, several leading politicians representing the Government as well as a number of trade unions of the Ceylon Electricity Board (CEB) have joined forces against the agreement, demanding that the Government revoke the agreement.  Agreement and background Shedding light on the controversial agreement, CEB Chairman M.M.C. Ferdinando, at a meeting held at the President’s Media Centre (PMC) recently, said that the decision to sign the agreement in question with New Fortress Energy Inc. was taken amidst a number of monetary resources-related challenges faced by the country’s energy sector. He emphasised that currently, Sri Lanka is in an energy crisis, owing to losses, debts, and the increasing electricity demand. He added that a similar situation arose back in 2006, and that the CEB managed the main challenges that situation posed – i.e. generating power at a lower cost, and fulfilling the country’s power requirement – by taking measures to build power plants that generate power at a lower cost. He added that even though such measures addressed the situation back then, a similar crisis situation emerged again in 2020. According to him, the main reason that has led to this situation is Sri Lanka not increasing power generation to cater to the increasing demand. Expressing concerns about the financial difficulties Sri Lanka’s power sector is facing due to issues such as emergency power purchases from the private sector and high costs relating to coal and fossil fuel power generation, which have resulted in the CEB being billions of rupees in debt, he explained: “The situation is such that we have to either increase electricity charges, or we have to reduce power generation costs, and the Government opted for the second option. The Government has put forward proposals to reduce costs, and we (the CEB) have accepted it. One suggestion was reducing power generation activities by fossil fuel power plants, and building two natural gas-run power plants, instead. In addition, it has been suggested to increase ongoing renewable energy-based power generation up to 70%. According to our calculations, it will reduce the cost of power generation per unit of electricity to around Rs. 15.” Ferdinando said that it is in such a context that the operations relating to the Yugadanavi Power Plant commenced, and that after converting it to a LNG-run power plant, it is expected to reduce or halve the cost of power generation at the said power plant. He explained why the Yugadanavi Power Plant project is necessary and urgent, noting: “The CEB had entered into a power purchasing agreement with a private investor with regard to the Yugadanavi Power Plant. One of the conditions the investor had to agree to in order to get a loan was that it takes measures to convert the said power plant into a natural gas-run power plant within two years and that it cannot continue to generate power using diesel. The failure to do that would result in the Government having to pay the loan. It is after agreeing to that that the Treasury became a guarantor for that investor to get a loan. In this context, the Treasury is bound to ensure the facilities for this power plant to operate on natural gases by 2024-2025.” Meanwhile, Energy Minister and Cabinet Co-Spokesman Udaya Gammanpila, who has openly opposed the agreement the Sri Lankan Government signed with New Fortress Energy Inc. owing to certain conditions in the agreement, also spoke about the background of the tender procedure pertaining to the said agreement.  “In November 2019, right after this Government came to power, a proposal was submitted for several activities, including providing floating ships, installing pipe systems, and also ensuring LNG distribution with regard to this project. In February 2021, then Power Minister Dullas Alahapperuma and I decided to call for tenders as there were various proposals for this project. Tenders were called in February 2021. However, New Fortress Energy Inc., which talked about this project since November 2019, did not participate in the tender process. It may be because someone had told them that they do not have to submit a request, and that someone may have promised to ensure that New Fortress Energy Inc. gets the project. What is happening now is the fulfilment of that promise.” Speaking to the media about the objectives of the agreement, he further stated: “One of the objectives of signing this agreement with New Fortress Energy Inc. is to convert the 300 megawatts (MW) Yugadanavi Power Plant – which is currently running on oil but is planned to be converted into a natural gas-run plant – into a LNG power plant. To do this, Sri Lanka is agreeing to give a 40% stake to New Fortress Energy Inc. Also, Sri Lanka is agreeing to give 49% of the stake of a 350 MW LNG-run power plant that is scheduled to be built in the future. With both these power plants combined and the entire LNG-run power-generating system these projects include, New Fortress Energy Inc. will have the power to provide LNG to Sri Lanka forever.” Opposition  After it was revealed that New Fortress Energy Inc. had entered into an agreement with the Government without much publicity, many parties came forward, pointing out various issues about this little known agreement. In addition to Gammanpila, Industries Minister Wimal Weerawansa and Water Supply Minister Vasudeva Nanayakkara, and also Opposition parliamentarians, have criticised the Government and the agreement.  To look into the reasons on how the agreement with New Fortress Energy Inc. could be detrimental to the country, The Morning spoke to Gammanpila, who noted that he has clearly expressed his disapproval of the agreement as the Energy Minister and that his opposition is based on four grounds. He explained: “First and foremost, this agreement monopolises the LNG supply to our power sector for an unlimited period of time. Therefore, we have a huge problem in respect of attracting investors to explore our gas reserves which have been identified in the Mannar Basin. By now, we have identified around nine trillion cubic feet of potential gas reserves in the Mannar Basin. If a potential investor cannot sell the gas obtained from that area in the Sri Lankan market, which this agreement may lead to, they would be reluctant to come to Sri Lanka. This happens in a context where the world is slowly but surely switching from the petroleum industry to renewable energy, because of global warming. “Secondly, the economic climate in the entire world is very sluggish at the moment. Also, Sri Lanka’s economic profile is very unattractive at the moment because of these reasons, and therefore, finding an investor for the mining of our gas deposits is a huge challenge. Amidst these challenges, we will be unable to find a potential investor if they feel that they cannot sell in Sri Lanka what they obtain from our gas deposits. It will be almost impossible. Also, this monopoly would create a national security issue as well, because of the country we are helping to create this monopoly with. As we know, in the recent past, the US has been threatening us with economic embargoes, demanding us to take certain measures such as introducing a federal Constitution, and penalising our war heroes. One of the reasons is the Liberation Tigers of Tamil Eelam (LTTE) supporters having a great influence over the US. In this context, the US getting to create a monopoly to supply LNG to produce around 40% of our power requirement is an alarming situation. They would be in a position to influence the Sri Lankan Government to do certain things with the threat of placing the country in darkness by denying us a power supply. “Thirdly, there is of course a good governance issue here. There is a question as to why the Government decided to award the LNG supply project to New Fortress Energy Inc. at a time when there was an ongoing tender process for the very same project. That is why I once said that this is the first time in the history of Sri Lanka that a Government awarded a project to a particular company which has not even participated in the tender process for the project. “Fourthly, there is a diplomatic issue as well, because India, Japan, and South Korea had already expressed their interest in implementing certain parts of this project. In addition to them, a Pakistani and Chinese joint venture was able to secure a tender in the tender process. All these countries, namely Japan, India, China, South Korea, and Pakistan, are our friendly nations, and they have helped us a lot in the recent past. In contrast, the US has been going against Sri Lanka, especially at international forums such as the United Nations Human Rights Council (UNHRC). It is tantamount to awarding a project to an enemy nation, despite the fact that several friendly nations have expressed interest in the same project. So we are giving a wrong message to the international community that if a country wants to handle projects in Sri Lanka, that country has to harass us instead of being friendly.” He added that as the Energy Minister, he has sought to have a dialogue within the Government in this regard, which he said, had failed, and that it is after that, that he had decided to come out and discuss this matter openly.  “Since then, the Government has invited us to have an internal dialogue, and we have initiated it and therefore, we are hopeful that we will be able to convince the Government of this danger. We will try our best to persuade the Government to annul this agreement,” Gammanpila added. Meanwhile, CEB Joint Trade Union Alliance Convenor Ranjan Jayalal, explaining the present situation regarding the protests, told The Morning that they had arrived at a decision to launch a strike, even though an exact date has not been finalised. “We are currently discussing with all the relevant trade unions. On 5 November, we held talks with public and private sector trade unions, trade unions affiliated with political parties, and also with independent trade unions. We are members of the public as much as trade union members, and a strike that affects the electricity supply is a serious situation. I must emphasise that we did not enjoy taking this decision, and if we set a date for the strike, it is because we have to,” he noted. Adding that the said agreement is detrimental to the country, Jayalal urged the Government to refrain from forcing them to implement the decision they have taken to launch a strike. When questioned about the discussions with the Government, Jayalal said that the Government has not given any opportunity for a discussion. He added that even though a request was made for a discussion, only recently was an acknowledgement of the request made. “The Government does not have money and we acknowledge it. Because of those who ruled the country during the past 73 years, the country has gone bankrupt. This country has to be salvaged. Investments are necessary, and our opposition is not against the US firm. We don’t care about which country is involved. What we demand is that the Government do this in a transparent manner. What is necessary is selecting a company through the tender process, but the current agreement is an underhand deal,” he added. Further, he said that even a funeral welfare society practices more transparency when selecting members to posts. Government’s stance  Despite opposition and disagreements, most members of the Government who have commented on the agreement with New Fortress Energy Inc. have maintained that it is beneficial to the country, and that it is a timely and necessary investment. According to them, as CEB Chairman Ferdinando pointed out, this investment would fill a massive gap existing in the country’s power sector and will pave the way for low-cost and low-pollution energy generation.   According to Power Minister Gamini Lokuge, who spoke to The Morning, investments such as this will not only be beneficial to the country now, but will also encourage more investors to come. “It was the CEB that had the monopoly in generating and distributing power, but the governments that ruled the country in the 1990s decided to hand over thermal power plants to the private sector, and also purchase power from the private sector. As a result, several thermal power plants came into existence. When this happened, we had to spend around Rs. 25-30 per unit of electricity, and we sold electricity at a much lower price such as Rs. 16. It is in this context that a discourse was commenced about reducing the cost of power generation. The necessary discussions in this regard took place since 2010; however, they were not successful. In the recent past, the Ceylon Petroleum Corporation (CPC) called for tenders to instal a distribution pipeline to distribute LNG while the CEB called for tenders for the supply and storage of LNG. Both these tenders attracted only one bidder. Meanwhile, we got to know about this company (New Fortress Energy Inc.) and they agreed to provide the services we needed at the prices in the world market, without a tender process. Also, it expressed willingness to purchase 50% of the shares of the Kerawalapitiya (Yugadanavi) Power Plant. By 2035, Sri Lanka will receive the total ownership of this power plant. This is not an indefinite agreement. When they agreed to purchase the stocks in question for $ 250 million for the said time period, the LNG supply was also given to them. The only condition we have agreed to is that we do not purchase LNG from anyone apart from this company. It is not something unusual, and there have been similar conditions in large-scale deals. When a big US firm comes forward to invest in projects in Sri Lanka, it will encourage other investors also to think that Sri Lanka is a good place to invest,” Lokuge said, adding that this is a very beneficial project which will help the power sector to reduce electricity prices by around 50%. While these trying times definitely call for quick and economically beneficial action from any government, the importance of these decisions being judicious as well as quick cannot be underestimated. The mere need for investments does not warrant jeopardising the country’s economic freedom, which has a direct impact on all other freedoms, and agreements of this magnitude should have been subjected to a wide discourse. However, those who spoke with The Morning said that even a proper assessment of the risks cannot be conducted as the agreement has not been publicised. Although the Government has stated that it will present the agreement to the Parliament soon, in a context where it has already been signed, how much the country can do to address the alleged detrimental conditions, if any, is a question.


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