Norochcholai coal power plant : Debt-to-equity swap deal ‘dangerous' - Expert

8 March 2013 03:02 am - 0     - {{hitsCtrl.values.hits}}

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A top energy expert recently warned of dire consequences of transferring the Norochcholai coal power plant back to the Chinese company in lieu of the massive loans obtained to construct the project and went on to describe a possible scenario of such a move as ‘dangerous'.

Dr. Tilak Siyambalapitiya, a leading energy sector consultant in the country with international repute raised serious concerns following the announcement by the media that the government is contemplating a possible option of a debt–equity swap as a solution to the existing financial crisis faced predominantly due to the country's energy sector.

“Converting debt to equity is very dangerous because the Return On Equity (ROE) could be extremely high of such a move and thus the whole purpose of putting up a coal power plant which was to bring down the electricity generation cost will be lost as the equity investor generally seeks higher return to compensate his higher risk,” he said.

According to capital structure theories of financing projects, cost of equity (or ROE) is higher than cost of debt (loan financing) because the equity provider bears a higher risk to that of a debt provider because debt is secured (through collateral) whilst the equity is not so.

According to D r. Siyambalapitiya, the more sensible and the professional approach to solve any financial difficulty faced by the Treasury in financing this debt is either to re-negotiate better payment terms with the Chinese fund provider or to approach another bank to take over this debt under more favorable terms.

“Given the fact that the massive cash flows generated by the Ceylon Electricity Board (CEB) (only second to Ceylon Petroleum Corporation), debt servicing is far from reality. Nevertheless as an alternative, the government could also negotiate for better terms such as a higher tenure to repay the debt if they cannot repay in ten years as initially agreed,” he quipped.

Media recently reported that that the government was in discussion with the relevant stakeholders and are seriously considering the transferring of the power plant which overshot the initial cost estimate of US $ 450 million to US $ 1,350 million as an option to the existing crisis.

However according to Dr. Siyambalapitiya, who was also a pioneer in getting the Norochcholai project off the ground amid various obstacles back in early 1990s as a then engineer at CEB maintains, by far coal power generates electricity at the least cost and went on to state that the generation cost of unit of electricity could be as low as Rs.6.00 per kWh, significantly lower than any other source of power generation.

“With the first year debt servicing cost of Rs.3.00 a unit of electricity kicks in (which CEB soon will have start paying) for the loan taken from China, the total generation cost (Rs.6.00) can go up to about Rs.9.00 or Rs.10.00 maximum.

Yet, this is still the better option than a debt-equity swap. In any case debt servicing cost will gradually become zero by the tenth year’, he quipped.

According to claims by the government the national average electricity generation cost is Rs.18.71 per unit (except the transmission cost & distribution cost). Nevertheless the government must bring down this generation cost to at least Rs.12.21 (allowing for network losses of 12 pc) if the industry to breakeven at the existing selling price per unit of Rs.15.50.

This can only be possible with completion of the balance two phases of Norochcholai along with Sampur/ Trncomalee power plants on time increasing the coal power component to 55 percent of the total power generation of the country from the existing rage of 40-45 as any other non-conventional renewable energy sources will only jack up the prices.
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