Review of Policy on Shifting from Coal Power Generation to LNG Power Generation by Kanaga Gnana

August 2016

Review of Policy on Shifting from Coal Power Generation to LNG Power Generation Report of the Independent Panel of Experts Committee

Submitted to the Cabinet Committee on Economic Management Government of Sri Lanka

Review of Policy on Shifting from Coal Power Generation to LNG Power Generation Report of the Independent Panel of Experts Committee

Submitted to the Cabinet Committee on Economic Management Government of Sri Lanka

August 31, 2016

Independent Panel of Experts

Chairman Professor Sirimal Abeyratne Members Professor K.M. Liyanage Dr. Sumith Pilapitiya Professor Rahula Attalage Mr. K.D. Ranasinghe Professor Kumar David Convener Mr. Merrille G.A. Goonetilleke, Additional Secretary (Technical) Ministry of Power and Renewable Energy

ACKNOWLEDGEMENT

The Committee wishes to thank all personnel and institutions for the assistance extended to the Committee members in carrying out the study. The institutional support that the Committee received from the Ministry of Power and Renewable Energy (MOPRE), Ceylon Electricity Board (CEB), and Public Utilities Commission of Sri Lanka (PUCSL) are noteworthy. Some members of the Committee also carried out field visits to both Norochcholai and Sampur, and the Committee extends its gratitude to the CEB and Trincomalee Coal Company (pvt) Limited for the excellent logistic arrangements made facilitating these visits. The Committee wish to acknowledge and thank the following officials and personnel for accepting the invitation extended to them and submit their views before the committee: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Mr. Asoka Abeygunawardana, Chairman/Strategic Enterprise Management Agency Dr. Saliya Wikramasuriya, Director General/Petroleum Resources Development Secretariat Dr. K. Amirthalingam, Professor/University of Colombo Mr. D.D.K. Karunaratne, Additional General Manager (Transmission)/CEB Mr. J. Nanthakumar, Deputy General Manager (Generation & Transmission Planning)/CEB Mr. M.B.S. Samarassekara, Chief Engineer (Generation Planning)/CEB Mr. R.B. Wijekoon, Electrical Engineer/CEB Mr. T.L.B. Attanayake, Electrical Engineer/CEB Mr. Damitha Kumarasinghe, Director General/PUCSL Mr. Nalin Edirisinghe, Director/PUCSL Mr. Kanchana Siriwardane, Director/PUCSL Mr. K. Gnanalingam, Energy Consultant & Former AGM /CEB Dr. Janka Rathnasiri, Energy Consultant Dr. Tilak Siyambalapitiya, Energy Consultant Mr. Vidura Ralapanawa, General Manager, MAS Intimates Mr. Parakrama Jayasinghe, Former President/Bio Energy Association of Sri Lanka Mr. T. A. Wanniarachchi, President/CEB Engineers’ Union Mr. G.J. Aluthge, Committee Member/CEB Engineers’ Union Mr. S.H. Midigaspe, Committee Member/CEB Engineers’ Union Mr. M.L. Weerasinghe, Committee Member/CEB Engineers’ Union

Independent Panel of Experts Committee 31 August 2016

iii

CONTENTS

EXECUTIVE SUMMARY .......................................................................................................................... v 1. INTRODUCTION .............................................................................................................................. 1 2. ELECTRICITY DEMAND AND SUPPLY ...................................................................................... 3 2.1 Electricity Demand .......................................................................................................................... 3 2.2 Electricity Supply ............................................................................................................................. 7 2.3 Cost of Electricity Generation ......................................................................................................... 9 3. POWER GENERATION: COAL VERSUS LNG............................................................................ 10 3.1 Fuel Costs ...................................................................................................................................... 10 3.2 Investment costs ........................................................................................................................... 11 3.3 Levelised Cost Comparison............................................................................................................ 12 3.4 Coal and LNG Comparison ............................................................................................................. 12 4. FROM COAL TO LNG AT SAMPUR ........................................................................................ 20 4.1 Anticipated Power Shortage ......................................................................................................... 20 4.2 A New Site for LNG? ...................................................................................................................... 22 4.3 Way Forward ................................................................................................................................. 23 5. SOCIAL AND ENVIRONMENTAL COSTS ................................................................................. 25 5.1 Environmental Impacts of Coal Power Plants ............................................................................... 25 5.2 Health and Social Impacts of Coal Power Plants ........................................................................... 26 5.3 Environmental and Health Impacts of LNG ................................................................................... 29 5.4 Climate Impacts of Power Generation .......................................................................................... 30 5.5 Sri Lankaâ&#x20AC;&#x2122;s Experience with Coal Power ........................................................................................ 31 5.6 Proposed Coal Fired Power Plant in Sampur................................................................................. 33 6. TRANSITION COSTS AND RECOMMENDATIONS ................................................................... 37 6.1 Economic Consequences ............................................................................................................... 37 6.2 Financial Costs ............................................................................................................................... 38 6.3 Social and Environmental Impact .................................................................................................. 39 6.4 Policy Recommendations .............................................................................................................. 40 APPENDIX ............................................................................................................................................ 42

EXECUTIVE SUMMARY

The Government of Sri Lanka has decided to change the proposed Sampur Coal Power Plant to a Liquefied Natural Gas (LNG) Power Plant; what would be the cost implications of this decision? The objective of the study is to review the cost implications of this policy decision of the government to change the source of power generation from coal to LNG and to draw relevant policy recommendations.

The cost implications of the policy decision are three fold: (a) economic cost to the nation in terms of growth implications arising from possible delays in power generation and changes in cost advantage (b) differences in financial cost of power generation arising from the choice of LNG instead of coal which are subject to both external and internal factors (c) environmental, health, and social costs between coal and LNG as revealed by technical analyses and stakeholder responses.

Historical data confirm that electricity demand and economic growth moves closely due to both ex-ante factors (as industry and commercial demand for electricity pushes economic growth) and ex-post factors (because income growth pushes household demand for electricity). According to Ceylon Electricity Board (CEB), electricity demand will double within 15 years (2015-2030) by growing at over 5 percent per annum. As the country is at the doorstep of a take-off with an acceleration of its economic growth momentum, the corresponding electricity demand is expected to rise even further.

The delay in the implementation of the Sampur coal power plant, and its delay further extended by the anticipated transition from coal to LNG will be important factors underlying a possible power shortage in electricity generation in the medium term. Thus, power shortage could be a constraint on achieving potential economic growth. This may be mitigated by: (a) focusing on the other short-term generation projects planned by the CEB, until the longterms plans are implemented (see point 6 below) (b) strengthening the current initiative of purchasing renewable energy from household and other sectors (c) encouraging household and other sectors to fix solar power panels to all new buildings to supply surplus of electricity generated to the national grid.

Sri Lankaâ&#x20AC;&#x2122;s average electricity tariffs are considered to be high by international standards even after the reduction of tariffs recently; this is one important factors underlying the erosion of cost competitiveness in the economy weakening investor confidence. When electricity generation from the planned coal-fired plant or other energy sources as planned by CEB are not available within the next five years of time horizon, a feasible short-term alternative would have to be oil; apparently this will raise the cost of power generation and hurt the cost competitiveness which have to be managed internally.

While short-term measures as outlined above are underway, long-term plans to expand electricity generation ensuring energy security in a growing middle-income economy need to be implemented without delays. Given the policy decision to shift from coal power generation to LNG power generation at Sampur, following policy options are recommended: (a) Sampur should be retained as a suitable site for LNG power generation. Under the present circumstances, both technical and financial analyses may suggest the opposite, pointing to it as a costly option. Nevertheless, a large-scale LNG power plant at Sampur is expected to play a major role in contributing to the regionâ&#x20AC;&#x2122;s potential economic growth and development within the next 10-20 years and in transforming the farming and fishing communities who will undertake jobs in the modern industrial and services sectors. (b) Coal may be a potential source of power generation in the future energy mix, provided that ground work needs to be prepared by evaluating and verifying its overall credibility. In this respect, in addition to the cost advantage of coal, the environmental and social acceptability needs to be enhanced. One of the important and urgent measures is to improve environmental management at Norochcholai (see point 14 below).

Sri Lankan policy making is passing through an important turning point at which it needs to renew its investment climate and improve business confidence. After establishing and operating Trincomalee Power Company Limited as a joint venture of CEB and NTPC, winding up of 5 years of preparation to install a coal power plant should not have repercussions damaging the countryâ&#x20AC;&#x2122;s effort in reviving its business environment. Given the policy change, it needs to be a shifting of the source of power generation rather than abandoning business operations; this needs to be carried out through a proper negotiation process.

Common perception is that coal is cheaper than LNG. Financial cost of power generation, however, varies due to external factors (world market prices and the global trends in using fossil fuel categories) as well as due to internal choices made in terms of economic and technological factors, including the choice of source markets and purchase agreements. Within the fossil fuel category international coal prices have remained typically low and less-volatile compared to LNG prices which have moved closely with oil prices. Internal choices can result in cost differences due to different source markets (for either coal or LNG), plant location, scale of operations, and differences in technology.

The comparison of the Levelised Costs of Electricity (LCOE) from Coal and LNG involves a number of parameters that are linked to technical, economic, environmental and social aspects. Under different assumptions and price scenarios, as our rough estimates revealed, LCOE between coal and LNG differs. Even in the scenarios where coal appears to be financially cost effective plant efficiencies are low, and thus it is important for plant efficiencies of the order of 38% for the purpose of comparing LCOE as one of the necessary elements in making decisions for selecting scenarios for detailed analyses.

10.

Although it could be argued that one fuel type is better than another on the cost advantage alone, power generation cannot be treated in isolation due to its developmental issues, presence of externalities â&#x20AC;&#x201C; both positive and negative, long-term implications, and locational implications on land and environmental values. Besides, even the international prices can change due to bilateral and multilateral agreements. Therefore, even power generation planning needs improvements to be competitive at international standards.

11.

Social, health and environmental impacts of transition from coal to LNG appear to be beneficial to the nation. This is revealed by the analysis based on technical impact assessments, and observations of local conditions including environmental management issues and international trends.

12.

The long-standing dispute over power generation causing issues in the power sector can be avoided by moving away from “fixed planning” towards “indicative planning” at CEB. Fixed planning entails achieving “pre-determined targets” under given assumptions and circumstances; the entire plan is likely to fail when the given assumptions and circumstances change over time. Indicative planning with its “rolling” character (i.e. frequent revisions under changing assumptions and circumstances) presents alternative options with adequate flexibility so that the government can choose the best feasible option.

13.

In facilitating a transition from “fixed” to “indicative” planning, it is necessary to strengthen and expand the research and development (R&D) activity by incorporating expertise knowledge from multi-disciplinary and cross-cutting subject areas encompassing electrical engineering, mechanical engineering, civil engineering, environmental science, health science, and energy economics. It is the R&D activity which would inform the appropriateness of different technologies, which are technically sound, economically efficient, commercially viable, environmentally sensitive and politically acceptable.

14.

Local opposition to coal power generation in general, and the proposed coal power plant at Sampur has been intensified in the recent past largely due to poor track record of environmental management at Norocholai – the only coal power plant in Sri Lanka. It is true that neither the “worst” nor the “best” cases can be used to justify any position. Nevertheless, emphasis on improving environmental management at Norochcholai is a key issue that requires action.

vii

1. INTRODUCTION According to the Ceylon Electricity Board (CEB), electricity generation is expected to increase at an average rate of over 6 percent within next 5 years (2016-2020), and over 5 percent within next 20 years (2016-2036). This is to be achieved with new additions to coal power so that the share of coal in the energy mix will be increased from the current level of 23 percent in 2015 to 40 percent by 2020 and 62 percent by 2034. The first coal power plant of 900MW - Lakvijaya Power Plant in Norochcholai, was fully operational since 2014. The project for the second coal power plant of 500MW in Sampur was scheduled to commence in 2011. Trincomalee Power Company Limited (TPCL) – a joint venture of CEB and National Thermal Power Corporation (NTPC) of India was incorporated in 2011 for implementation and operation of the plant, which was scheduled for 2020. In spite of initial preparations to commission the Sampur power plant in 2013, the project has delayed to date and is likely to delay further. The Government of Sri Lanka (GOSL) has decided to change the proposed Sampur Coal Power Plant to a Liquefied Natural Gas (LNG) Power Plant. What are the consequences of this decision? How costly and critical these consequences would be in terms of Sri Lanka’s energy supply, electricity costs, economic progress, society and environment? What would be the policy recommendations to overcome or mitigate the negative consequences? Objective The study is aimed at a policy review of the decision of the government to change the source of power generation from coal to LNG and to draw relevant policy recommendations. The review is based on an assessment of the potential costs and benefits of the policy decision with special reference to the proposed coal power plant at Sampur. Specific objectives are as follows: 1. 2. 3. 4.

To review economic cost to the nation in terms of growth and development To assess financial costs between coal and LNG under different cost scenarios To evaluate environmental, social and health implications To provide policy guidelines and recommendations

Questions There are specific questions to answer from all relevant aspects of financial, economic, technical, social and environmental perspectives: First, what is the economic cost of the government’s policy decision to the nation in terms of its growth implications? Second, what would be the financial cost implications in general and in particular by taking the Sampur case into account? Third, what would be the cost implications in terms of environmental, social and health issues of the decision? Finally, given the reasonable answers to the questions above, what would be the policy implications to minimize costs and maximize benefits?

Methodology The study is based on the review of available reports and documentary evidence, interviews with key informants representing different stakeholders of the energy sector, and the observations of the Committee members. Thus, the study is based on a review of the existing literature and views of the different stakeholders, analyzed and supplemented with insights and observations of the Committee members. The key informants include mainly the representatives from Ceylon Electricity Board (CEB), Public Utilities Commission of Sri Lanka (PUCSL), and other institutes of the country; representatives from trade unions, environmental activists, expertise in the field, and people of the respective areas. The policy review undertaken in the study is limited to disclose both cost implications of the governmentâ&#x20AC;&#x2122;s policy decision enabling the government to take precautionary actions as an when necessary.

2. ELECTRICITY DEMAND AND SUPPLY This section provides an analysis of the electricity market in Sri Lanka, taking its demand and supply conditions into account. Sri Lankan economy has elevated to lower middle income category and expectations of accelerating its growth momentum continues to remain strong. Economic status and economic progress of the country are important factors underlying electricity demand so that the supply of electricity with proper timing at reasonable cost and high quality need to be ensured at policy level. Failures in the electricity market resulting from demand â&#x20AC;&#x201C; supply gaps and inefficiencies will constrain growth and development and erode cost competitiveness. Given the nature of the industry these failures cannot be corrected in the short-run.

2.1 Electricity Demand Growth of electricity demand moves closely with real GDP growth. Demand for electricity has been growing at an average rate of 5.8 percent per annum, while real GDP at an average rate of 5.7 percent per annum during the last 16 years since 2000. Rise and fall of annual growth rate of real GDP has been followed by similer movements in the rate of growth of electricity demand too; negative growth of GDP in 2001 was associated with extended power cuts up to 8 hours a day; slump in economic growth due to global financial crisis in 2009 was also accompanied by a sharp decline in demand for electricity.

Figure 1: Annual Rate of Growth of Real GDP and Electricity Demand 2000 â&#x20AC;&#x201C; 2015 14

Real GDP

Demand for electricity

8 6 4 2 0 -2

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

-4

2000

Rate of Growth (%)

Source: DCS data

Electricity Demand will double within next 15 years Real GDP growth is estimated to rise from 4.8 percent in 2015 to 7.0 percent by 2018.1 Along with this, electricity demand will also continue to rise at a higher rate than it was in the past. According to CEB estimates, total electricity demand will double within next 15 years reaching from 11516 GWh in 2015 to 25598 GWh in 2030; it will continue to grow at an annual average rate of 6.2 percent within next 5 years, and 5.8 percent within next 10 years. At a time that Sri Lanka is setting the stage for achieving and sustaining higher growth momentum in the years to come, electricity demand should not be a constraining factor which is difficult to overcome in the short term. If the country is ready to accelerate its growth momentum within the next few years, electricity demand is due to rise above what is anticipated and estimated under the present circumstances. Table 1: Electricity Demand Forecast Demand Peak demand (GWh) (MW) Demand forecast 2015 11516 2401 2020 15681 3131 2025 20033 3836 2030 25598 4805 2035 32184 5934 Annual average growth rate (%) 5-year average 6.2 5.3 10-year average 5.8 4.9 20-year average 5.3 4.7 Source: CEB data Ex-ante and Ex-post Effects of GDP growth on Electricity Electricity demand moves closely with the rate of GDP growth because of both ex-ante and ex-post effects of GDP growth on electricity demand: Industry demand for electricity rises as ex-ante effect of economic growth, while household demand for electricity rises as ex-post effect of economic growth. Countryâ&#x20AC;&#x2122;s overall per capita electricity consumption has increased to 562.1 kWh in 2015 from 272 kWh in 2000 while Per capita income of the country has increased to US$ 3,924 in 2015 from US$ 869 in 2000. There is no significant deviation of sectoral demand for electricity from GDP growth. Particularly, demand for domestic purpose (household sector), industry purpose (production sector), and general purpose (commercial sector) also moves closely with the rate of GDP growth. Apart from GDP growth, however, changes in electricity tariffs, demand side management (DSM) policies, increased energy efficiency of electrical appliances, and increased access to electricity by low-income households can also result in variations in electricity demand.

CBSL, Annual Report 2015, Central Bank of Sri Lanka, p23.

Figure 2: Growth of Electricity Demand by Purpose and Real GDP Growth Domestic

Industry

20.0

15.0

15.0 10.0 5.0

5.0

Per cent

10.0

0.0 -5.0

-10.0

-15.0

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2009

2010

2011

2012

Domestic

2013

2014

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

2015 2016

2009

Real GDP Growth Rate

2010

General Purpose

2012

2013

2014

2015 2016

Real GDP Growth Rate

Hotels

20.0

15.0

15.0 10.0 Per cent

10.0 Per cent

2011

Industry

5.0

0.0

5.0 0.0 -5.0

-5.0

-10.0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2009

2010

2011

General Purpose

2012

2013

2014

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

2015 2016

Real GDP Growth Rate

2009

2010 Hotels

2011

2012

2013

2014

2015 2016

Real GDP Growth Rate

Sources: Ceylon Electricity Board and Department of Census and Statistics

Sri Lanka among Asian Countries: Electricity Consumption Sri Lanka’s per capita electricity consumption has doubled over the past 15 years since 2000, but continued to remain much lower than that of most of the Asian countries. Sri Lanka’s per capita electricity consumption accounts for 562 kWh in 2015, compared to over 5000 kWh in advanced countries such as Singapore, South Korea, Hong Kong and Japan, and over 2000 kWh of some developing countries such as Malaysia, Thailand, and China. It is not surprising that development status of the country is an important determinant of electricity consumption. Apart from that high electricity tariffs in Sri Lanka has also played a major role in suppressing the growth of electricity demand of the country. Prior to electricity tariff reduction in 2014, Sri Lanka was reported to be a country with highest average electricity tariff rate with US$ 25 cents per kWh including its subsidy component, according to a report of International Energy Consultants (2012).2 With a recent decline in electricity tariff after commissioning Norochcholai coal power plant, electricity consumption has spurred in 2015. Even after the reduction electricity tariffs, Sri Lanka continues to be a high-tariff country according to the tariffs applicable to “medium level customers” in 2015. Moreover, tariff discrimination among different purpose of usage in Sri Lanka reveals that electricity tariffs penalize business activities against consumption activities.

International Energy Consultants (2012). Regional Comparison of Retail Electricity Tariffs, URL: www.energyconsultants.com.au

Figure 3: Per Capita Electricity Consumption in Selected Asian Countries 2015

Source: World Development Indicators

Figure 4: Electricity Tariff in Selected Countries for Medium Level Customers 2015 35 Household

Commercial

Industrial

Average Unit Price (LKR)

30 25 20 15 10 5 0

Source: data from Tilak Siyambalapitiya

Electricity tariff together with its quality is a major determinant of international cost competitiveness of the economy affecting production, distribution and consumption. The issue gets aggravated when the electricity usage for industrial and commercial purpose is discriminated in favour of domestic usage; this is clearly visible in electricity tariff discrimination practice in Sri Lanka, compared to most

of the other countries in the region. However, one important element that determines the countryâ&#x20AC;&#x2122;s cost advantage among many other countries in the region is the quality of electricity in Sri Lanka; the country has been able to manage its electricity distribution by minimizing the frequency of power failures.

2.2 Electricity Supply Electricity supply in Sri Lanka is primarily sourced from hydro, coal and oil. Non-conventional renewable energy (NCRE) which includes wind, solar and biomass (dendro) still remains at early stage of development, while the long-term reliance of power generation on renewable energy is emphasized in policy documents of the country. Table 2: Installed Capacity (MW) as % of total capacity Total capacity (MW) Hydro Fuel oil Coal NCRE 2000 63.9 35.2 0.8 1779 2005 85.5 8.2 6.3 1411 2010 42.8 49.3 7.8 2817 2011 38.3 44.3 9.5 7.8 3148 2012 41.0 40.4 9.1 9.6 3312 2013 40.5 39.7 8.9 10.9 3362 2014 35.0 30.9 22.9 11.2 3932 2015 35.8 29.0 23.4 11.9 3850 Source: CEB data Sri Lanka, which had predominantly hydro based electricity generation system till mid-1990s, has gradually shifted to thermal power until coal power generation started in 2011 to meet the rising demand for electricity; the former is uncertain due to its vulnerability to weather conditions, and the latter expensive eroding the cost competitiveness of the economy. This peculiar mix of installed capacity was more a result of short-term crisis management than an outcome of a long-term power generation planning. While the long-term planning was subject to lengthy debates and discussions along with institutional capacity constraints, spontaneous power crises led CEB to resort to short-term crisis management strategies. The total installed capacity is 3,850 MW in 2015, while more than a quarter of it exceeding 1000 MW has been added only during the last 5 years. This is mainly due to the commencement of operations at Norochcholai coal power plant in 2011. However, hydro power still accounted for 37.5 percent of electricity generation, while thermal-based power has declined considerably to 17.4 percent easing the cost of electricity generation; financial saving of the cost due to this has been estimated by CEB as Rs. 250 million per day. Thus more than half of installed capacity still depends on two risky sources compelling the countryâ&#x20AC;&#x2122;s need to diversify the fuel mix. The status of the power mix also highlights the importance of having a flexible tariff policy to ensure financial viability of electricity generation.

Table 3: Electricity Generation (GWh) (2000-2015) as % of total Hydro Fuel oil 2000 49.9 49.4 2005 36.2 60.6 2010 46.6 46.6 2011 34.9 49.9 2012 23.1 58.8 2013 50.3 27.4 2014 29.4 34.8 2015 37.5 17.4 Source: CEB data

Coal 9.0 11.9 12.3 25.9 33.9

NCRE 0.7 3.2 6.8 6.3 6.2 9.9 9.8 11.2

Total (GWh) 6322 8766 10715 11528 11801 11898 12356 13089

At the same time it is observed that most of Asian countries have shifted toward Coal-based and Natural Gas (NG)-based power generation since 1990s. There is a notable shift towards NG while Coal also continues to remain major source of electricity generation in many countries in Asia. Among the selected countries in the list it is only Sri Lanka which has not yet resorted to NG as alternative source of power generation. This further confirms the fact that Sri Lanka has eroded its economic competitiveness by resorting to high cost sources of electricity generation, and remained vulnerable to external shocks among many Asian countries.

Table 4: Electricity Production and Sources in Asia Selected Countries - 1990 & 2012 (Billion kWh) Country Bangladesh China Hong Kong India Indonesia Japan Korea Rep. Malaysia Myanmar Pakistan Philippines Singapore Sri Lanka Thailand Viet Nam

Total Production (Billion kWh) 1990 2012 7.7 49.0 621.2 4,994.1 28.9 38.8 292.7 1,127.6 32.7 195.9 842.0 1,034.3 105.4 534.6 23.0 134.4 2.5 10.7 37.7 96.1 26.3 72.9 15.7 46.9 3.2 11.9 44.2 166.6 8.7 122.8

Coal % of Total 1990 2012 1.8 71.3 75.8 98.2 70.3 65.5 71.1 29.9 48.7 13.8 29.3 16.8 44.8 12.7 41.5 1.6 7.2 0.1 0.1 7.3 38.8 11.8 25.0 20.0 23.1 17.9

Natural Gas Oil Hydropower Other % of Total % of Total % of Total % of Total 1990 2012 1990 2012 1990 2012 1990 2012 84.3 85.1 4.3 11.5 11.4 1.6 0.4 1.7 7.9 0.1 20.4 17.5 4.9 27.3 1.8 2.1 0.2 3.4 8.3 4.5 2.0 24.5 11.2 2.1 7.4 2.2 23.2 46.9 16.7 17.5 6.5 3.4 4.9 21.2 38.4 28.1 17.5 11.4 8.1 25.5 6.7 9.1 20.9 17.9 4.0 6.0 1.4 50.2 28.9 24.1 46.6 45.9 4.5 17.3 6.7 0.7 39.3 20.0 10.9 0.5 48.1 72.4 33.6 28.2 20.6 35.9 44.9 31.1 0.8 4.7 26.9 47.2 5.8 23.0 14.1 22.4 14.4 84.3 98.9 13.0 1.1 2.7 0.2 59.0 99.8 27.7 1.6 40.2 70.3 23.5 1.5 11.3 5.3 3.0 0.1 35.8 15.0 2.7 61.8 43.5 0.1 Source: Statistical Database System, Asian Development Bank

2.3 Cost of Electricity Generation During the period of 2000-2013, unit cost of electricity generation remained greater than the average unit tariffs, reflecting that CEB was among one of loss-making public enterprises; in fact according to the Annual Report of the Ministry of Finance (2012) it was among the biggest loss-making public enterprises.3 Last few years after 2013, this has changed as unit cost remained lower than the average unit tariff; this appears to have been mainly a result of change in energy mix with cheaper coal power generation after the commissioning of the Norochcholai power plant. However, the issue of lossmaking nature of the CEB at least partially points to the importance of policy emphasis on low cost power generations systems and flexible electricity pricing policy. Figure 5: Average Cost and Tariff of CEB 2000-2015 25

Average Cost Average Tariff

Rs./kWh

20 15 10 5

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

Source: Ceylon Electricity Board

Ministry of Finance and Planning (2012). Annual Report 2012. Colombo: Ministry of Finance and Planning, Government of Sri Lanka: According to the report, CEB was categorized as one of the biggest 3 loss-making public enterprises of the country along with Sri Lankan Airlines and Ceylon Petroleum Corporation.

3. POWER GENERATION: COAL VERSUS LNG This Section deals with the economics of the choice between coal and natural gas as long-term power generation options emanating from their technical and financial comparisons. The transitional policy issue of changing from coal to LNG at the proposed Sampur power plant and its cost implications are addressed in the next section. This general discussion is relevant to the importance of getting

a fuel mix as a strategic objective and as a safeguard against price volatility ensuring energy security of the country.

3.1 Fuel Costs A cost comparison between coal fired electricity and LNG obviously varies with fluctuations in fuel prices in the world market. In general, fossil fuel prices in the world market are influenced by economic growth of the world (particularly in large economies), fossil extraction technologies (affecting cost of production), speculations in financial and commodity markets, developments in renewable energy, and supply-side shocks. Within the fossil fuel category, according to historical world price data coal prices remained low and less-volatile compared to LNG prices which have moved closely with oil price fluctuations.

Figure 6: Global Coal and LNG Price Movements 2000 â&#x20AC;&#x201C; 2015

Even though coal continued to remain as the largest cheaper source of electricity generation in the world, it appears that countries increasingly prefer to move into LNG at least until renewable energy becomes a widely available and commercially attractive option. This leaves the space for widening the price gap between coal and LNG prices in the future, though at present LNG prices remain at a historically low levels. According to US Energy Information Administration (2016),4 as global demand for coal shows sluggish performance in the years to come, coal supply is also expected to show a slower growth. In contrast, global LNG demand and supply are projected to rise gradually, but its impact on the LNG prices is expected to remain minimal. Coal prices have and are likely to remain fairly stable at between $60 and $80 (CEB, World Bank, and global statistics) per metric ton for the foreseeable future. While LNG price has fluctuated significantly in the recent past and there is a difference between US (lowest), European (intermediate) and Japanese (high) prices. The volatility of gas prices in the last eight years has been remarkable, varying from a high of over $16 per million BTU in Japan to below $4 per million BTU in the US. Forecasts for about 10 years into the future range from $5 per million BTU for USA, to over $ 11 per million BTU, CIF Japan. One of the up to date figure available to the Panel is $7.90 per million BTU including regasification and delivery at the point of firing at gas plants in India in mid-August 2016. It is difficult to be certain, despite the gush in supplies from US â&#x20AC;&#x2DC;frackingâ&#x20AC;&#x2122; (the process of injecting liquid at high pressure into subterranean rocks through boreholes to force open existing fissures and extract oil or gas) that current very low prices will be sustained into the future. All market analysts speak of the great difficulty of predicting future gas, oil and coal prices. However there is safety in comparative estimates since fuel prices tend to move up and down in tandem except when there is a technical breakthrough such as fracking. It would be safe to stick with the World Bank and CEB (submissions to Panel) estimates of $66 to $ 80 per metric ton of coal and $7.0 to $8.5 including freight for a million BTU of LNG including delivery and re-gasification.

3.2 Investment costs In general for large power projects with proven technologies investment cost comparison is stable and globally reliable. The installed capacity cost of a modern high technology (super critical) coal power plant is about US$ 1.85 million per MW and $1.10 million for a more conventional technology. Gas fired combined cycle power plant will cost about US$ 0.9 to 1.0 million per MW (CEB data in line with World Bank and global statistics).5 In addition LNG requires a special purpose harbour and re-gasification of the frozen liquid to a gaseous state prior to firing in turbines. The cost of a land based LNG harbour and terminal facilities will be close to US$ 500 Million while a Floating Storage and Re-gasification Unit (FSRU) can be set up for less 4

US Energy Administration Information, International Energy Outlook 2016, Washington DC. Numbers in this range and calculations based on that are used in the computations are presented in Appendix. 5

than US$ 200 Million but would incur an annual rental of about US$ 50 Million (CEB handouts to Panel verified with web sources). If large scale conversion of other operations (national transport, industries, domestic usage, etc.) to natural gas is envisaged then a large land based terminal near Colombo can be justified (JICA study indicates this). However, if a commercially viable quantity of Natural Gas is found in the Gulf of Mannar a FSRU terminal on a ten year rental will be appropriate as it can be returned without encountering stranded asset problems. The cost of a jetty for coal unloading is included in a coal power plant costing.

3.3 Levelised Cost Comparison Employing the fuel prices and plant cost estimates in the previous paragraphs it is possible to derive Levelised Costs (power plant, harbour/jetty and transmission spread costs, spread and over plant lifetime) for electricity generated by a coal fired plant at Sampur including a coal jetty and transmission line, and for a Natural Gas fired plant with a dedicated terminal on the west coast of the island and reduced transmission commitment. An 80% load factor is employed in this study for both coal and gas fired options, provision is made to include 4% transmission losses for the Sampur case. In the case of a natural gas plant on the west coast transmission losses are not relevant since is the plant is close to load centres. Transmission costs too are lower for the LNG case since the power station will be close to the load centres; see â&#x20AC;&#x2DC;Transmission Costsâ&#x20AC;&#x2122; in the table below. A major cost factor in respect of LNG is the choice between a Floating Storage and Re-gasification Unit (FSRU) and a land-based harbour. The former is cheaper but entails a rental of about $50 million a year. The later is suitable for a large permanent structure envisaging as use for other purposes such as transport and industry. There are different schools of thought regarding the future coal, LNG and oil price trends. Since the Committee is not supported by specialist research staff it is best to stay with the cost estimates provided by the CEB and the World Bank if they are in line with the global statistics. . It is now possible to derive a guideline estimate of the annual increment of electricity generating cost for 300 MW LNG fired plant operating at 80% load factor compared with a hypothetical coal power plant of the same capacity.

3.4 Coal and LNG Comparison Table 5 compares coal and LNG financial costs without taking account of environmental externalities. The table is a derived from an Excel spreadsheet to deal with various data assumptions and sensitivity studies. For coal power the low-end is Rs 8.50 per kWh (USc 5.86) without coal jetty and transmission line and assuming a coal price of $65.70 per metric ton. A similar plant including jetty and transmission and a coal price of $71.70 per metric ton is Rs 11.70 per kWh (USc 6.57) for a 500 MW coal plant at Sampur (i.e. 33% plant efficiency in both cases) . If a smaller but advanced technology (i.e. 38% plant efficiency cases) more expensive 300 MW plant is considered these unit costs would rise respectively to Rs 10 (USc 6.90) and Rs 11.70 (USc 8.09) per kWh and also to Rs.12.19 (USc 8.41) for the case of Coal cost at $80 per metric ton. High discounting (10%) erases the benefits of lower future fuel costs.

In the case of LNG the low-end cost, excluding LNG terminal costs and transmission line, is Rs 10.73 (USc 7.40) for a plant of capacity 300 MW . This rises to Rs 11.17 (USc 7.71) if a floating terminal is included or 12.84 (USc 8.86) if a land based terminal is included; both for a 500 MW plant. All LNG plants assume 48% plant efficiencies based on HCV.

Table 5: Coal and LNG Cost Comparison COAL

LNG

COALPRICE Fuel CFuel Characteristicsistics

65.7

71.7

80.0

5500

5900

500MW

500MW Trinco Coal Plant

300MW NEW COAL PLANT

(With Jetty & Tx line)

($/MT) Heat Content (kCal/kg)

Trinco Coal Plant

(With Jetty & Tx line)

Plant Capacity (Gross)

LNG PRICE ($/mmbtu) Heat Content (kCal/kg)

8.5

7.5

7.0

8.5

7.0

13000

LNG 300MW plant only

LNG 500M W plant

LNG 500MW plant

(with FSRU &Tx cost)

(with Land Based Terminal & Tx cost)

500.0

300.0

500.0

(USD/kW)

1030.6

1668.2

1041.1

950.0

1041.1

80%

GWh

3181.6

1892.2

2010.9

3351.4

3351.

3351.4

Efficiency (HHV)

33%

38%

48%

Levelized Cost of Electricity

US cents/kWh

5.86

6.57

6.90

8.09

8.41

8.25

7.40

7.71

8.92

8.86

Plant Unit Capital Cost (Gross) Plant Factor Annual Energy Production

Authorsâ&#x20AC;&#x2122; estimates; for details, see Appendix

4. FROM COAL TO LNG AT SAMPUR

The preceding discussion was confined to the comparison of coal and LNG fired power generation in the long term scenario by taking the global trends into account. It does not deal with the additional costs that the country has to undergo in order to meet the anticipated energy shortage in the short and medium terms (2018 â&#x20AC;&#x201C; 2025). The energy requirement in the medium term, as discussed in Section 2, depends on the countryâ&#x20AC;&#x2122;s forecasted or potential economic expansion. There is a need to commission and run oil fired plant due to delay in commissioning the 500 MW Sampur coal power plant in 2016 as had previously been planned; in fact, the execution of the project had been deferred several times. The environmental issues of recently commissioned Norochcholai coal power plant as discussed in the next Section, have added fresh dimensions to coal power plants causing further delays in commencing the construction of Sampur plant. However, all the delays added together are not without costs.

4.1 Anticipated Power Shortage Since peremptory changes in policy directions on national projects of this nature which cost hundreds of millions to tens of billion rupees of public money have significant impact on orderly decision making and carry significant additional costs to the national economy, a summary indication is provided below of what these added, now unavoidable costs to the country are. Table 6 gives CEB estimate of fuel prices by fuel type and Table 7 the incremental costs of oil fired electricity from 2018 onward until the conversion of the proposed 300 MW initially-oil fired combined cycle plant power plant to LNG. This duration is likely to extend beyond 2022 depending on the time needed to design, obtain approvals, finance, construct LNG harbour facilities and convert the proposed oil plant from oil to LNG. Taking account of uncertainty and volatility in government decision making it is best to take it that the costs incurred in the period 2023 to 2025 in Table and indicated by an asterisk (*) are very likely to materialise. Table 6: CEB Estimates of Fuel Prices by Fuel Type Fuel US $/Metric Ton US $/Million BTU Coal 71.70 3.06 LNG 8.50 Auto Diesel 17.00 Furnace Oil & Residual Oil 13.10 Source: CEB estimates

These figures are indicative guidelines only and assume a median load growth, hydrology and that existing and bridging CEB proposals for oil-fired power plant, private oil-fired power plants, and when it becomes available, electricity generated from the proposed 300 MW combined cycle power plant

will be dispatched in the interim to avert the anticipated power shortages. That is, these oil fired power plant facilities are used as the hypothetical alternative to the abandoned (assumed to be) Sampur coal power plant for cost comparison. Table 7: Incremental Cost of Oil-Fired Electricity Year Incremental cost US$ Millions (#) 2017 0 2018 0 2019 54 2020 109 2021 140 2022 181 2023* 259 2024* 268 2025* 258 Total to 2025 1,271 Source: CEB estimates # Incremental cost refers to the additional cost above what would have been incurred in using Sampur coal power plant, since oil fired electricity has to be generated due to not commissioning Sampur in 2018. * These are further costs incurred by the possibility that the conversion of the combined cycle power plant and other thermal units to LNG firing does not take place by the expected dates due to design, financing, approval, plant construction and harbour construction delays.

Figure 7: Incremental Energy Contribution by Fuel Type 6000 Auto Diesel Furnace Oil Resedual Oil Naphtha Coal Puttalam Biomass Low Sulphur Furnance Oil

Energy (GWh)

5000

4000 3000 2000 1000 0 2017

2018

2019

2020

2021

2022

2023

2024

2025

Source: CEB estimates

As in Figure 7, in the absence of LNG and coal, different types of fuels should contribute to serve meeting the additional energy demand. Additional costs which have to be incurred to provide oil fired power due to the absence of Sampur coal power, as in Table 5 (1 GWh equals 1000 kWh; a kWh is what is colloquially known as a unit). The Tables 5 and 6, and Figure 7 were prepared by the CEB at the request of the Committee. These numbers in the table are large but not out of line with previous experience. The previous occasion on which contortions and delays in the electricity supply sector became endemic was from the late 1990s till 2013 when Norochcholi was brought on line.

4.2 A New Site for LNG? Retaining Sampur for LNG Changing from coal to LNG in general is not to be confused with the question of retaining Sampur as the site of an LNG power station. (a) The power station was to be located at a relatively remote place to minimise the number of people in the local vicinity who would suffer environmental disadvantage. This is always a factor in the sitting of nuclear and coal fired power stations and indeed many types of industries. If the plant is not to be coal fired but to be LNG fired this consideration disappears. (b) The second reason is that electricity would be generated about 200 km away from the load centres in the south and high capacity transmission circuits would have to be constructed at a cost of Rs. 14.3 billion. (Sampur to New Habarana 400kV Transmission line including a switching station at Habarana and energy losses of not less than 5% on average incurred to transmit the power to the load centres. (This is an unavoidable cost in the case of the Sampur coal option). (c) The third reason is that an LNG harbour is a $200 million to $500 million undertaking (depending on Floating or Land Based) and once built must meet all Sri Lankaâ&#x20AC;&#x2122;s needs including but not limited to industrial and transport requirements. It is costly to have more than one LNG harbour facility or to pipe gas from Trincomalee to load centres. (d) However, having considered the development need of Sampur and its other locational advantages such as the land availability, Trincomalee port development and proposed industrial development, it is not worthless reserving and demarcating Sampur for power generation. Besides, the long-term development needs of the area appeal for such large-scale projects as such which would generate large positive externalities.

Alternative site for LNG A feasible alternative site for a LNG power station would be Kerawalpitiya and the LNG infrastructure can be located at the northern environs of Colombo harbour or a new breakwater has to be constructed at Kerawlpitiya. The necessary infrastructure should be designed with the facility to pipe gas out to industrial and other end users in high load areas and advantage should be taken to convert all existing oil fired power plants in the west coast to gas firing. The elimination of all oil generated electricity should be the obvious objective for reasons of cost. Indigenous Gas deposits in the Mannar basin If gas is discovered in the bay of Mannar in sufficient quantities the option of locating a gas fired power station there will have to be considered. But these options are a long way off and still need in-depth analysis. . More information will emerge over the next decade when informed decisions can be made. It is premature for this Panel to make recommendations on this matter. However, the availability of domestic demand for natural gas, not only for electricity generation but also for the use of other sectors such as transport, is one important factors even for attracting firms for gas exploration and extraction as well as many other auxiliary industries.

4.3 Way Forward The CEBâ&#x20AC;&#x2122;s Base case of 27 July 2016 (submitted to PUCSL) referred to above envisages: a) 170 MW of Furnace oil fired power plant in 2017 to meet the immediate needs b) 3x35 MW of Gas turbines in 2018 and 2019, c) 300 MW Combined Cycle power plant initially oil-fired in 2019 and to be converted to Natural gas later when feasible d) 2x250 MW of coal fired power plant to be commissioned in 2021 and 2022 respectively; and e) further LNG and coal options after 2023 It is not purpose of the Committee is to address the Long Term Generation plans such as above (e). However, the Committee in principle is in agreement with this mixed strategy and the unavoidability of immediate (2017-2019) oil fired additions and to propose to plan into the future on short term and long term horizons based on the Government policy. At the same time it is realistic to follow up on doubling the wind, solar, mini-hydro and biomass component to grow from 11% at present to 30% by about 2030. The decline in global solar panel prices in the last 12 months is remarkable and recent quotations for wind-power in Sri Lanka are not much above coal and LNG prices. The Panel does not pursue these matters further because it is outside the core terms of reference of the study. It is evident that no development project can be realized without socio-environmental impact. Power generation and cost of energy associated with it too are not exceptions. In the present context, among several other factors, the cost of energy has significant bearing on the countryâ&#x20AC;&#x2122;s global

competitiveness in socio-economic development. Therefore it is imperative to understand and make sure that socio-environmental impacts and socio-economic development are fairly treated and optimally placed in deciding energy scenarios of the country to make the development goals of the country realistic. Furthermore, sustainability requires attaching due value to limited resources of a nation, when allocating them to development projects or other purposes. In the context of energy generation planning, for instance, land value may be accounted for by incorporated energy density, MWhr/m2 of land, of the generation project. Apart from short term trends and energy needs, being vigilant on global trends and future technologies are paramount to create future energy scenarios sound enough to support countryâ&#x20AC;&#x2122;s global competitiveness and reach economic growth targets. In a different context, the energy price has a pivotal impact on our potential to benefit from bi or multi-lateral trade agreements since it significantly influences our competiveness in all sectors, including service, manufacturing and agriculture. Hence striking the right balance between socioenvironment impacts and socio-economic benefits is demanded again in energy planning. The committee is of the opinion that the depth that this aspect has been looked at, in current planning and cost estimating processes needs improvements.

5. SOCIAL AND ENVIRONMENTAL COSTS This section presents the environmental and social costs of coal fired power generation compared with LNG power generation. The initial part of this section will focus on generic environmental and social impacts of coal fired and LNG power generation, with an emphasis on health impacts as most studies done in Sri Lanka on this subject is relatively weak on health impacts. Understanding and addressing the possible health impacts are crucially important as most of the social issues and community protests against coal power is due to adverse health impacts on the community. Thereafter, specific issues related to the use of coal and LNG in the Sri Lankan context will be discussed, particularly the environmental and social impacts of the proposed coal plant in Sampur, in the context of the experience of the coal fired power plant in Noracholai.

5.1 Environmental Impacts of Coal Power Plants Access to electricity has a positive effect on the health and well-being of people worldwide. However, it is well documented that the use of coal to generate electricity has negative environmental and health consequences. There are a multitude of studies that provide evidence of the adverse impacts of coal on human health and the environment during every stage of its use for electricity generation, including post combustion disposal. Coal fired power plants emit as many as 60 hazardous air pollutants, albeit some in trace quantities6. There are four main ways in which pollution is released from coal fired power stations: (i) air emissions; (ii) contaminants collected in air pollution control devices; (iii) bottom ash and (iv) flyash from smoke stacks. Key airborne pollutants produced during coal combustion are particulate matter, sulfur dioxide, oxides of nitrogen, carbon dioxide, mercury, arsenic, chromium, nickel, other heavy metals, acid gases (HCL,HF), hydrocarbons (PAHs) and varying levels of uranium and thorium in flyash. Emissions can disperse over long distances causing adverse health impacts to those living in areas far removed from the power plant. Populations that are especially vulnerable to health effects from air pollution include children, the elderly, pregnant women, and people with lung conditions like asthma and chronic obstructive pulmonary disease. Specific pollutants from burning coal that cause a negative health effect on the respiratory system include particulate matter (PM), sulfur dioxide (SO2), and oxides of nitrogen such as NOx. Fly ash contains trace concentrations of heavy metals and other substances that are known to be detrimental to health in sufficient quantities. Potentially toxic trace elements in coal include arsenic, beryllium, cadmium, barium, chromium, copper, lead, mercury, molybdenum, nickel, radium, 6

Burt, E. Oris, P and Buchanan, â&#x20AC;&#x153;Health Effects from Coal Use in Energy Generationâ&#x20AC;? University of Illinois, School of Public Health Journal, April 2013.

selenium, thorium, uranium, vanadium, and zinc. Approximately 10% of the mass of coal burned in the United States consists of unburnable mineral material that becomes ash, so the concentration of most trace elements in coal ash is approximately 10 times the concentration in the original coal. While there are ways of recycling coal ash, such as its use in the cement manufacturing process and in other engineering products such as bricks and in road construction, global experience shows that most of it is disposed of in dry or wet landfills. More than 65% of flyash from coal fired power plants is disposed in landfills and ash ponds, worldwide7. Landfills that leak flyash waste can contaminate ground and surface water with arsenic, cadmium, barium, thallium, selenium, and lead. Although some may try to argue that coal ash is not considered hazardous, after a long regulatory process, the US EPA published a final ruling in December 2014, which establishes that coal fly ash is classified as a sub-category of hazardous waste under the Resource Conservation and Recovery Act (RCRA). Therefore coal fly ash has to be managed as a hazardous waste.

5.2 Health and Social Impacts of Coal Power Plants Particulate matter is generated from the combustion of coal and is characterized by size -- small particles less than 2.5 micrometers (PM2.5) and larger particles up to 10 micrometers (PM10). PM2.5 travels deeper into the airways than PM10 and is therefore generally believed to cause a greater threat to human health. Exposure to sulfur dioxide (SO2) emitted by coal burning power plants increases the severity and incidence of respiratory symptoms of those living nearby, particularly children with asthma. For adults and children who are susceptible, inhalation of SO2 causes inflammation and hyperresponsiveness of the airways, aggravates bronchitis, and decreases lung function8. Oxides of nitrogen (NOx) are by-products of fossil fuel combustion from automobiles and coal-fired power plants, among many other sources. Oxides of nitrogen react with chemicals in the atmosphere to create pollution products such as ozone (smog), nitrous oxide (N2O), and nitrogen dioxide (NO2). NO2 and ozone are pollutants of particular concern. When asthmatic children are exposed to NO2 they can experience increases in wheezing and cough9. Coal-fired power plants contribute to the global burden of cardiovascular disease primarily through the emission of particulate matter. Particles less than 2.5 microns in diameter (PM2.5) have been

International Conference on Fly Ash Utilization, NDCC Convention Centre, New Delhi held during November 24-25, 2011 8

U.S. Environmental Protection Agency. Integrated Science Assessment for Sulfur Oxides - Health Criteria. 2008 September 2008; EPA/600/R-08/047F. 9

U.S. Environmental Protection Agency. Integrated Science Assessment for Oxides of Nitrogen-Health Criteria. 2008 July 2008; EPA/600/R-08/071.

causally linked to cardiovascular disease and death10. A review of the literature on impacts of air pollution on pregnancy suggests that the evidence is sufficient to conclude that exposure to air pollution during pregnancy can cause low birth weight. Studies that investigated the effects of SO2 and particulate matter in China and South Korea concluded that these pollutants were associated with low birth weight11. Coal contains many naturally-occurring heavy metals, including mercury. When coal is burned, mercury is emitted into the atmosphere in gaseous form. The United Nations estimates that 26% of global mercury emissions (339-657 metric tons/ year) come from the combustion of coal in power plants12. The mercury emitted into the atmosphere from coal-burning power plants is deposited into waterways, converted to methylmercury, and passed up the aquatic food chain13,14. Consumption of methylmercury-contaminated fish, from mercury emissions locally, regionally, and internationally, by pregnant women can cause developmental effects in their offspring such as lower intelligence levels, delayed neurodevelopment, and subtle changes in vision, memory, and language15. There have been studies undertaken to identify possible linkages between electricity generation from coal power plants and infant mortality. Infant mortality was shown to increase with increased coal consumption in countries that had mid to low infant mortality rate at baseline (1965) such as Chile, China, Mexico, Thailand, Germany, and Australia. In India and China, years of life lost were estimated up to 2.5 years and 3.5 years, respectively16.

U.S. Environmental Protection Agency. Integrated Science Assessment for Particulate Matter. 2009 December 2009; EPA/600/R-08/139F 11 SrámRJ, Binkoá B, Dejmek J, Bobak M. Ambient air pollution and pregnancy outcomes: A review of the literature. Environ Health Perspect. 2005; 113(4):375. 12 Pacyna J, Sundseth K, Pacyna E, Panasiuk ND. Study on mercury sources and emissions and analysis of cost and effectiveness of control measures: “UNEP Paragraph 29 study”. 2010 Nov; UNEP (DTIE)/Hg/INC.2/4:17. 13 Lippmann M, Cohen B, Schlesinger R. Environmental Health Science: Recognition, Evaluation, and Control of Chemical and Physical Health Hazards. NewYork, NewYork: Oxford University Press; 2003. 14 National Research Council (US). Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use. National Academy Press; 2010. 15 World Health Organization (WHO). Exposure to Mercury: A Major Public Health Concern. Public Health and Environment 2007:3. 16 Gohlke J, Thoma R, Woodward A, Campbell-Lendrum D, Pruss-Ustun A, Hales S, etal. Estimating the global public health implications of electricity and coal Scientific Evidence of Health Effects from Coal Use in Energy Generation consumption. Environ Health Perspect. 2011 Jun; 119 (6):821.

In most instances, the externality costs of power generation from coal are not included in the price comparison of electricity costs. Estimates of the externality costs of electricity generation from coal suggest that 95% of the external cost consists of the adverse health effects on the population17,18. The environmental and public health damage caused by the use of coal for power generation have been documented in the literature, albeit mainly in the context of developed countries. A study conducted on determining the externality costs of coal fired power generation in the US, found the cost to be an additional 17.8 US cents for each kWh of electricity produced19. A study undertaken by Machol et al20, estimates 45 US cents per kWh as the cost of the health burden and environmental damage from coal combustion. Other studies cited in a report on Environmental Issues in the Power Sector in Sri Lanka21 provide damage costs estimates ranging from 0.1 – 6.0 c€/kWh. An analysis undertaken by the European Commission the estimated the external life cycle costs of fossil fuels (the most expensive of which was coal) to be 1.6 - 5.8 c€/kWh22. A comprehensive study on the negative effects of power generation was released by the Australian Academy of Technological Sciences and Engineering (ATSE) in March 2009. The study calculated the greenhouse gas impacts and health damage costs for different power generation technologies which included coal, natural gas, wind, solar PV, solar thermal, geothermal, carbon capture and storage and nuclear energy. The study determined that Australia had a national health burden of approximately $A2.6 billion per annum due to health costs of burning coal23. If the externalities of coal were calculated and recovered by a coal tax, coal would be the most expensive of all electricity generating fuels.

Rabl A, SpadaroJ, Bickel P, Friedrich R, Droste -Franke B, Preiss P,etal. Extern E-Pol. Externalities of Energy: extension of accounting framework and policy applications. Final Report contract NENG 1- CT 2002- 00609. ECDG Research 2004. 18 Rabl A, Spadaro JV. Environmental impacts and costs of energy. Ann NY Acad Sci. 2006 Sep; 1076:516-526. 19 Epstein PR, Buonocore JJ, Eckerle K, Hendryx M, Stout III BM, Heinberg R, etal. Full cost accounting for the life cycle of coal. Ann NY Acad Sci 2011; 1219(1):73-98. 20 Machol B, Rizk S. Economic value of U.S. fossil fuel electricity health impacts. Environ Int 2013 Feb; 52:75-80. 21

ECA, RMA and ERM “Sri Lanka: Environmental Issues in the Power Sector” 2011, World Bank.

Yang A, Cui Y. Global Coal Risk Assessment: Data Analysis and Market Research. World Resources Institute 2012.

Australian Academy of Technological Sciences and Engineering. The hidden costs of electricity: externalities of power generation in Australia. Melbourne: ATSE, 2009. http://www.apo.org.au/sites/default/files/ATSE_Report_Hidden_ Costs_Electricity_2009.pdf (accessed Jun 2011).

5.3 Environmental and Health Impacts of LNG Although a fossil fuel, the emissions from natural gas combustion are much lower than those from coal or oil. Natural gas emits 50 to 60 percent less carbon dioxide (CO2) when combusted in a new, efficient natural gas power plant compared with emissions from a typical new coal plant24. Natural gas is the cleanest burning fossil fuel and in combustion, it produces negligible amounts of sulfur, mercury and particulates. This is a significant advantage to the public living around a natural gas power plant. Combustion of natural gas produces nitrogen oxides, but at much lower levels than coal. The drilling and extraction of natural gas from wells and its transportation in pipelines results in the leakage of methane, which is the primary component of natural gas that is 34 times stronger than CO2 at trapping heat over a 100-year period and 86 times stronger over 20 years25. Preliminary studies and field measurements indicate that these methane leakages range from 1 to 9 percent of total life cycle emissions26. A study conducted by the US Department of Energy showed that for every 10,000 homes in the US that was powered with natural gas instead of coal there was a reduction of annual emissions of 1,900 tons of NOx, 3,900 tons of SO2 and 5,200 tons of particulates27. These emission reductions translate into public health benefits as the impacts of these air pollutants on humans have been identified above. The US EPA undertook a study in 2011 to estimate the benefits and costs of implementing the Clean Air Act, which is legislation that regulates the emission of SO2, NOx, CO and PM in the US and found 24

National Energy Technology Laboratory (NETL). 2010. Cost and performance baseline for fossil energy plants, Volume 1: Bituminous coal and natural gas to electricity. Revision 2. November. DOE/NETL-2010/1397. United States Department of Energy. 25 Myhre, G., D. Shindell, F.-M. BrĂŠon, W. Collins, J. Fuglestvedt, J. Huang, D. Koch, J.-F. Lamarque, D. Lee, B. Mendoza, T. Nakajima, A. Robock, G. Stephens, T. Takemura, and H. Zhang. 2013. Anthropogenic and natural radiative forcing. In Climate change 2013: The physical science basis: Contribution of Working Group I to the fifth assessment report of the Intergovernmental Panel on Climate Change, edited by T.F. Stocker, D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex, and P.M. Midgley. Cambridge, England: Cambridge University Press, 659â&#x20AC;&#x201C;740. Online at www.climatechange2013.org/images/report/WG1AR5_Chapter08_FINAL.pdf. 26

Tollefson, J. 2013. Methane leaks erode green credentials of natural gas. Nature 493,doi:10.1038/493012a.

Alvarez, R.A., S.W. Pacala, J.J. Winebrake, W.L. Chameides, and S.P. Hamburg. 2012. ulesReport.pdf. (Bradbury et al. 2013

that the ratio of health care cost savings to compliance cost was 25:1 in 201028. This clearly argues for stringent regulations and reducing air pollutants from power plants and burning cleaner fuels. The biggest advantage of natural gas fired power generation is that there is no solid waste for disposal. This makes siting of a natural gas power plant much more acceptable to the local community.

5.4 Climate Impacts of Power Generation A study was conducted assessing the climate benefits of natural gas fired and coal fired power plants in 2014. According to this study, in so far as contribution to global warming is concerned, the choice between coal and LNG is a toss up â&#x20AC;&#x201C; the outcomes are much the same. Coal emits twice as much carbon dioxide but natural gas leakage is unavoidable in its extraction, transportation and utilisation. Methane (CH4) the main constituent of natural gas is two orders of magnitude more damaging in its green house effects. Natural gas plants can produce higher short term warming than coal plants with the same power output, if there is substantial methane leakage. However, if methane leakage is low and power plant efficiency is high natural gas plants can result in some reduction in near term warming. In the very long term, natural gas plants produce less warming that would occur with coal plants, as seen in the graph below.

The results presented in this study shows that in the general case, it is difficult to say whether a natural gas plant is better than a coal plant or not when it comes to climate impacts. In terms of direct climate effects, the question can be answered with reference to a particular natural gas plant with a specific upstream methane leakage rate when compared with a particular coal plant using a specific metric evaluated over a specified time interval29

US Environmental Protection Agency Office of Air and Radiation. The Benefits and Costs of the Clean Air Act: 19902020. Washington DC: EPA, 2010. 29

Xiaochun Zhang, Nathan P Myhrvold and Ken Caldeira â&#x20AC;&#x153;Key factors for assessing climate benefits of

5.5 Sri Lanka’s Experience with Coal Power Construction of the Norochcholai power plant began on 11 May 2006, with the first unit (300 MW) commissioned on 22 March 2011. Two additional units of 300 MW each have been commissioned in 2014 and currently the plant is running at full capacity. The commencement of construction of this plant was delayed for many years due to social and environmental protests. There have been frequent media reports and interviews where the local population have complained about the adverse environmental and social impacts as a result of the power plant30. Observations on environmental management Based on the site visit and the discussions with the local community, the strongest environmental and social argument against future coal fired power plants in Sri Lanka has been made by the CEB itself, by its sheer negligence of managing the environmental and social issues arising during operations of a coal fired power plant. This is particularly so with regard to the mismanagement of the coal ash disposal site. In planning and designing the Lakvijaya power plant, the CEB has taken a very optimistic position that 100% of the flyash can be recycled with no disposal needed on site. Considering that more than 65% of flyash from coal fired power plants is disposed in landfills and ash ponds, worldwide, the CEB should have had a proper flyash disposal system in place as a backup in the event that recycling is not an option. The committee was informed by CEB that for the last year or so the flyash was not accepted by the recyclers due to various reasons including low quality of the flyash. Therefore, flyash is “open dumped” in the bottom ash disposal site. This site is unprotected from the elements and airborne flyash was visible even during the visit. Good practice examples of coal ash management globally show that open dumping of fly ash and even bottom ash is unacceptable. Although the committee members were informed that the ash disposal site was lined with a synthetic liner to prevent ground water contamination, there were no barriers to prevent surface runoff. When uncontrolled surface runoff from a coal ash disposal site is possible, the benefits of a synthetic liner at the base of the landfill are of limited value and ground and surface water contamination is possible. The ash disposal site is subject to heavy winds for six months of the year (April – August), with the onset of the South West monsoon. The wind brings coal dust and ash inland, dispersing contaminants, including heavy metals and particulates up to about 3 km from the site. The month of May is considered the worst period for ash and dust dispersal. As outlined in paragraph 5.4, coal ash contains heavy metals and has been classified as a hazardous waste by the US EPA and thereby requires to be managed as a hazardous waste. It is recommended that immediate action be taken by CEB to ensure proper management of the coal ash disposal site. Although CEB anticipates that the flyash can be recycled again soon, considering the environmental and serious public health hazard created by the manner in which the ash disposal site

natural gas versus coal electricity generation” Environ. Res. Letters. 9 (2014) 114022 (8pp) 30

Environmental Foundation (Guarantee) Limited, “Case Study – Lakvijaya Power Plant”, (2016).

is being operated at present, a proper management and disposal system has to be immediately implemented. There should be precautions taken against leaking of contaminants into ground and surface water as well as airborne contaminants as dust, and reverse the catastrophic failure of coal ash management at the Lakvijaya power plant. Significant improvements are needed in the coal storage site as well. Coal dust is dispersed due to the winds during the monsoon period. Although not as bad as the coal ash dispersal, it is imperative that CEB manages the coal storage site in a manner that is environmentally acceptable and minimizes adverse health impacts on the local community. Although the committee was informed that coal storage site is also lined to prevent ground water pollution, there were no barriers to prevent surface runoff, thereby significantly reducing the containment of contaminants. The wind barriers seemed less than effective as about 20 meters of the coal storage site had no wind barriers and was in direct line of the wind, increasing the likelihood of airborne coal dust. There should be precautions taken against leaking of contaminants into ground and surface water as well as airborne contaminants as coal dust at the coal storage site immediately. Another possible source of environmental pollution could be during loading and unloading coal from the ship to the barge and from the barge to the conveyors. Although there was no unloading at the time of the site visit due to monsoon seas, the housekeeping practices of CEB with regard to the coal storage site and the coal ash disposal site compels one to expect the worst. Assuming that CEBâ&#x20AC;&#x2122;s management of the loading and unloading is as sloppy as its coal storage and coal ash disposal site management, there could be significant pollution of the marine environment both at the site of unloading the ship and loading the barge as well as unloading the barge on the pier. There could also be significant airborne pollution of coal dust during this process. There are no studies done to make a conclusive statement to this effect but unless good housekeeping practices are in place, it is inevitable that airborne and marine pollution will take place. Norochcholai Power Plant has installed a continuous monitoring of the stack emissions. During the site visit, stack emission monitoring data for SO2 and NOx were available for review. These emissions were within acceptable levels. This demonstrates that the air pollution control devices are in operation. However, the PM monitoring instrumentation may have been non-functional because the reading stated â&#x20AC;&#x153;invalidâ&#x20AC;? which implies instrument failure. Although the EIA clearance conditions stipulated that there should be three air quality monitoring stations, this appears to have been disregarded and the CEB uses one mobile station to monitor air quality within the Lakvijaya power plant premises. This is sub-optimal because the stack height ensures wide dispersal of the flue gases. Cooling water is discharged into the sea through an open channel. The CEB stated that the cooling water discharge temperature was 4 degrees higher than the intake. There were no studies or data on the impact of the discharge of cooling water into the marine environment. In the absence of data, no conclusive comments can be made by the committee. Observations on social issues The committee visited the community immediately adjacent to the power plant and observed the adverse impacts of coal and ash dust, first hand. The whole area was coated with ash and the community stated that the problem of dust had worsened since the flyash was also disposed of in the ash dump. The community complained of respiratory problems and increased hospital visits,

especially among children and the elderly. An agricultural farm was visited and it was noted that virtually the entire crop was destroyed due to ash deposits. The more concerning issue is that coal dust is considered a hazardous waste with heavy metals. Regular inhalation of dust with heavy metal contamination would result in health problems for the local community as outlined in paragraphs 5.7Public health impacts could be spread over a much larger area because there is quite a lot of agricultural land around the power plant and the dispersion of coal dust on agricultural crops and soil could result in heavy metal uptake by agricultural produce. It is well established scientifically that plants have an ability to bio-accumulate heavy metals thereby increasing its concentration in the produce. This could result in the possibility of health impacts in a wider community than the local area. A report prepared by the Environmental Foundation Limited, identifies livelihood and economic impacts on the local community due to reduced agricultural income and drastically reduced fish harvests. An increase in adverse health impacts, including respiratory problems have been identified as a serious concern among the local community31. The way forward for CEB at Norocholai Just as much as CEB has mismanaged the coal storage and coal ash disposal sites, the CEB has mismanaged the social issues arising as a result of the power plant. The assignment of a dedicated officer to interact with the local community and a grievance redressal mechanism, with community participation should be instituted as soon as possible. Such a mechanism and action taken to redress the community grievances would result in the reduction of the feeling of helplessness of the affected community. Considering that there was significant environmental and social opposition to the construction of the coal fired power plant in Norocholai, it defies all logic that the CEB has not placed more effort and resources to manage the environmental and social issues at the Lakvijaya power plant. This is especially so for an organization that is trying to establish other coal fired power plants in the country. To reiterate, as outlined above, the strongest environmental and social arguments against future coal fired power plants in the country have been provided by CEB. The CEB management should put in place a high level environmental and social management team at the Lakvijaya power plant as a priority action and immediately address the environmental and social issues arising at Norocholai. This would give some credibility to CEB to discuss management of environmental and social issues of any proposed coal power plant. This should be a pre-requisite for considering further coal fired power stations in Sri Lanka.

5.6 Proposed Coal Fired Power Plant in Sampur The environmental community has come out against the establishment of a coal fired power plant in Sampur. In addition to the site specific environmental sensitivities and the marine ecosystem in the Kodiyar Bay, the opposition to coal fired power plants is largely due to manner in which CEB has mismanaged the environmental and social issues at the Noracholai power plant. The EIA prepared has been quite sub-standard as exemplified by the fact the Technical Committee of the Central 31

Environmental Foundation (Guarantee) Limited, â&#x20AC;&#x153;Case Study â&#x20AC;&#x201C; Lakvijaya Power Plantâ&#x20AC;?, (2016).

Environmental Authority (CEA) had to request revisions to the EIA on three occasions before providing conditional approval on February 2, 2016. A review of the conditions upon which the approval has been provided is the clearest indication of the weaknesses in the EIA. Key Environmental issues Extensive comments on the shortcomings of the EIA have been provided to the CEA by various environmental groups and individuals. Therefore, this section will be limited to the most important issues. The most significant concern is the credibility of the air pollution analysis undertaken for the EIA. While it is a well-accepted fact that the wind direction is from the North East and blows over the country during the North East monsoon (December – February), the EIA air dispersion models consider wind blowing in the south easterly direction which means that the pollutants are blown out to sea. However “if the wind is from the North-East, it shall entrain the pollutants from Sampur towards the central mountain ranges from Ritigala to Namunukula. Mountains amplify the impacts of pollutants on atmospheric chemistry and cloud physics. Even modest rise in toxic gases can have damaging consequences on the air that people and animals breathe, the water they drink, and ecosystems. This can impact the quality of tea and hydropower production”32. A detailed analysis of this issue is publicly available33. Unless care is taken to address the air pollution impacts identified in this analysis (or offer arguments to counter this assertion), the monsoon winds from the north-east will have a huge influence on the impacts of this coal power plant as the easterly winds will carry pollutants and fly ash inland, towards the center of the country, passing through vital agricultural lands and unique ecosystems. The exclusion of the coal unloading jetty and associated facilities such as bulk storage from the EIA precludes a comprehensive assessment of the environmental impacts of the project as proper EIAs require that all associated facilities should be included in the analysis. The conditional clearance provided for the EIA by CEA states that “the proposed method of disposal of the high temperature cooling water into the Shell Bay is not acceptable to the CEA. A comprehensive proposal for an alternative method for cooling water disposal should be submitted to this authority and approval obtained”. Considering that the marine ecosystem in Shell Bay is sensitive and regulatory enforcement by CEA of public entities is less than desirable, it is surprising that the EIA approval has been granted, even conditionally, without knowing and approving the cooling water disposal system. A closed loop cooling water system would have much less impacts on the marine environment and it should be considered. The marine ecological assessment in the EIA of Koddiyar Bay and Shell Bay are superficial at best and is inconsistent with NARA’s assessment of Shell Bay. Fly ash is one of the most toxic byproducts of coal combustion. The EIA states that all of the fly ash that is generated from the Sampur power plant can be absorbed by the cement industry and recycled. However, as the discussion on the situation with regard to flyash management in Noracholai clearly shows the assumption that all flyash will be recycled is unrealistic. When the flyash at Noracholai cannot be absorbed 100% by the cement industry, relying on the Sampur flyash to be recycled by the 32 33

Zubair, L. “Is the air pollution analysis for the Sampur Coal Plant credible?” Daily Financial Times, July 20, 2016 Zubair, L. “Is the air pollution analysis for the Sampur Coal Plant credible?” Daily Financial Times, July 20, 2016

same industry shows that the project proponent has not learnt from experience, especially since the buy back guarantee comes from the same entity who committed to buy back the flyash from Noracholai. Since coal ash disposal has been a significant environmental and public health problem in Noracholai, it is surprising that the CEA conditional clearance on ash disposal is vague at best. Based on the experience of Noracholai, very stringent guidelines are advisable. It is also surprising that the EIA states that the coal ash is non toxic based on the analysis of one sample when extensive studies conducted has resulted in the US EPA designating flyash as a hazardous waste. Research done for a Master of Science thesis has identified an increase in heavy metals in the vicinity of the Noracholai plant34. The EIA also states that other wastes such as bottom slag and bottom ash will be given to brick makers and road construction. However, it is unclear how this material, which should be considered as hazardous will be managed by small time brick makers or even used in road construction without exposing workers and the public to adverse health impacts. Improper disposal could result in damage to ecosystems as well. Back up systems for disposal of coal ash (bottom ash and flyash) will be a permanent feature as there is no ultimate solution for solid waste that is disposed off in landfills or ponds. In the US, one of the main environmental disasters associated with coal ash disposal are breaching of fly ash ponds. The Sampur ecosystem is too sensitive to withstand such a disaster which means that the project proponent should have a good track record of effective environmental management. This is not the case with regard to both partners in this joint venture. CEB generation planning process uses an outdated World Bank study using 1993 GDP data of developing countries such as India and China to determine the social/environmental costs when calculating externalities. This is taken as € 0.001per kWh. This is unreasonably low where currently impact is considered to range around 10 US cents per kWh based on studies identified in paragraph 5.11. If the damage costs of the World Bank study are used35, then it should be corrected for GDP for the same countries up to year 2021 when the Sampur plant is expected to be operational. This would add a significant increase to the social/environmental damage costs. The CEBs Generation Plan states in the assumptions that if the social/environmental cost is 6 US cents per kWh or more, all coal power plants will be replaced with Natural Gas plants in their own plan. Key social issues The greatest social issues arising from the proposed Sampur coal fired power project are the same issues arising in Noracholai. i.e., coal ash, coal dust, adverse impacts on agriculture, fisheries and community health as well as possible contamination of water sources. The committee was informed that a group of approximately 50 people from the local community of Sampur visited the communities affected by the coal power plant in Noracholai. Based on the discussion on the present management of environmental and social issues at Noracholai as discussed above, it is obvious that there will be significant public protests against the construction of a coal fired power plant in Sampur.

Chalani Harshani Therisha Rubesinghe, “Investigation on the Level of Heavy Metals in the Ecosystem in the Vicinity of Norochcholai area, Puttalam Lagoon and Coastal Area” (2013) Master of Science Thesis, PGIS, University of Peradeniya. 35 ECA, RMA and ERM “Sri Lanka: Environmental Issues in the Power Sector” 2011, World Bank.

Response of the environmental community and the local community at Sampur Considering the environmental and social opposition to the construction of coal fired power plants initially at Noracholai and now at Sampur, the CEB should have been much more pro-active in dealing with the opposition. If the environmental and social issues at the Norachcolai coal power plant had been managed in such a way to minimize adverse impacts, the CEB could have countered some of the environmental and social concerns. There are many countries in the world where coal plants are managed well with minimal environmental and social impacts. Unfortunately, the sheer neglect in the way the environmental and social issues have been managed at Noracholai, gives no confidence that the management at Sampur will be any better. Under these circumstances it is impossible to foresee acceptance from the local community for a coal power plant in Sampur. Immediate remediation of the environmental and social issues at Noracholai must be a pre-requisite for CEB to engaging and gaining support from the environmental community and more importantly from the local community in Sampur. Response of the environmental community and the local community to a LNG power plant Natural gas comprises of over 90% methane--the simplest hydrocarbon. Hence it burns completely without leaving any residue â&#x20AC;&#x201C; solid, liquid or gaseous. It is the cleanest fossil fuel. The carbon dioxide emission is also about 50% less than that emitted during coal combustion for the generation of the same amount of energy. Hence, local environmental pollution and social impacts with regard to public health will be minimal as compared to a coal fired power plant. If the fuel is LNG, ash disposal and coal dust from storage sites is not an issue. Air pollutants are a concern but on a more reduced scale than with coal. The volume of high temperature cooling water will be about a 1/3 less than what will be discharged from a coal plant. Its impact will be much less on the discharging environment than with cooling water from a coal plant. There is no solid waste for disposal from the power generation process. Considering the above, the likelihood of the environmental community supporting a LNG plant will be much greater than for coal. When considering social impacts, the most obvious adverse impacts on the health of the local community such as experienced in Noracholai will be negligible. So will the possible impacts on agriculture. The discharge of cooling water may have adverse impacts on fisheries, but it cannot be quantified without a proper study. Unless there is resettlement of the local community, it could be anticipated that the community will be more amenable to accepting a LNG power plant than a coal power plant in their local neighborhood.

6. TRANSITION COSTS AND RECOMMENDATIONS The cost implications of the governmentâ&#x20AC;&#x2122;s decision to change the proposed coal power plant in Sampur to a LNG power plant were examined in the preceding sections. The three main areas where cost implications appear to be explicit are economic consequences to the nation, financial costs arising from the choice of different technologies, and environmental, health and social costs. 1. Economic consequences to the nation is a policy issue, because there is scope for mitigating the negative impact of transition from coal to LNG growth and development with a set of policy options. 2. Financial costs arising from the choice of LNG instead of coal is subject to external factors such as global price movements and internal factors such as the choice of economic and technological specifications of a LNG power plant. 3. In case of environmental, health and social costs differences are noteworthy as they all stand in favour of LNG over coal by technical analysis of impact assessment as well as by responses from the stakeholders. Conclusions and recommendations pertaining to cost implications in the above areas are outlined below in detail. The cost issues in these areas demand for policy interventions on the part of the government. In addition, there are important policy issues related particularly to the role of CEB arising from the analysis and observations of the Committee which are also presented in this concluding section for perusal at policy level.

6.1 Economic Consequences Economic consequences arise mainly due to the delay in generating electricity as per the timeline portrayed by the CEB. Three years of delay in commissioning operations of the Sampur coal power plant is, indeed, a separate issue. Nevertheless, the delay appears to be extended by the decision to change the proposed coal power plant into an LNG power plant. Even with initial preparations, a second coal power plant will not be commissioning operations before 2021, while an LNG power plant requires fresh preparations. Moreover, the delay has made the implementation of the Sampur coal power plant politically a more difficult option under any government. As electricity demand is growing closely in line with economic growth in the medium term, the delay has far reaching consequences in constraining growth and development. According to CEBâ&#x20AC;&#x2122;s estimates, electricity demand is due to rise annually at a rate over 6 percent within the next five years till 2020. If the country is setting the stage to accelerate its growth momentum at higher rates, the required growth of electricity generation would be even more. As required electricity generation is already behind the schedule and the extended delay due to the decision of the government to replace coal power plant with LNG at Sampur, growth and development of the country is likely to be constrained by electricity generation.

An added issue is the difficulty of achieving the potential reduction in electricity costs and tariffs which would have otherwise improved the international competitiveness of the economy. There are two issues of electricity pricing in Sri Lanka: the first is that Sri Lanka has high average electricity costs in the region, and the second is that the electricity tariffs penalize commercial sector customers against household customers; both issues have eroded the countryâ&#x20AC;&#x2122;s international competitiveness. The delay in electricity generation will force the country to continue further with the existing cost disadvantage. Finally, Sri Lankan policy making is passing through an important turning point at which it needs to renew its investment climate and improve business confidence. After establishing and operating TPCL as a joint venture of CEB and NTPC, winding up of five years of preparation to install a coal power plant should not have repercussions damaging the countryâ&#x20AC;&#x2122;s effort in reviving its business environment. Given the policy change, it needs to be a shifting of the source of power generation rather than abandoning business operations that need to be carried out through a proper negotiation process.

6.2 Financial Costs Financial cost of power generation, and thereby the electricity tariffs to the consumer and additional costs to the government (in the form of subsidies to customers) varies with global conditions and internal choices of economic and technological factors. Fossil fuel prices in the world market are influenced by (a) economic growth of the world (particularly in large economies), (b) fossil extraction technologies (affecting cost of production), (c) speculations in financial and commodity markets, (d) developments in alternative energy markets (such as non-conventional renewable energy) and, (e) supply-side shocks. Within the fossil fuel category, according to historical world price data coal prices remained low and less-volatile compared to LNG prices which have moved closely with oil prices. Internal choices can result in cost differences due to different source markets, plant location, scale of operations, differences in technology, and time delays. The economics of the choice between coal and natural gas as power generation options is one of the key factors in this study. The comparison of the Levelised Costs of Electricity (LCOE) from Coal and LNG has been carried out. The estimation of the Levelised costs of electricity involves a number of parameters that are linked to technical, economic, environmental and social aspects of the situation of interest. Furthermore, assigning the values to these parameters need careful thought and also making number of realistic assumptions. In view of the complexity and difficulty in assigning values to the relevant parameters, the comparison analysis is presented in the form of number of realistic scenarios incorporated to the Appendix in order for the policy makers and the authorities to ascertain a clear picture of the state of play of the platform. In order to capture the technologies and costs in an advantageous manner to both Coal and LNG options, a number of technologies have been taken into consideration together with their relevant plant capital costs, fuel costs, typical plant efficiencies, fixed and variable operating and maintenance costs, other case specific infrastructure costs etc. These have been ascertained as much as possible from internationally sourced relevant references and also from consultations with the stakeholders invited by the Experts Committee. Five scenarios have been presented for each Coal and LNG options with a yearly mean plant capacity factor of 80% and resulting Levelised electricity cost corresponding to each scenario is tabulated (see Appendix).

As per the recommendation of the International Energy Agency, IEA, (Power Generation from Coal, Coal Industry Advisory Board CIAB, IEA 2008), in order to improve the operating efficiency of the global fleet of Coal fired plants, new coal power plants should have plant efficiencies greater than 40% (HCV based) and it is also recommended for the Governments to look to replace Coal fired plants built 25 years ago to reach this efficiency. This would be an important pre-consideration for further analysis of this comparison. Even though scenarios with plant efficiencies in the order of 33% have been presented to provide a clear picture of the state of play, in view of the levels gaseous and solid emissions and heat rejections from these type of plants and the concerns of their impact on the local climate and livelihood, Experts Committee would like to propose considering scenarios for Coal with plant efficiencies of 38% for the purpose of comparing levelized Cost of Electricity (LCOE) as one of the necessary elements in making decisions for selecting scenarios for further detailed analysis.

6.3 Social and Environmental Impact Social, health and environmental impacts of transition from coal to LNG appear to be beneficial to the nation. This is revealed by the preceding analysis based on technical impact assessments, and observations of local conditions including environmental management issues, and international trends including the related international agreements. Even though countries are still building coal power plants as a result of their individual choices, there is a worldwide swing away from the use of coal for the generation of electricity. There are international accords to which Sri Lanka is a signatory are intended to underscore this. Sri Lanka is well within its obligations and its Green House gas emission reduction obligations will still be within the countryâ&#x20AC;&#x2122;s commitments even if the coal power plant in Sampur is commissioned. The issue lies more with local environmental and social impacts than with international obligations. The move towards cleaner fossil fuels like LNG and renewable energy should largely be due to local environmental and public health benefits especially in a small country like Sri Lanka. The analysis clearly suggests that LNG is cleaner and safer than coal as a source of power generation. Considering that the Norochcholai Power Plant is the only coal fired power plant in Sri Lanka and the CEB had significant environmental and social opposition to the construction of the plant, it defies logic as to why CEB has mismanaged the coal ash disposal and coal storage sites, resulting in huge, avoidable environmental and social problems. The opposition to the Sampur coal fired power plant in particular and coal power in general is based largely on the track record of CEBâ&#x20AC;&#x2122;s management or lack thereof of the environmental and social issues at Noracholai. Had the environmental and social management at Noracholai been exemplary, the CEB would have been able to have a much more credible discussion on environmental and social issues. It is natural that the environmental community, the local community and the general public would look at CEBâ&#x20AC;&#x2122;s mismanagement of the environmental and social issues at Noracholai and consolidate their opposition to coal power. Based on the analysis of environmental, health and social costs undertaken in Section 5, the cost differences are not insignificant and favor LNG over coal. CEB has a history of facing opposition to the construction of power generation plants due to environmental and social issues. Much of this opposition could be mitigated if CEB takes the management of environmental and social issues seriously. Therefore, the CEB has to pay much greater attention to management of environmental and

social issues arising from power generation regardless to the fuel source in order to ensure that preventable adverse environmental and social impacts are minimized. A well trained and resourced environmental and social unit must be established within CEB immediately as this is a pre-requisite regardless to fuel options for power generation. Independent third party monitoring including environmental and social auditing should be institutionalized by CEB for all their power generation plants to ensure compliance with environmental regulations in order to ensure less public opposition and resulting delays to the construction of future power plants.

6.4 Policy Recommendations (a) There is scope for mitigating any negative impact of transition from coal to LNG on economic growth with a set of policy options. This requires short-term policy measures to sustain electricity generation during an interim period of time within next few years. This may be achieved by: i. focusing on the other generation projects outlined by the CEB and selecting the projects that can be completed within a short period of time; ii. expanding on the current initiative of purchasing electricity from households and other sectors generated from renewable energy sources; iii. encouraging to fix renewable energy sources (such as solar panels) for new buildings (residential or otherwise) to generate electricity for the national grid. The above short-term measures, however, do not rule out the need for large-scale power plants and the importance of Sampur as a suitable site for a large-scale power plant. (b) When electricity generation from the planned coal-fired plant or from LNG plant or renewable energy based plants are not available within the next five years of time horizon, a feasible short-term alternative would have to be oil; apparently this will raise the cost of power generation and hurt the cost competitiveness of the economy. Until the recommendation under (a) above is realized, this cost disadvantage has to be taken into account at policy level to manage internally. (c) Although the common perception is that power generation from coal is cheaper than that from LNG, this is not as simple as that to realize unless a proper analysis is done. The cost differences arise from global price trends and international source markets on one hand, and the choice of economic aspects at home and the selection of appropriate technology on the other hand. As the calculations presented here are only indicative of the cost differences between coal and LNG, detailed cost estimates need to be carried out in planning long-term power generation. (d) Although it could be argued that one fuel type is better than another on the cost advantage alone, power generation cannot be treated in isolation due to its developmental issues, presence of externalities â&#x20AC;&#x201C; both positive and negative, long-term implications, and locational implications on land and environmental values. Besides, even the international prices can change due to bilateral and multilateral agreements. Therefore, even power generation planning needs improvements to be competitive at international standards.

(e) At least partially the problem of dispute among different stakeholders of the power sector in the country is attributed to the “fixed planning” exercise carried out by the CEB. Fixed planning entails achieving set targets under given assumptions and circumstances, while the entire exercise is likely to fail when the given assumptions and circumstances change over time. It is advisable that planning exercise should be changed into “indicative planning” which provides alternative options and adequate flexibility enabling the government to choose the most feasible option under different circumstances. This could also be incorporated into a “rolling planning” exercise with annual revisions of the indicative plan in line with changing circumstances. (f) In order to realize the above, it is necessary for the CEB to strengthen and expand its research and development (R&D) activity. Electricity generation involves multi-faceted cross-cutting issues encompassing electrical engineering, mechanical engineering, civil engineering, environmental science, health science, and energy economics; the R&D division of CEB should be equipped with knowledge and capacity in all these cross-cutting disciplinary areas. It is the R&D division which would provide appropriateness of different technologies, which are not only technically sound, but also economically efficient, commercially viable, environmentally sensitive and politically acceptable. (g) Local opposition to coal power generation in general, and the proposed coal power plant at Sampur has been intensified in the recent past largely due to poor track record of environmental management at Noracholai – the only coal power plant in Sri Lanka. It is true that neither “worst” cases nor the “best” cases can be used to justify any position. Nevertheless, emphasis on improving environmental management at Norochcholai is a key factor even for future coal power generation is to be taken into consideration.

APPENDIX APPENDIX 1: Estimates of Electricity Costs of Coal and LNG under Different Cost Scenario

COAL

LNG

COALPRICE 65.7

65.7

71.7

80.0

($/MT) (Delivered at Power Plant price based on imported CIF prices)

Fuel Characteristics

LNG PRICE ($/mmbtu)

8.5

7.5

7.0

8.5

7.0

(Delivered at Power Plant price based on Henry Hub Pricing)

Heat Content (kCal/l)

5850

Specific Gravity (kg/l)

0.45

Heat Content (kCal/kg)

5500

5900

Heat Content (kCal/kg)

13000

Fuel Cost ($/Gcal)

11.9

12.2

13.6

Fuel Cost ($/Gcal)

33.690

500MW

500MW Trinco Coal Plant

300MW NEW COAL PLANT

LNG 300MW plant only

LNG 500M W plant

LNG 500MW plant

(With Jetty & Tx line)

Trinco Coal Plant

(With Jetty & Tx line)

(with FSRU

(with FSRU &Tx cost)

(with Land Based Terminal

&Tx cost)

& Tx cost)

Plant Capacity (Gross)

500.0

300.0

500.0

Plant Capacity (Net)

454.0

270.0

286.9

478.2

Plant Unit Capital Cost (Gross)

(USD/kW)

1030.6

1668.2

1041.1

950.0

1041.1

Plant Unit Capital Cost (Net)

(USD/kW)

1135.1

1853.6

1892.2

1088.5

993.2

1088.5

Plant cost

Mill USD

515.32

500.47

312.33

285.0

475.00

520.56

Jetty Cost

Mill USD

113.0

FSRU/Terminal Cost

Mill USD

171.3

487.8

Transmission Cost

Mill USD

40.8

Total Investment Cost

Mill USD

Annual Energy Production

100

728.32

500.47

713.5

312.33

285.0

687.10

732.66

1049.16

10%

9.4269

9.427

9.4269

9.426

9.4269

80%

GWh

3181.6

1892.2

2010.9

3351.4

3351.

3351.4

Years

PV factor

Plant Factor

100

515.32

Discount Rate Life Time

113.0

Full Load Heat Rate (HHV, NET)

(kCal/kWh)

2600

2241

1793

33%

38%

48%

Fuel Cost

UScts/GCal

1194.2

1215.2

3369.0

2976.2

2777.8

3369.0

2777.8

Unit Fuel Cost

UScts/kWh

3.10

2.72

6.04

5.34

4.98

6.04

4.98

F O&M

$/kW-mth

2.838

4.634

0.378

V O&M

$/MWh

5.5547

5.7705

4.920

Annual Fixed O&M

(Mill USD)

15.46

15.01

1.30

2.17

Variable O&M

(Mill USD)

17.67

10.92

9.89

16.49

Fuel Cost

(Mill USD)

98.79

51.53

121.48

107.31

166.93

202.46

166.93

Total Annual Cost

(Mill USD)

131.92

77.46

131.37

117.20

183.42

218.95

183.42

Levelized Cost of Electricity

US cents/kWh

5.86

6.57

6.90

8.09

8.41

8.25

7.40

7.71

8.92

8.86

Levelized Cost of Electricity @70% Plant Factor

US cents/kWh

6.18

6.99

7.41

8.78

9.09

8.50

7.62

8.03

9.26

9.34

Efficiency (HHV, NET)

NOTES & REFERENCES TO APPENDIX TABLE (a) Columns of calculations have been based on different international price scenarios from different sources; columns 1-4 under Coal and columns 6 & 9 under LNG were based on data provided by CEB, and were estimated by Professor Kumar David; column 5 under Coal and columns 7, 8 & 10 under LNG were based on data directly from international sources, and were estimated by Professor Rahula Attalage. a) Life time refers to the operational life of the plant b) Capital costs exclude interest during construction http://www.eia.gov/forecasts/aeo/assumptions/pdf/table_8.2.pdf https://setis.ec.europa.eu/system/files/Technology_Information_Sheet_Advanced_Fossil_Fuel.pdf c) Plant efficiency is calculated using the higher calorific vale (HCV) heat content of fuel which is given in the row the Heat Content in the Fuel Characteristics portion of the table. If the LCV (Lower Calorific Value) heat content of fuel had been used, the apparent efficiency would be 5% higher for coal and 10% higher for gas according to IEA recommendations. However the end result (plant efficiency) would be no different because a lower calorific value (5% and 10% lower, for coal and gas respectively) is being used for fuel heat content. http://www.worldenergyoutlook.org/weomodel/investmentcosts/ http://www.worldenergyoutlook.org/media/weowebsite/2014/weio/WEIO2014PGAssumptions.xlsx d) The net usable energy output (Annual Energy Production) is output net of generator and transformer losses and consumption of power station auxiliaries. e) Capital costs presented are a simple multiplication of typical industry wide Plant Unit Capital Cost (Net) multiplied by plant size. f)

Other Sources of information: U.S. Electric Power Administration; Monthly releases and website https://www.eia.gov/tools/faqs/faq.cfm?id=107&t=3 (“What is the efficiency of different types of power plants”) Efficiency in Electricity Generation: EURELECTRIC “Preservation of Resources” Working Group CEB Long Term Generation Expansion Plan 2015-2034 (Not approved by the PUCSL) CEB hand out to this Expert Committee at our first meeting World Bank Team in Sri Lanka