Latest update April 18th, 2024 12:59 AM
Sep 02, 2013 Letters
Dear Editor,
The news, debate and discussion on the Amaila Hydropower Project have dominated the headlines recently especially since some critical information became available. It is fair to say that everyone has had an opportunity to comment.
Some of the commentators like Messrs. Ram, Goolsarran, Ms. Bulkan and others have sought to analyse the Project from the available information. Many others who have not even studied the available documentation and even if they were able to access it would not be capable of analysing anything, offered comments, often as surrogates for the Government. Even the American Ambassador and that other prominent American Dr. Joey Jagan felt it necessary to get in on the action at a very late stage. Dr. Jagdeo too.
The fact of the matter is, that were it not for the insistence of the IDB that the Government obtain parliamentary approval for two peripheral pieces of legislation relating to Amaila, no information would have been made available to the parliamentary parties. Amaila would have been fait accompli like the Marriot, burdening consumers and tax payers with a flawed project costing the GPL over US$2 billion over 20 years backed by a guarantee that if as consumers Guyanese cannot meet the payments to the promoters, then as taxpayers they will be forced to do so through taxes.
The debate led to the piecemeal release of information by the Government including the Economic and Financial Evaluation Study on Amaila done by an international consulting firm Mercados Energeticos for the Government of Guyana and Sithe Global jointly. The study was concluded in November 2009 and revised in March 2010.
Although it was quite late in the game to release this report, it is still useful to study and analyse it. It is prepared by independent professionals with experience and competence in the subject matter. The Government’s position has always been that Amaila will prove “cheap and reliable” power and this has not only been a ‘dream’ of Guyanese for decades but that this project will be “transformative” and propel the development of the economy and the country as a whole.
Government spokespersons and Sithe promised varying reductions of the present electricity tariffs ranging from 20% to 40%, the 71% and 91% in the longer term, often confusing cost of production (at Amaila), selling price of energy to GPL by Amaila, GPL’s new cost of production, and potential adjustments to tariffs.
Responding to the propaganda that Amaila will produce “cheap and reliable” energy the critics have pointed to the secrecy and lack of transparency surrounding the deal; the extremely high cost of plant (probably the highest in the world of cost per megawatt); the failure to have competitive bidding and procurement and the ability of GPL in its present inefficient state to
handle the receipt transmission and distribution of the power coupled with the fact that GPL’s tariffs are set by GPL itself based on its own licence will no meaningful role for the regulatory body the PUC.
It did not escape the critics’ eyes that the returns on funds provided were set at the exorbitant and usurious rates of 19% (Sithe) 9.5% IDB and 8.5% for China Bank. These rates are unprecedented in international transaction and altogther constitute over US$1200 million in interest payment alone, all payable in foreign currency, against which the rate of the Guyana Dollar continues to depreciate. All these costs will of course inexorably and ultimately find their way into the tariffs.
And it did not pass unnoticed that Sithe with a promised investment of US$150 million or 17% of the whole deal will have majority control of the equity in the company and 100% control of Management and Operations.
The documents released by the Government speak of a fixed annual payment of US$122 million to Sithe for energy supplied to GPL. This is a lump-sum, take-or-pay contract for the supply of power which no one can quantify since the contract provides for Amaila to “give” blackout for six different reasons including inadequate flow of water, various types of maintenance and emergencies.
As far as the critics are concerned, other than the romantic notion of hydro, there is nothing redeeming about this particular project given the way it is conceived, planned, architectured, structured and owned.
Many see this as a gigantic rip- off in the making and the colonial mechanism of placing an agent in the GPL to take control of its revenues and its receivables (pledged to the project) is particularly offensive.
It is in this context that the study conducted by Mercados Energeticos is useful in the sense that it may help to clarify some of the issues raised above and to answer the burning question: Is this Project at US$858 million a good project that will provide “cheap and reliable power” as the promoters contend or is it detained to be the biggest disaster ever to befall Guyana if it should go through? Mercados study could be helpful in answering this question.
The Mercados Report is divided into two main sectors, one dealing with the economic and financial analysis and the second with hydrology issues.
The main objective of the study was to ensure that Amaila Falls Project is:
i. The least cost generation expansion option assuming the profitability of the project and
ii. Compatible with medium and long term demand projections.
In order to do projections that would have some possibility of achievement or near achievement, one must start with some known facts and build upon this base with educated estimates of the future, much of it informed by assumptions.
Mercados operates on the basis of a 154 MW plant instead of 165 MW, GPL ownership of 142 MW of installed capacity (2009) as opposed to 163.9 MW (GPL data) distribution level losses of approximately 30% as against total system losses of 34.3% (2009) (GPL data).
On the demand side, Mercados assumed that of the 131 GWh a year produced by self-generators, 60% would return to the grid in year 1 of Hydro and the remaining 40% in year 2; and that Linden would also be placed on the grid in year 1 at approximately 66.70 GWh a year. Mercados projected demand in 2011 was 619 GWh and sales at 436 GWh. Actual demand in 2011 was 653 GWh and sales 430 GWh with actual system losses at 32 % as compared to Mercados estimate of 27.4%. Incidentally, Mercados system losses projection of 20.8% remains unchanged from year 2013 to year 2035. In the year 2013 System losses remain at around 31.2%.
The reason we compare the Consultants projections with known data is merely to show the difficulty of estimates. Similarly, in its Base Case Scenario it uses a Crude Oil price of $75 per barrel (2013 – US$104 per barrel), which are directly related to the price of HFO and LFO used extensively by GPL. In its estimation, HFO prices are approximately 82.5% of crude prices and LFO 130% of crude.
According to GPL, HFO is costing the company on average in 2011 104% of crude and LFO 144% of crude. These are sharp differences and point to the conclusion that either the international experts are plain wrong and quite inaccurate on their conversions or that GPL’s prices as a percentage of crude are overstated. This particular item requires further study since the fuel bill at GPL exceed G$22 billion (2011 Audited Statement).
So far we have listed most of the problems encountered by Mercados in arriving at reasonable believable economic and financial results. However in their cost – benefits analysis of Amaila, Mercados used these figure of US$105 million as their fixed annual payment for energy from Amaila. The latest figure is US$122 million per annum, a difference 16.2%.
In view of these discrepancies it is highly unlikely that the economic and financial results of the Mercados study can be relied upon to support investing US$858 million in Hydro.
Of course the Mercados study does not deal with this capital sum nor does it concern itself with exchange rate risks, dealing exclusively in US currency and conveniently ignoring that GPL will be obliged to buy energy in US currency and sell electricity in Guyana dollars. Significantly too, it does not deal with the GPL’s licence and its methodology of setting tariffs.
Nowhere does it factor in the massive GPL overhead (payroll, depreciation) exceeding G$6.6 billion (2011 Audited Statement) in addition to the production costs.
Mercados focused on savings in fuel purchases for generation, savings in Operations/ Maintenance of GPL’s Thermal Equipment and savings in Capital expenditure in new thermal facilities.
In spite of all the difficulties Mercados concluded that “the inclusion of Amaila Falls cuts down GPL’s average supply costs to US11.5c in the medium to long term”. All of this is based on the fact that GPL will continue to utilise Thermal power in significant measure. The whole notion that Hydro will replace fossil is dead wrong. GPL will always need to produce energy from fossil fuels for a variety of reasons.
Incidentally, Mercados looked at the estimated cost of the energy produced by medium speed equipment running on heavy fuel oil with 16.07% return on equity and arrived at an estimated cost of 13 – 14 cents US per KWh and US$75 price of crude.
The compares favourably with the now famous US11 cents bandied about by the promoters of the Project. As far as the writer is concerned it is much better to pay an extra 2 cents or 3 cents rather than investing US$858 million in a questionable project producing energy where 31% is not billed to anyone.
Based on everything stated above, the Mercados 2009/2010 study and its conclusions on so-called savings are unreliable for an investment decision in 2013. The projections and assumptions of Mercados suffered from:
1. Poor estimation of System losses
2. Excessive and unjustified optimism on the return of self-generators to the grid.
3. Overly optimistic forecasts for Linden consumers.
4. Problems in demand forecasting
5. Failure to deal with GPL’s licence and tariff setting.
6. Estimating fuel prices as a function of crude oil prices.
7. Failure to estimate actual energy purchases from Amaila totalling US$122 million
8. Failure to account for exchange risks.
9. Failure to compute savings from system loss reduction and consequent positive impact on tariffs.
10. Use of Sithe’s financial model as an input for Mercados cost benefit analysis.
11. Failure to incorporate in the analysis the sum of US$122 million payable by GPL to Amaila for an undetermined amount of energy which under normal circumstances can be metered and measured.
The whole business of paying US$122 million for energy without knowing exactly how much of this product is being purchased and therefore without knowing the unit cost is the most incredible feature of the deal. Compounded by GPL’s legendary incapacity to manage its existing generating capacity, the uncertainty of the unit price raises serious doubts about whether and when GPL will be ready to cope with Amaila-produced hydro.
In a wise statement Mercados concluded that that “Amaila brings structural benefits to the power system: a generation mix hydro-thermal is better to hedge risks (oil prices volatility) than a system that entirely relies on thermal plants.”
Conversely, entire reliance on hydro is misplaced.
The second part of Mercados deals with its review of existing hydrology studies. The report made quite a few troubling observations and conclusions especially the question of lack of hydrological data in the design process and the fact that flows used were obtained by extrapolating results from Kaieteur Falls. It concluded that this methodology “may cause uncertainty regarding the expected power generation.” The report bemoaned actual data on the site and suggested a way to obtain more accurate information.
The main conclusions were that in wet months (June to September) more power can be generated and demand is covered but in months with low hydraulicity, demand is partially covered. This is as clear as it gets. Therefore, the Power Purchase Agreement (PPA) reasonably cognisant of this eventuality makes provision for a “legal” blackout based on inadequate flow of water. Clearly, the very fact of the non-guarantee of year round flow is sufficient to seriously reconsider whether an investment of US$858 million in a hydro project makes sense at all.
To overcome this problem would require costly engineering variations but Mercado notes that such variations to the structure proposed by Sithe will be practically impossible.
Conclusion
Mercados Economic and Financial Study needs to be reviewed, revised and updated to take account of the latest information now available and placing greater emphasis on the impact of Amaila on GPL’s tariff.
After all, the raison d’etre of Amaila is that it will produce cheap electricity for the GPL consumer. Mercados did not carry its analysis to the logical conclusion and destination i.e. the GPL consumer. This needs to be done using more realistic data and the figure of US$122 million.
Using more realistic data or demand, Linden, self-generation shifts, system losses, GPL’s overhead costs (over G$6.5 billion 2011) fuel prices for HFO, normal and steady growth in demand, continued use of fossil fuel, a more realistic projection of the impact on present tariffs should Amaila at US$858 million proceed points to an increase in the order of 23%.
As far as the problem of no-flow, this Project should be no-go.
R. Gaskin
(To be continued)
JAGDEO ADDING MORE DANGER TO GUYANA AND THE REGION
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