- Cabinet to be officially notified of decision soon: Energy Min. Sec.
- Conflicting concerns regarding induction of battery storage
The long-delayed billion-rupee Liquefied Natural Gas (LNG) terminal and pipeline project off Kerawalapitiya, which was finalised last year to be awarded to a Chinese contractor, is now facing cancellation, with the decision expected to be communicated to the Cabinet shortly, The Sunday Morning reliably learns.
The Energy Ministry is planning to shift away from LNG towards battery-powered Renewable Energy (RE), it is learnt. Although the contract was awarded last year, the Government has been re-evaluating whether to proceed with the project due to the inclusion of a take-or-pay clause, which could expose the country to substantial financial losses given Sri Lanka’s current limited LNG demand, according to sources.
When contacted, Ministry of Energy Secretary Prof. Udayanga Hemapala confirmed that the Minister had decided to cancel the tender but noted that the decision had not yet been made official, as the ministry was required to formally communicate it to the Cabinet of Ministers.
Implementation delays
The deal – initially tendered in February 2021 and closed in June the same year – is structured under a Build-Own-Operate-Transfer (BOOT) model and has once again reignited debate over the controversial take-or-pay component. The Government finalised the tender in July last year, following years of delays. However, even after the finalisation, the primary concern remained the inclusion of the take-or-pay clause in the LNG supply agreement.
A senior official close to the matter told The Sunday Morning that while take-or-pay clauses were standard practice in global LNG contracts, applying such terms in a relatively small market like Sri Lanka carried significant financial risks. “Even if the system has cheaper sources such as hydro or coal, we would still be obligated to pay for LNG volumes that we do not require,” the official warned.
Nevertheless, the official claimed that LNG was essential for the country’s energy requirements, particularly during periods of low hydropower availability and high demand.
Meanwhile, RE suppliers have raised concerns over the agreement, cautioning that long-term LNG commitments could restrict the integration of clean energy into the national grid and potentially undermine Sri Lanka’s broader transition to RE.
According to a feasibility study conducted in 2014, the Colombo North Port was initially identified as the most suitable location for an LNG terminal. However, Kerawalapitiya was subsequently selected due to its proximity and suitability for natural gas-fired power generation. Under the proposed plan, a Floating Storage and Regasification Unit (FSRU) with a regasification capacity of 375 million standard cubic feet per day and a minimum LNG storage capacity of 156,000 cubic metres was to be developed.
The FSRU was planned to operate under a 10-year Build-Own-Operate (BOO) model, while the associated pipeline infrastructure was to be developed by the Ceylon Petroleum Corporation (CPC) under BOOT terms.
Global LNG price volatility remains a key factor in the debate. Between 2020 and 2023, LNG prices averaged between $ 8.2 and $ 9.6 per MMBtu. For long-term system planning under the Ceylon Electricity Board’s (CEB) Long-Term Generation Expansion Plan (LTGEP) 2025–2044, a projected LNG price of $ 11.2 per MMBtu has been assumed, excluding infrastructure costs. A sensitivity analysis has also been included to assess potential price fluctuations, it is learnt.
The LTGEP 2025–2044 identifies natural gas as a critical component of a cost-effective and environmentally sustainable power system. Under the base case scenario, LNG availability was projected by mid-2027. According to the sensitivity analysis in the plan, a delay of an additional three years could increase the present value of total system costs by approximately $ 304 million.
In line with this strategy, the CEB has planned the development of a 130 MW gas turbine power plant at the Kelanitissa Power Station through international competitive bidding. The plant is expected to improve operational flexibility, enhance grid stability, and support rapid system restoration in the event of islandwide power failures. However, implementation delays mean the plant is now expected to become operational only by 2030.
CEB statistics show that fuel costs account for approximately 85% of the board’s total electricity generation expenditure. In 2023, the CEB spent around Rs. 109 billion on fuel oil, while expenditure declined to Rs. 81 billion in 2024. Engineers estimate that achieving just a 10% saving through competitive fuel procurement could result in annual savings of Rs. 8–10 billion, easing financial pressure on the utility and benefiting electricity consumers.
Ad hoc changes?
However, as reliably learnt by The Sunday Morning, CEB engineers are opposed to the Minister’s reported decision to move away from LNG, maintaining that LNG is critical not only for electricity generation but also for the shipping industry and other economic sectors.
“Shifting to battery-powered RE is good in principle, but it is expensive for a country like Sri Lanka,” claimed a senior engineer attached to the CEB, who wished to remain anonymous. “The cost of decisions made based on poor or incomplete studies will ultimately have to be borne by future generations,” he claimed.
The CEB official warned that even with battery-powered RE, the overall cost of energy would remain extremely high. “We have already planned and commissioned several power plants designed to operate on LNG. Policies and long-term planning frameworks have been developed based on LNG integration. When ad hoc changes are made to such policies, it becomes unbearable for the power system and extremely damaging to the country’s economy,” he said.
On the other hand, the Public Utilities Commission of Sri Lanka (PUCSL) expressed support for integrating battery-powered RE into the national grid. “If the Minister has taken such a decision, it would be a welcome step,” PUCSL Director General Damitha Kumarasinghe said.
However, when questioned about the LNG power plants already committed under existing plans, Kumarasinghe attributed the situation to shortcomings in past energy policy formulation.
Viability of LNG
In such a backdrop, the Sri Lanka Energy Managers’ Association (SLEMA) said that the country should exercise caution before abandoning LNG, even as the ministry is reportedly considering cancelling the long-delayed LNG tender.
Responding to a question on whether Sri Lanka still needed LNG at a time when RE was being prioritised and the LNG tender may be shelved, SLEMA President Dr. Amila Wickramasinghe said that the issue must be evaluated through detailed technical and economic analysis rather than political positioning.
He noted that LNG had broader economic value beyond electricity generation. “The industry could also benefit when you have natural gas, because we have previously done several studies – not just SLEMA, but various organisations – on whether there are other uses of natural gas,” he said.
According to Dr. Wickramasinghe, industries such as ceramics and other manufacturing sectors that currently rely on petroleum fuels for boilers and thermal processes could benefit economically if LNG is procured at a competitive price. “Their electricity or energy bills will be reduced if natural gas is procured at a competitive price. So it all depends on the pricing and the procurement process,” he explained.
He added that industries consumed energy not only in the form of electricity but also through petroleum fuels for thermal requirements. “If you go with the most optimum procurement process, then not only electricity but other industries could also benefit,” he said.
However, Dr. Wickramasinghe pointed out that realising these benefits would require significant supporting infrastructure. This includes port facilities to unload LNG as well as pipelines or alternative transportation systems to move gas from unloading points to industrial zones.
He said discussions in the past had included the possibility of a backbone pipeline extending towards major industrial areas, including regions in the south. “These are long-term plans, but they are possible,” he said.
Technical considerations
Addressing the ministry’s stated priority for renewable energy, Dr. Wickramasinghe said this should not be interpreted as a rejection of LNG.
“My understanding of the Minister’s thinking is that he is very supportive of RE,” he said, adding that as an electrical engineer, the Minister would also be aware of the technical requirements needed to support a renewable-heavy power system.
“RE alone can’t run the system,” Dr. Wickramasinghe stressed. While battery storage can support renewables to some extent, he said conventional wisdom still held that thermal power was required to ensure system stability. “Otherwise, even renewables can’t run,” he said.
He explained that increasing renewable penetration required more flexible power sources, a role LNG could play effectively. While the Government is exploring battery storage alongside renewables, he questioned whether such systems could yet provide firm energy. “Battery storage is good to some extent, but in certain aspects, batteries are not serving the purpose,” he said.
One critical issue, he explained, was system inertia. “Our systems need something called inertia. When you have rotating machines, you get inertia, which gives the system time to react to disturbances. When you don’t have rotating machines, as with batteries and renewables that operate through power electronics, you don’t have that inertia,” he said.
“In very simple terms, without inertia, the system has no time to react and can suddenly collapse,” he added.
Commenting on whether LNG could be considered clean energy, Dr. Wickramasinghe described it as a transitional fuel. “LNG emits less carbon than coal and diesel, but it is still a petroleum product. In some definitions, it is considered clean, but in others, it is not,” he said. “It sits somewhere in between – cleaner than what we have been using, but not 100% clean.”
He added that RE combined with battery storage was significantly cleaner, though not entirely carbon-free when lifecycle emissions were considered. “If you look at how solar panels, wind turbines, and batteries are manufactured, transported, and installed, there are carbon emissions involved,” he said. “Still, renewables are much cleaner than conventional thermal power.”
From an economic perspective, Dr. Wickramasinghe said that at present, LNG combined with renewables was cheaper than renewables combined with battery storage. “That situation will change, but at the moment, LNG and renewables are cheaper,” he said.
He cautioned, however, that technology being labelled as “cheap” did not automatically result in savings. “In Sri Lanka, we often say a technology is cheap, but then procure it from the most expensive source,” he said.
He pointed out that even RE projects could end up being more expensive than LNG if procurement was not competitive. “Our nameplate says it’s renewable and clean, but we end up spending much more than we should,” he said, referring to what he described as vested interests promoting overpriced solutions.
He stressed that energy decisions should be based on current data, observed trends, and rigorous engineering and economic studies. “Numbers change every year. We cannot make decisions today that may not be valid five years later,” he said.
All efforts by The Sunday Morning to reach Minister of Energy Kumara Jayakody for comment were unsuccessful.