With the long-term coal tender for Norochcholai pending Cabinet approval, Lanka Coal Company (LCC) Chairman Shehan Sumanasekara highlighted the crucial role of coal in the country’s energy mix, especially given the anticipated extreme dry season.
In an interview with The Sunday Morning, he said: “The long-term coal tender process is currently awaiting Cabinet approval, which is beyond my control.”
He explained that negotiations had been necessary due to higher-than-anticipated prices compared to last year’s rates. To ensure a steady supply, the first shipment is scheduled for 10 September, with additional shipments planned through October. Long-term tendering will begin afterward, alongside two spot tenders to secure 2.2 million MT for the next season.
Sumanasekara elaborated on the stringent criteria used to select bidders, emphasising transparency and reliability. “We only allow credible, financially stable suppliers to participate in the tender process,” he said. He also discussed measures taken to address potential non-serious bidders, including requiring substantial bid bonds to ensure financial backing and minimise risks.
Addressing environmental considerations, Sumanasekara defended coal’s role in Sri Lanka’s energy mix amid ongoing debates about privatisation and restructuring of the Ceylon Electricity Board (CEB).
“Coal remains a vital component of our energy security. Any changes to privatisation and restructuring need to be carefully evaluated to maintain stability and reliability,” he asserted.
Following are excerpts:
Given the crucial role of coal in Sri Lanka’s energy mix, particularly with the expected extreme dry season, could you provide an overview of the current status of the long-term coal tender for Norochcholai and the key factors that influenced the selection of the most responsive bidder?
The long-term coal tender process for Norochcholai is currently awaiting approval from the Cabinet, which means it is not yet within my control. Negotiations were required due to the higher-than-anticipated price, especially when compared to last year’s Black Sand prices.
At the LCC, we diligently followed the correct procedures by initiating the tender. The negotiation process was swift, with discussions completed in a single day via Zoom. We are prepared to meet the upcoming demand, with the first shipment scheduled to arrive on 10 September and subsequent shipments planned to ensure a consistent supply.
While nine shipments are still under the old contract, four or five will arrive in September and the remainder in October. The long-term tender is expected to commence thereafter. Additionally, we have planned for two spot tenders to secure the 2.2 million MT required for the next season. However, the final decision on the tender is pending Cabinet approval.
Can you elaborate on the criteria used to select the most responsive bidder for the long-term coal tender? How did you ensure transparency in this process?
The selection of the most responsive bidder for the long-term coal tender was based on a set of stringent criteria designed to ensure transparency and reliability. When a party registers, it must meet all the requirements of being a credible supplier, including financial stability.
The LCC now has about 21 registered companies from various countries such as Russia, South Africa, the UAE, Singapore, Indonesia, and India. These are established, 100% coal suppliers that have been thoroughly screened to ensure they are not fly-by-night operators.
Since I took charge, I have brought more transparency to the process, which has increased confidence among both the public and private sectors. Open tenders are used to maintain transparency, but only registered and credible entities are allowed to participate. This approach ensures that the companies involved are capable of fulfilling their commitments, thereby safeguarding Sri Lanka’s energy security.
Given the controversy surrounding previous tenders, how did the LCC address potential issues of non-serious bidders in this round of tendering?
In addressing potential issues of non-serious bidders, the LCC has taken significant measures to ensure that only credible and reliable suppliers are involved in the tender process. Buying affordable coal is crucial for maintaining financial stability and ensuring the affordability of electricity for consumers. However, my role in this process is strictly procedural, and the final decision rests with the Cabinet.
One of the key steps taken was to ensure that all participating bidders are thoroughly vetted and registered as credible entities. For instance, one of the largest coal suppliers globally initially provided 11 cargoes before sanctions required it to stop. It assigned its cargoes to another company, which successfully delivered the remaining shipments. Given this history, we can reasonably expect that these companies will fulfil their obligations if awarded the contract, although nothing is guaranteed.
Additionally, to further safeguard the process, the LCC has required substantial bid bonds from all participants. For example, the Russian company involved in the previous tender has already provided a bid bond of around $ 13 million. This ensures that the companies involved are serious and have the financial backing to deliver on their commitments, thereby minimising the risk of non-performance.
The LCC is adopting a 50/50 approach between long-term and spot tendering. Could you explain the rationale behind this strategy and how it benefits the company and the country?
During my tenure, we have encountered situations that highlighted the need for a balanced approach to coal procurement. One key instance was in October 2022, when we faced a crisis and had to open the tendering process. At that time, credit was hard to come by, and of the 11 or 12 registered parties, none were willing to extend credit to us. This experience underscored the importance of having both long-term and spot tendering options.
The 50/50 strategy between long-term and spot tendering allows us to mitigate risks and take advantage of market conditions. Long-term contracts provide stability and ensure a steady supply of coal at a predetermined price, which is crucial for planning and budgeting. On the other hand, spot tendering gives us the flexibility to respond to market fluctuations and secure coal at potentially lower prices when the market is favourable.
This approach benefits the company by providing a balanced portfolio that can adapt to changing circumstances. It ensures that we are not overly dependent on a single procurement method, reducing the risk of supply disruptions. For the country, this strategy helps maintain energy security and potentially reduces costs, which can lead to lower electricity prices for consumers.
By following the proper tendering process and adhering to Government protocols, we ensure that we are making informed decisions that are in the best interest of the country. However, the final decision on the tendering strategy rests with the Cabinet, and we await its direction on this matter.
Given the fluctuating coal index prices, how is Sri Lanka managing the financial implications of these changes, especially with the decision to rely on upfront payments rather than credit? How does this approach affect our ability to secure competitive rates in the global market?
This time, instead of securing one block of 2.25 million MT of coal for the entire season, we’ve divided our long-term contract into two seasons. From September to March, we need 2.25 million MT, but under the long-term tender, we are only purchasing 1.1 million MT. The remaining 1.1 million MTwill be procured for the 2025-2026 season, spanning from September 2025 to April 2026.
The spot tender for 10 days involves buying coal for the next month, allowing us to get immediate prices and avoid long-term risks. In contrast, the long-term tender involves 38 shipments spread over seven months, during which price fluctuations can occur. This is why we use index pricing to manage the uncertainty in coal prices. Suppliers also face this uncertainty, often including a risk premium in long-term contracts. In contrast, spot tenders mitigate this risk by providing prices for the near future, which tend to be lower.
However, relying entirely on spot tenders has its drawbacks. If a spot price is unavailable or there are procurement issues, we might not have enough coal. By securing a portion of our supply through long-term contracts, we ensure we have the necessary reserves and can cover our needs even if spot prices become unavailable. The long-term contract acts as a safety net, preventing disruptions to our coal supply.
In terms of payment options, we offer suppliers both Letter of Credit (LC) and Telegraphic Transfer (TT) terms. An LC is a reliable payment method where the bank guarantees payment to the supplier once specific conditions are met. The supplier ships the coal and, once the shipment is underway, we make an 80% payment. The remaining 20% is paid upon verification of the coal’s specifications at the unloading port.
On the other hand, TT terms involve immediate payment once the coal is loaded and documents are provided, eliminating the need for the bank to hold the LC. Both options avoid credit-based transactions, ensuring a more secure payment process.
How does the LCC balance its procurement strategy with environmental considerations and compliance amidst ongoing discussions on coal’s role in Sri Lanka’s energy mix?
The LCC’s approach to procurement includes balancing financial considerations with environmental compliance. When a supplier loads coal at its port and sends the vessel, the LC is opened, but payment is not made until the ship is en route to Sri Lanka.
For example, if the voyage takes 20 days, payment is made after 10-12 days, once we have received the shipping documents and tracked the vessel’s progress. This process acts like an advance payment, but we ensure the vessel’s arrival and verify the coal’s specifications before making the final 20% payment upon unloading.
Regarding environmental considerations and coal’s role, there are ongoing discussions about the future of coal in Sri Lanka’s energy mix. My personal opinion is that coal, which currently provides about 28-38% of our energy, is a crucial component of our energy security.
Given its significance, I believe that coal power plants should remain under Government control to ensure national security. Privatisation could lead to risks such as operational disruptions or sabotage, and may not necessarily address the underlying financial or operational issues more effectively than public management.
The restructuring of power generation assets and the potential privatisation of plants like Norochcholai should be carefully evaluated by experts. While privatisation may bring efficiency gains, it is essential to consider the long-term impact on energy security and the ability to maintain a stable and reliable energy supply.
With ongoing discussions about the privatisation of Norochcholai and the broader restructuring of the CEB, how do you see these developments impacting coal procurement and the overall management of the country’s sole coal power plant?
The ongoing discussions about the privatisation of Norochcholai and the restructuring of the CEB raise several considerations for coal procurement and management of the country’s sole coal power plant.
All imported coal must meet specific quality standards, with penalties for deviations from these specifications. There are limits to allowable variations, and any coal that exceeds these limits can be rejected. For example, while Russian coal meets our specifications without penalties, South African coal may incur penalties due to differences in quality. The surveyors, such as Cotecna, verify these specifications to ensure compliance.
Regarding the broader energy strategy, there’s a debate on whether Sri Lanka needs more coal power plants. While renewable energy is encouraged, it faces challenges such as high costs and limited immediate capacity. The cost-effectiveness of coal power, especially in comparison to renewables, plays a significant role. Coal is relatively cheap, costing around Rs. 28 per unit compared to more expensive renewable options. Hydropower remains cheaper but is seasonal, unlike coal, which provides a stable supply.
Environmental concerns about coal are significant, but global practices show that even developed countries sometimes rely on coal when necessary. The transition to renewable energy is slow, with no country yet surpassing 30% renewable energy in their mix. This indicates that a balanced approach is needed.
Alternative energy sources like hydrogen, Liquefied Natural Gas (LNG), and nuclear power are being explored. Nuclear energy, for example, has been successful in countries like the UAE, providing a stable and reliable power supply.
While the shift towards renewable energy is essential, it must be weighed against practical considerations of cost and energy security. The privatisation and restructuring of energy assets should be carefully evaluated to ensure that they align with national interests and maintain a secure and cost-effective energy supply.