• Tender to close on 10 August
• 35 coal shiploads of 65,000 MT needed yearly
• Two shipments secured through spot tenders
• Ministry seeks G-to-G agreement with Russian supplier

By Maheesha Mudugamuwa Concerns have been raised over the ongoing million-dollar tender for the supply of coal to the country’s only coal power plant in Norochcholai, due to allegations that it could cause a massive financial loss to the country. The tender is for the supply of nearly 4.5 million MT of coal to the Lakvijaya Coal Power Plant (LVPP) for three years on long-term credit basis, The Sunday Morning learns. Accordingly, on 12 July, the Chairman of the Special Standing Cabinet Appointed Procurement Committee (SSCAPC) of the Ministry of Power and Energy on behalf of Lanka Coal Company (Pvt) Ltd. (LCC) had invited sealed bids to supply coal for the 900 MW Lakvijaya Power Plant from coal suppliers registered with LCC, who were eligible to bid. Seven companies – Swiss Singapore Overseas Enterprises Pte Ltd., Suek AG, Adani Global Pte Ltd., HMS Bergbau AG, Mercuria Energy Trading Pte Ltd., Knowledge International Strategy Systems Pte Ltd., and Yongtai Energy Pte Ltd. – have been pre-qualified to bid for the coal tender. The selected company is required to supply 4.5 million ± 10% MT of coal during the agreement period on Cost and Freight (CFR)/Free on Board (FOB) Trimmed basis. The tender will be closed on 10 August. Coal requirement Lakvijaya in Norochcholai generates around 40-50% of the total electricity requirement of the country depending on availability of hydropower. The first phase of the LVPP commenced in February 2011 and the annual coal requirement in that connection had been identified as 650,000 MT.  The power generation of the second and the third phases commenced in April and September of 2013, respectively. Accordingly, the total annual coal requirement had been 2,250,000 MT. The annual coal requirement for the generation of thermal power is collected from October to March of the ensuing year and stored at the Lakvijaya Coal Yard. This ensures uninterrupted power generation, since the April to September off-season with ensuing rough seas in the Norochcholai area renders it impossible to unload coal or for the ships and barges carrying coal to reach the jetty of the power plant. Each ship arriving at Norochcholai carries about 65,000 MT of coal. According to the plant’s requirement, approximately 35 shipments are required each year. This year’s coal requirement has been fulfilled by a long-term tender that was floated in 2021 to purchase around 2.25 million MT of coal. Accordingly, half of the stated requirement, which is around 1,140,000 MT, was unloaded between September 2021 and April 2022.   The remainder is scheduled to be unloaded between September 2022 to April 2023 due to sea conditions, while the balance requirement for 2022 has been met by calling for three spot tenders. Coal purchases Coal purchases are made under two systems – Term Contracts and Spot Contracts – and follow the International Competitive Bidding System. Term Contracts are purchases made under the contracts generally awarded for a period exceeding one year to obtain relatively a larger quantity of coal from the suppliers selected by inviting open quotations. Spot Contracts are purchases made under the contracts awarded for obtaining a relatively smaller quantity over a very short period by inviting bids from the registered suppliers at the prevailing competitive prices. Coal prices are determined on the basis of two internationally-recognised price indices – New Castle Index used for determining the price of coal supplied by the countries in the Asia Pacific Zone and API 4 Index used for determining the price of coal supplied by countries in the African Zone. As per the estimates in the Cabinet paper No/2022/PE on coal procurement submitted by Power and Energy Minister Kanchana Wijesekera earlier this month, the total coal requirement of LVPP for the 2022-’23 season is 2.42 million MT. A total of 50% of said requirement, which is around 1,140,000 MT, has been secured from the previous term tender and about another 120,000 MT (two shipments) have already been secured from the Spot 5 Tender. The remaining quantities need to be secured through a suitable procurement method, the Minister has informed the Cabinet. As Sri Lanka is facing a severe shortage of foreign exchange at present and the remaining coal stocks too are reaching their lowest levels, procuring coal has become vital, especially at a time when the country’s power sector is totally dependent on coal-powered power plants in Norochcholai. However, the ongoing conflict between Russia and Ukraine has resulted in a dramatic increase in world coal price indices. As mentioned in a recent Cabinet memorandum by Wijesekera, the global coal prices have risen from $ 70 to $ 300 per MT during the period from 2017 to date and the exchange rate against the USD has also fluctuated from Rs. 152 to Rs. 359. As a result, compared to the previous seasons, the unit cost of coal in the current season has increased threefold. Accordingly, the Minister had informed the Cabinet that it was expected that the total cost of coal may increase to $ 600-650 million for the next coal season (2022-’23) and the monthly USD requirement for the purchase of coal would be $ 90-100 million. However, international energy experts predicted that after a projected sharp increase in 2022, coal prices were expected to decline moderately in 2023, although they would remain much higher than their five-year average.  Coal prices on the rise PUCSL Chairman Janaka Ratnayake warned that the price of coal had gone up due to the current global energy crisis, with the coal pricing index reaching $ 350 per MT, resulting in vulnerabilities in getting cheaper coal from the Russian region.  “We have three locations where we can source coal. One is a private port in South Africa. The other two sources are Russia and Australia. In Russia there are two pricing indices. One is near Crimea, which is cheaper and is now sold at around $ 150 per cubic metre. However, there is some vulnerability due to the ongoing war.  “The other is near Odessa in Japan, where the indices are $ 350 per cubic metre. The other available source is in Australia, but we haven’t imported from there as yet. South Africa is out as it is a private port,” the PUCSL Chairman added.  He stressed that Sri Lanka should move quickly to import coal during the available unloading window from September to March 2023. Cheap rates At present, cheaper coal is only available in the Russian region and there has been a significant price discount of up to 50% from the Russian market relative to Australian and South African coal on expectations of a European ban on Russian coal. Wijesekera had informed the Cabinet that his Ministry, along with the LCC, had explored the possibility of entering into an agreement with viable international coal suppliers on a Government-to-Government (G-to-G) basis. Accordingly, proposals from potential suppliers had been invited through the Ministry of Foreign Affairs and 10 proposals received and evaluated by a Special Committee appointed by the Power Ministry. Following the evaluation, the Committee had recommended the proposal submitted by Russian supplier Suek AG as feasible. Further, this supplier had also been recommended by the Russian Federation’s Embassy in Sri Lanka, the Minister had stated. The Minister had further informed the Cabinet that due to the current global geopolitical situation, coal could only be procured from a limited number of countries, causing global coal prices to spike. This has further exacerbated Sri Lanka’s current economic and financial situation. As a result, long-term credit must be taken into account from existing registered coal suppliers of LCC (solicited) and from unsolicited proposals. Wijesekera had also suggested that to obtain competitive pricing in this context, the quantity of coal must be increased by at least 4.5 million MT for two seasons, as stated in the Cabinet paper. The Cabinet paper also recommended that spot tenders be sought in addition to term tenders to fulfil the next season’s requirement as it is expected that the first shipment of the above term tender will be unloaded in December 2022 after completing the procurement process. Controversy In Sri Lanka, coal tenders have been mired in controversy on numerous occasions during the past decade, as this is one of the most lucrative tenders in the country. This controversial nature was also highlighted by former Power and Energy Minister Patali Champika Ranawaka, who termed the coal procurement process  as a ‘coal mafia.’ In such a backdrop, questions have been raised as to why the Ministry is opting for long-term coal tenders if the Government has received G-to-G proposals from Russian suppliers. It has also been noted that the Ceylon Electricity Board (CEB) too has recommended spot tendering until global prices stabilise. Speaking to The Sunday Morning, a senior Government official who wished to remain anonymous stressed that the authorities were planning to adopt long-term procurement at a time when the global coal indices had reached their peak within the past several years. “We expect a Free on Board (FOB) $ 350-370 per MT rate through this tender or even higher. As per the information on the Russian coal market and also as mentioned in the Cabinet paper, Russian coal can be procured through a proper G-to-G mechanism at around $ 200 (it is around FOB $ 175),” he stressed.  The senior Government official further claimed that the CEB had recommended calling for a spot tender in parallel, but the Power and Energy Ministry/LCC were refraining from doing so. “If a spot tender is called, we can have some estimation of a reasonable market price,” he stressed, since the tender had been called in a backdrop where the country had received G-to-G proposals and while recommendations had been given to go for spot tendering. The bid documents which were only sent to the pre-qualified companies included conditions such as requiring $ 500 million credit for six months, The Sunday Morning reliably learnt. Therefore, it was alleged that the tender was aiming at a single company, as the bids were subjected to special conditions, including the very limited time period of around three weeks given for the companies to submit their bids. Response from authorities When contacted, LCC Chairman Jagath Perera told The Sunday Morning that even though the contract was for a three-year period, the prices would be changed as per the indices of the previous month. He clarified that a fixed price would not be applied for the purchase of coal and therefore even in the long-term contract the prices would vary based on the respective global prices at the given time. Public Utilities Commission of Sri Lanka (PUCSL) Chairman Janaka Ratnayake too confirmed the prices would vary based on global pricing as there must be a term in the agreement on deciding the prices when going for tendering. When asked whether the CEB had advised to go for spot tendering instead of long-term contracts, CEB Chairman N.S. Ilangakoon stressed that the tenders were handled by the Ministry and there may have been reasons for the decisions taken. “Nobody agrees to a short-term basis as we can’t pay, which might be the reason why they have decided to go for long-term tenders, so we are hoping for the best,” he added. He further explained that the CEB did not usually give recommendations and although the CEB’s General Manager represented the LLC Board, all tenders were handled by the Ministry. When contacted, Power and Energy Ministry Secretary M.P.D.U.K. Mapa Pathirana assured that the country would not incur a loss by going ahead with a long-term contract as the prices would be decided on the average of the prices on the given date. “In a long-term tender, only the shipping charges will be set as fixed charges and the coal prices will be considered based on the prices on the respective date,” he explained. When asked whether there would be any change in prices on the basis of the company, the Secretary stressed that everybody was given a chance to bid. Attempts to contact Minister Wijesekera were futile.