Govt. proffers explanation for high cost

May 26, 2010 News

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Amaila Falls Hydro Project…

…cites terrain, importation of inputs among other reasons

“Countries (to which) Amaila (Falls Hydroelectric Project) has been compared have a developed construction industry where many of these inputs are readily available; so prospective contractors do not have to contemplate importing all of the equipment and materials when building a project.”
This is according to a Government statement which sought to explain the costing of the hydroelectric project in Guyana.
It was pointed out also that financing for the project comes from two sources, debt and equity.
The statement pointed out that the debt is expected to come from the Chinese and the Inter Development Bank at single digit rates of interest.
Equity, the statement said, is being injected by Sithe Global with Government of Guyana (GoG) having the option to inject funds and buy down Sithe’s equity.
The Sithe equity will earn 20 per cent per annum, “a lower rate than similar private-sector infrastructure investments in other emerging economies.”
The government statement said that it is important to stress that Sithe Global, as developer, is bearing the development risk for the project.
“It should be noted that the average costs of financing is not 20 per cent as one media house has spuriously speculated… Debt is blended with equity, with debt being maximized (estimated at 70 per cent of total financing)…So average costs are closer to single digits depending on the final cost of the debt.”
The statement added also that Government has the option to inject funds into the project to reduce Sithe’s equity and the overall costs of financing the project.
The statement contends that every dollar of cheaper capital will in turn bring down the generation cost of the project.
“For example, funds from the LCDS will be used in this direction; GoG’s financing of the road similarly reduces the project cost.  Government can, over time, reduce the equity from Sithe based on a formula; this allows Guyana to maximize the inputs of local capital and other sources of funding, that may come at a later date.”
It was pointed out that this is a large project and the local capital markets have limited capacity; “This project is over 15 times the size of the Berbice Bridge project…So the ability to raise financing locally is limited.”
The statement stressed that “Many persons who make comparisons, have to determine if they are comparing construction costs for the hydro alone, or construction costs for the hydro and transmission line/road, or all construction costs and other project costs.”
The statement by the government said that level of development of the construction industry is also important pointing out that Guyana has to import many of the project inputs; the majority of the construction materials, equipment and personnel have to be imported and transported to a project site that is extremely remote and currently inaccessible by vehicle or airplane.
It was reiterated that Sithe Global, directly and indirectly, via its management team, has completed over 15,000 MW of energy projects.
“Sithe Global is a subsidiary of Blackstone that maintains an investment portfolio of over US$100B of assets under management…Sithe’s management team has completed over 15 hydro projects around the world.”
The government statement said that the Amaila hydro project is a private sector-led project with no GoG guarantees and Sithe, as developer is bearing the development risk of the project. GPL does not pay for power until after commercial operation and independent testing.
“This is a Build Own Operate Transfer (BOOT) arrangement, where after 20 years from the date of start up, the project reverts to Government at no cost.
It was pointed out, also, that the life of the 154 MW hydro project is estimated to be over 100 years but the project will be fully financed and paid off over a 20year period, “After this period, the operating costs will be very low.”
To this end the government contends that GPL projects that average tariffs to customers can decline by 40 per cent when the hydro comes on stream in 2014.
Government explained that the average price that GPL expects to pay for the power from the hydro delivered at Sophia after generation and transmission of a distance of over 280 KM, will be considerably less that the price that GPL pays for generation today.
“In the last few years, GPL has faced considerable pressure on generation costs with a fluctuating price for fuel.”
It was explained that the average generation costs for GPL for all of its gross generation in the last four years, has averaged over US$15 cents per KWH; in 2008, this figure exceeded US18 cents.
“These costs do not include employment costs of GPL personnel for generation, capital costs or depreciation.  When these costs are included generation costs increase approximately US one cent to US three cents per KWH.”
It was pointed out that for areas like Linden and self generators, who rely largely on diesel fuel, the average generation costs have been much higher.
“Linden, for example, which has an Independent Power Producer, had average generation costs for all of its generation for the last four years of US20 cents for 2006, US21 cents for 2007,US 26 cents for 2008, and US20 cents for 2009…Subject to the total capitalization of the project, the costs to GPL of the hydro project, should allow generation costs to be substantially lower.”

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