The construction cost of Amaila is in the range that Gaskin suggests

Dear Editor,

We appreciate the thoughtful analysis provided by Ramon Gaskin in his recent letter in SN titled ‘The Amaila project should be comprehensively reviewed by professional engineering and financial experts‘ (February 14, 2012).  We would like to thank him for this opportunity for an ongoing dialogue; however, we wish to clarify certain misunderstandings regarding the project.

It is unnecessary to guess at the liability Guyana Power & Light (GPL) would take on as a result of the various cost components (construction, financing, etc).  The total cost to GPL is encompassed in a single all-in tariff paid annually over 20 years, starting the first year of operations for the hydropower plant.  The all-in tariff cost, which includes the repayment of debt, equity and operating and maintenance expenses, is projected to be US$114 million in year 1 and escalate by 1.5-2.0% until year 12, then drop to US$71 million (following the repayment of the debt) and escalate by approximately the same percentage until year 20.  After year 20, the unencumbered asset is transferred to GPL at no cost, with the only ongoing costs to GPL being those needed for operations and maintenance of the plant, at roughly US$15 million per year.

Mr Gaskin suggests that the evaluation of the savings to GPL customers is based on “scare tactics” and “$200 per barrel oil.”  In fact, the year 2018 GPL savings, as projected by Sithe Global and presented to the Guyana media, was US$91 million (over G$18 billion) after payment of the tariff referred to above.  This savings is based on the heavy fuel oil price equivalent of US$115 per barrel crude oil in 2018.  Indeed, at US$200 per barrel crude oil, the projected year 2018 savings to Guyanese consumers is US$261 million (over G$53 billion).

Mr Gaskin asks for clarity regarding the money Sithe Global has spent thus far developing the Amaila project, as well as the investment it intends to make in the project at financial close. In our January 24, 2012 meeting with political leaders, local businessmen and press, we disclosed spending US$11.1 million since 2009 in environmental, engineering & design, legal, financing and other expenses.  As noted then, the breakdown of that expenditure is US$5.8 million for environmental work, $2.3 million for engineering and design, $1.2 million for financing costs, $0.9 million for legal work and $0.9 million for other miscellaneous expenses.  Sithe Global’s cash equity obligation commitment at financial close is expected to be US$150 million.

The environmental development costs were related to establishing an updated Environmental and Social Impact Assessment (ESIA) so that the project is implemented at world class standards and complies with the guidelines set by international institutions such as the Inter-American Development Bank.  Engineering and design costs are the result of fieldwork and early design works for the dam, powerhouse, power tunnels, transmission line and electrical interconnect facilities.  Legal costs pertain mainly to the structuring of the transaction, while financing costs spent to date are primarily associated with arrangement of debt providers.  The remainder of the expenses falls into miscellaneous categories such as administrative, travel, and general development matters.

Additionally, Mr Gaskin raises a concern regarding transmission of power along a single transmission line.  Sithe Global’s engineering design includes two electrical circuits designed to provide 100% redundancy in case either circuit fails or faults.  The transmission lines are to be supported by heavy duty steel towers to ensure long term reliability under all foreseeable weather conditions.  Furthermore, the corridor for the transmission lines has a width of up to 100 metres to avoid high vegetation falling on the circuits and interrupting the interconnection (for environmental considerations, the corridor width will be reduced in areas of lower vegetation).  To ensure operational security of the GPL electric grid under a variety of contingencies, GPL commissioned Siemens Power Technologies International, a world leader in electrical grid power systems analysis, to develop a model of the GPL grid system and the Amaila project interconnection.  This valuable engineering tool allows planners to ensure the proper infrastructure is in place to deliver reliable power to GPL’s consumers.

Mr Gaskin also puts into question the forecast power demand of GPL assumed for the project.  This is a question that GPL has addressed in the past, but Sithe Global can offer up its assessment based on its own due diligence and the reporting of independent consultants.  GPL’s current annual energy demand (including losses) is 669 GWh and is forecast to grow to 895 GWh in 2016 when the Amaila project is online.  At that time the Linden grid will be connected to the GPL system, which will add a projected 76 GWh in 2016.  Additionally, self-generators have expressed interest in switching onto the GPL grid to take advantage of lower power prices after the project comes online, adding 90 GWh or more by 2016.  These additions bring the total projected energy demand (including losses) to 1,061 GWh in 2016, with demand forecast to continue modest growth to 1,322 GWh in 2020.

Finally, Mr Gaskin questions the cost of the Amaila Project, suggesting that a hydropower plant of this size would normally cost between $320 million and $360 million.  It is important to remember that construction costs of similar sized hydroelectric projects can vary a great deal due to different site characteristics and locations, the size and length of the dams and tunnels (if required), as well as the extent of other needed infrastructure such as transmission lines.  In this case, the construction cost of the hydropower facility of the Amaila project is in the range that Mr Gaskin suggests and represents about 70% of the total $519 million EPC construction cost.  However, the Amaila project also requires a 270km long transmission line, which makes up about 30% of the total EPC construction cost.  This is a cost that many hydro projects do not carry; however, this high voltage transmission line provides a valuable infrastructure asset that significantly upgrades Guyana’s electrical grid for decades to come.

The Sithe Global team has worked very hard to ensure EPC construction costs are competitively priced and based on value engineering and economic performance.  To this end, the team conducted an internationally competitive bid process in order to select China Railway, and continues to work hard to maintain the EPC pricing until it is fixed at financial closing of the project.  We believe the Amaila Project will significantly transform Guyana’s economy from a reliance on fossil fuels to a sustainable and renewable energy based economy facilitating further economic growth for Guyana.  The clean and renewable energy from the Amaila Project should be a showcase for Guyana, reflecting its international leadership in low carbon energy.

Yours faithfully,
Raphael Herz
Brian Kubeck  
Sithe Global