Dear Editor,
I believe that the Norconsult Report provided extremely important advice by suggesting that since the perceived risks of investing in Guyana are high, mainly due to political and regulatory reasons, one possible way for Norway to support the project would be to issue guarantees to the project for the repayment of the loan. According to the report, this would reduce the financing costs substantially, and the risks for the equity sponsor of the project. This would obviously call for Norway to play a closer role in the administration of the project, but I do not see this as a negative.
The Report also noted that the original PPA had a risk allocation which was not well balanced, in the sense that several major risks were not allocated to the party which was best equipped to handle the risks. Norconsult opined that to a large extent these risks have to be transferred to the EPC contractor and the sponsor. The Report was not clear about which risks it was referring to, but it would be in the government’s interest to follow up on this.
Keen attention should also be paid to Norconsult’s statement that restoring China Rail as the EPC contractor would probably cause Norway’s International Climate and Forest Initiative (NICFI) to withdraw its support for the project. Opposition to China Rail was noted in many places in the Report.
Many sections of the Report mentioned the need to buy out Sithe Global (SG), given that it has a 60% share in Amaila Falls Hydro Inc (AFHI). What is confusing to me is why there is a need to buy out SG when it was SG that withdrew from its position as developer and main sponsor of AFHP. Didn’t SG give up its right to the 60% share by walking away? Moreover, if it’s a case of buying out technical plans and project documentation already prepared, why do we need another 3 years for project evaluation and start of construction?
There is nothing that precludes SG from resuming the role of developer and main sponsor once the project gets the unanimous approval of the National Assembly, a condition dictated by SG. It seems that this project has the support of the opposition party, so it’s only the governing coalition that needs to be on board to move the project along.
In terms of the economic and financial analyses, I am not sure what was the scope or terms of reference for the Report, but I think the Report was ‘light’ on its analyses, making only high level adjustments to the original project costs and financial assumptions.
Given Norconsult expertise in hydropower construction, I expected it would have at least given an opinion on the proposed capital costs under the original design, and at least an order of magnitude estimate for the underground powerhouse alternative and higher capacity transmission lines.
I believe that over the long run the AFHP will be definitely cheaper than the status quo.
However, we must be concerned about the short term costs ratepayers will be asked to bear under the take-or-pay scheme for the Power Purchase Agreement (PPA). In theory, anything cheaper than the current GPL rates will be favourable. That is why the terms of the PPA should be carefully scrutinized to make sure that ratepayers will be better off over the entire duration of the BOOT period.
Careful attention must be paid to such things as how project cost overruns will be treated. Is a certain amount of GWh guaranteed each year under the PPA, if yes how much, if no what protection is there for ratepayers? Is the load forecast used to develop the $/kWh charge that GPL expects to charge customers realistic? Will there be an opportunity to pay off the remaining principal on the foreign loan before the end of the BOOT period given the astronomical return on equity sought? (In the USA electric utilities get about 9% ROE as opposed to the 17% to 19% sought here.) How much back-up generation will GPL have to carry and at what cost? What rates will the off-grid customers be willing to pay to take service from GPL?
These are just some of the questions to be analyzed to ensure that proper protections are in place for ratepayers to be better off with the AFHP.
Yours faithfully,
Vijay Puran
New York
