In a letter to the newspapers published on Sunday, Sithe summarized their qualifications and provided a brief overview of the project. It was important to note that Sithe, directly and indirectly, via its management team, have completed over 15,000 MW of energy projects. Sithe Global is a subsidiary of Blackstone that maintains an investment portfolio of over US$100 Billion of assets under management. Sithe’s management team has completed over 15 hydro projects around the world.
Not surprisingly, certain media houses chose to ignore the considerable experience of the Sithe’s management team and correct previous misleading headlines. Instead, a new level of speculation on the cost of the project started, making comparisons with other projects, without knowing if they were comparing “oranges and apples”, says a press release from the Government of Guyana.
Following is the text of the press release:
The Amaila hydro project is a private sector-led project with no GoG guarantees. Sithe, as developer is bearing the development risk of the project and 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 GoG at no cost. The life of this 154 MW hydro project is estimated to be over 100 years but the project is being fully financed and paid off over a 20 year period. After this period, the operating costs will be very low. As a result of this project, and other savings in costs that GPL can achieve, GPL projects that average tariffs to customers can decline by 40% when the hydro comes on stream in 2014.
In examining whether this project makes sense, the following are the most important:
i. The price that we pay for generation from the hydro project versus what we will pay today and estimated future fuel prices.
ii. That a public procurement process was pursued to determine that prices were the lowest possible
iii. Getting the best rates on the financing for the project
Firstly, 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. The average generation costs for GPL for all of its gross generation in the last 4 years (2006-2009), has averaged over US15 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 US1-3 cents per KWH.
For areas like Linden and self generators, who rely largely on diesel fuel, 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 4 years of US 20 cents for 2006, 21 cents for 2007, 26 cents for 2008, and 20 cents for 2008. Private self generators likely face similar or higher costs per KWH.
Subject to the total capitalization of the project, the costs to GPL of the hydro project, should allow generation costs to be substantially lower. This is the bottom line. As indicated above, GPL is projecting tariffs to drop by 40% on average in 2014, when the hydro comes on line.
It is important to note that the price that GPL pays will not be adjusted for inflation. Fuel prices on the other hand, are likely to rise as a result of global supply/demand changes. According to a recent U.S. Energy Information Administration outlook report fuel prices will reach an average of US$106.4 p/bbl in 2014. Keeping GPL demand constant to 2014, generation cost without hydro would approximate to US$18.4 cent p/KWH. This alone represents a 40% increase to GPL’s average generation cost with hydro.
Secondly, the cost of the project includes 3 major components:
i. The cost of the actual hydro project construction project that will deliver 154 MW at the Amaila site for transmission is just over US$306 M;
ii. Secondly, the cost of the transmission line, the clearing of the transmission line corridor and the road is approximately US$145 M
iii. Thirdly, of the financing costs and development costs, interest during construction, the debt reserve fund, and construction contingency alone account for US$165M.
So looking at the project, the actual construction costs is US$450 M; if one is to compare hydro project construction costs only to hydro projects in other countries, the figure to use would be US$306 M.
The current costs were derived competitively per the below process.
In early 2008, an Expression of Interest document was issued by Sithe Global to over 30 firms with the capability to build this project. Of these firms, nine uplifted comprehensive EPC tender documents prepared by MWH Engineers and Sithe Global. Five bids were received in October 2008 which were reviewed and levelized by URS and the Washington Group, internationally recognized engineers.
The bid costs came in considerably higher than had been budgeted. Various considerations were put up for this:
i. Commodity prices in 2008 were at an all time high and contractors were projecting these to continue to rise (e.g. Fuel, steel, cement, and shipping).
ii. The limited capacity of local firms with the necessary construction expertise and equipment would necessitate considerable equipment and experts to be brought to Guyana.
iii. Thirdly, the terrain was difficult given its remoteness, distance from major towns and settlements, and the overall physical attributes.
In late 2008, the GoG concluded that the costs of the project were too high, and that a re-bid and restructuring of the costs of the project was necessary. Bidders and any other parties, who were interested, were asked to re-price their proposals. In November of last year, as a result of the re-pricing, the total construction costs for the project were reduced to US$ 452 M. The re-pricing reduced construction costs by app. 25% when compared to the lowest bid of 2008 and over 60% when compared to the highest bid of 2008. The capital costs mentioned earlier is the result of this re-pricing. So the bottom line is that a competitive process was used to procure the construction costs.
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 earlier point on the level of development of the construction industry is also important. 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. Countries that Amaila has been compared to 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. Unfortunately, in Guyana, this is the reality for the time being
Thirdly, the cost of financing. Financing for this project comes from two sources—debt and equity. The debt is expected to come from the Chinese and the IDB—at single digit rates. Equity is being injected by Sithe with GoG having the option to inject funds and buy
down Sithe’s equity. The Sithe equity will earn 20% per annum, a lower rate than similar private-sector infrastructure investments in other emerging economies. It is important to stress that Sithe, as developer, is bearing the development risk for the project. It should be noted that the average costs of financing is not 20% as one media house has spuriously speculated. Debt is blended with equity, with debt being maximized (estimated at 70% of total financing). So average costs are closer to single digits depending on the final cost of the debt.
Additionally, GoG has the option to inject funds into the project to reduce Sithe’s equity and the overall costs of financing the project. 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. 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. All efforts are being made to further reduce the costs of financing.
Conclusion
It is important for media houses to be objective, fair and balanced in the way they report on these matters Additional information on the project is being provided in a phased manner given that certain aspects of the project are still being finalized. Given the importance of this project to the economic development of our economy, what is at stake if we don’t develop our own hydropower potential is the future of the development of Guyana’s economy through affordable, reliable, locally-sourced renewable energy.
