Luotang Power Plant

Provincial Planning Commission on behalf of the Hubei Provincial Government, and is located in Luotang City, Central China. The plant was designed, and constructed to operate as a 600 MW coal-fired plant, and is contracted on a Build Operate Transfer (“BOT”) basis; meaning the plant would be given to the Hubei Provincial Government at the conclusion of 20 operational years at no cost. Although it is a coal-fired plant, the emissions meet Chinese standards, making Luotang one of the least polluting coal-fired plants in the country (for its size).

During the 20 year operational period, the Luotang plant is contracted to sell power to the Hubei Provincial Power Company (HPPC) at approximately 65% of the regular selling price. The plant has also negotiated a coal supply contract with Pingdingshan; where they are to supply low sulfur bituminous coal that meets quality specifications for a fixed price per tonne (adjustments for inflation built in). Unfortunately, Luotang has been receiving coal shipments that are of questionable quality, causing the plant to come under a degree of financial stress.

Conclusion

We are recommending that the Luotang Power Plant to rework terms of their coal-purchasing contract. Although the quality of the coal has slightly risen over the past year, the inflationary price exceeds its quality. We propose a purchasing contract where the price of the coal is determined by the energy output (quality) per tonne. Our recommendation for the company was thought through on the assumption that coal quality was the primary factor as to why the plant has been experiencing revenue issues. We have formulated other assumption that needs to be taken into consideration as well;, the current fixed selling price to the parent for 65% of the regular price is far too low for the plant to operate at an efficient level, the price needs to be adjusted to reflect the normal take price of coal.