Pummelled by high international oil prices, Sri Lanka -- which produces no crude of its own -- is scrambling to reduce its dependence on oil and cut energy costs via hydropower and coal power projects.

The Norochcholai project was delayed for years by opposition from environmental groups, which the government says has now been overcome, and is expected to reach full capacity by 2012.

"This coal power project will have a positive impact on Sri Lanka's economy, as it will bring down the cost of electricity and also will boost investment in Sri Lanka by enabling us to offer electricity at cheaper rates," Treasury Secretary P.B. Jayasundara told reporters.

The 20-year Chinese loan charges 2.0 percent annual interest and comes with a 5-year grace period.

Cyclical droughts that dried up reservoirs and hit hydropower generation have forced companies to rely on expensive-to-run diesel generators, and Sri Lanka is desperate to find ways to bring down energy costs that have put pressure on the island's balance of payments.

The state-run Ceylon Electricity Board is accruing huge losses because the government subsidises electricity to the public.

"The (Ceylon) Electricity Board makes a loss of 40 million rupees ($390,000) per day," said Mahindananda Aluthgamage, Deputy Minister of Power and Energy, forecasting the new plant would enable the board to slash per unit production costs, which are now about 50 percent higher than sales revenues.

The government is also hoping to build new coal plants in the eastern district of Trincomalee and another in the southeastern district of Hambantota.