Another electricity tariff hike: Is there no option for Sri Lanka?

by Eng Parakrama Jayasinghe
parajayasinghe@gmail.com

 Electricity consumers reeling from the massive increase in tariff in February (adjusted somewhat in July 2023) were naturally appalled by the request for a further increase by the Ceylon Electricity Board (CEB).  A public consultation was held on 18 October 2023 by the Public Utilities Commission of Sri Lanka (PUCSL) to seek the stakeholders’ views on the CEB’s request for a tariff increase. However, the many representations made both in writing and orally at the public hearing do not seem to have had any impact; the PUCSL has allowed the tariff increase of 18% sought by the CEB. It is however somewhat relieving that permission has been granted conditionally. More on that later.

The rationale for the electricity tariff increases is that the CEB needs to cover costs. While the principle of cost reflective tariff is acceptable it must be read in conjunction with the provision in the PUCSL Act which states, among other things:

PUCSL Powers and Obligations

Excerpts of the Electricity Act No 20 of 2009:

·  Clause 3 (1) d – ‘to regulate tariffs and other charges levied by licensees and other electricity undertakings, in order to ensure that the most economical and efficient services possible is provided to consumers.

·  Clause 4 (1) a – ‘to protect the interests of consumers in relation to the supply of electricity by promoting efficiency, economy and safety by persons engaged in or in commercial activities connected with the generation, transmission, distribution, supply and use of electricity.

·  Clause (1) c – ‘to secure that licensees acting efficiently will be able to finance the carrying on of the activities authorized or required by their licences.

(These clauses have not been revised in the amendments to the Act in 2013 or 2023)

 During the aforesaid consultation, many startling revelations emerged. Firstly, the CEB itself admitted that the expected loss incurred was not 30 billion as originally claimed but Rs 18.5 billion. Also, the PUCSL has also contested the daily demand values and the estimation of the hydro resource availability expectations in the coming months. Many industry experts too contested those estimates.

A request for tariff increases without due diligence to ensure the above criterion is not logical by any means.

Past practices

However, we Sri Lankans are left with Hobson’s choice when the CEB requests a tariff hike after running up massive losses. It can do as it pleases after incurring losses and expects the Treasury to bridge its deficits. Unfortunately for us citizens, the Treasury has been doing just that and the net effect is that consumers indirectly bear such burden without any recourse for redress.

Records indicate that in the past decade alone the CEB has thus caused losses amounting to Rs 1 trillion and still remains afloat thanks to funds provided by the Treasury or state banks.

It is of some comfort that the Treasury has apparently decided to discontinue this practice.

Present situation

When the February tariff hike was imposed, it was claimed that with that the CEB would be at least cost neutral and would not need further subsidies. Either it was false promise or the CEB had no intention of honouring it.

Now, the CEB has obtained a further tariff hike to cover losses already made. What would happen if it couldn’t secure a tariff increase?  Could the Treasury make funds available, as it did in the past? If it does, there would be further increase in taxes and tariffs.  Head we lose tails they win!

Reasons for the CEB’s failure to be become cost neutral as promised are as follows:

•  Indiscriminate use of oil-based power generation

• Completely ignoring the principle of adopting least cost mode of generation

•   Inability of meet the fund requirement to purchase coal

•  Irrational and politically motivated steps to provide power 24/7 irrespective of cost and no one being accountable for such costs

• Ignoring the fact that Sri Lanka is still bankrupt

•   No effort to facilitate and accelerate the development of much more economical Renewable Energy

 The need for the previous hike was the large increase in cost of both oil/coal-based generation. That should have been recognised by both the CEB and the Ministry and appropriate action taken.

But what did they do? They did away with the 2.5 hr power cut to which the consumers had got accustomed; it would have helped reduce the use of expensive generation options. The government made a political decision, knowing very well that the additional generation had to be oil/coal based at much higher costs.

•  The CEB was not keen to reach cost effectiveness or seek more logical and economical modes of power generation.

•   All past losses were taken up by the Treasury – eventually passed on to the consumers indirectly. One trillion rupees has thus been ‘stolen’ from the people over the past decade.

•  No one is held accountable for such irresponsible behaviour.

•   No plans in place to reach the much talked about 70% RE by 2030

•  Is 70% renewable energy an achievable goal? The feasibility was demonstrated some days last year. But no lessons were learned. (See Figure 01)

 Power cuts cannot be avoided just yet

The unpalatable truth is that we do not have enough foreign exchange for oil and coal imports. Electricity generated using coal and oil costs Rs 70.00 a unit and Rs 120.00 unit, respectively, and losses will be Rs 41.00 a unit and Rs 91.00 a unit respectively, whereas all renewable energy-based generation costs are significantly lower.

As such, even though the use of coal with whatever funds allocated cannot be avoided in the dry months of the year, to limit the number of hours of power cuts, no such justification can be made for continued use of oil for power generation. Electricity consumers will come to terms with reality and the difficulties that limited power cuts cause, if they are convinced that the authorities concerned will do their utmost to solve the problem expeditiously.

There has been no attempt to accelerate the addition of low-cost renewable energy power generation, which is the most economical and does not require any foreign exchange, even though the authorities are fully aware of the drought months at the beginning of the year. The rooftop solar power generation is the most feasible option at no cost to the state and could help meet the shortfall in the hydro power generation during the dry months.

The comparison of costs of generation

The chart presented by Dr Tilak Siyambalapitiya at the Public Consultation is reproduced with his permission. It reveals the reality of the present debacle. (See Figure 02)

It is obvious that the average variable cost of Rs 32 per kWh has resulted from the high dependence on the use of oil.  As such, the only way to bring it down is to stop the use of oil entirely, the possibility of which has become evident on some days. If this requires the re-imposition of some limited power cuts, so be it. If the state takes some meaningful steps to develop the renewable energy sector, particularly by seeking resources from many Green Funds, the present feed in tariff of Rs 37 could come down further. What is equally important is that such tariff provided now is fixed for the next 20 years. Thus, the net present value will be less than Rs 10.00.

The situation during the dry months from January to May will be much worse with an increase in the thermal power generation and the emergency power purchase will send the costs further up. It is already too late for rooftop solar power generation to be stepped up to avert such a situation in 2024. But everything possible must be done to do so for the benefit of everyone.

 We had already reached the 70% renewable energy target with Zero Oil

This is the happy scenario that should have been accepted as the way forward with plans being formulated , to ensure that alternative sources of energy were available during the dry months at no cost to the State or the CEB.

While the CEB and the Ministry of Power and Energy lack the perspicacity and the vision or competence to understand this reality, they reject the proposals made by those who have the vision and the ability to expedite the change. The consumers must not be burdened with the unnecessary expenditure on thermal power generation. The standard ruse of awarding contracts for use of emergency power is being repeated this year as well and cannot be allowed.

Overdue payments have discouraged the operators of renewable energy projects beyond measure; many of them have not been paid for 14 months or so although upfront payments are made in dollars for coal and oil imports. The CEB’s colossal losses have come as no surprise.

 What about the present demand for price increase?

To ensure compliance and efficiency within the CEB, the PUCSL has set forth a series of conditions for tariff approval. These include the following:

1. To conduct a comprehensive independent audit for the fourth quarter 2023 and report to the Commission – deadline by 31 January 2024

2.  To establish a fully functional Bulk Supply Transaction Account (BSTA) – deadline by 31 December 2024

3. To settle all outstanding dues in 2023 to Renewable Energy Generation Licensees – deadline by 31 March 2024

4. To recognise the delay interest due under Standardised Power Purchase Agreements in the financial statements – deadline by 31 March 2024

5. To negotiate and enter into Fuel Supply Agreements with fuel suppliers – deadline by 31 December 2024

6. To liberalise solar rooftop schemes by allowing unhindered transfer to and from different schemes -deadline by 31 March 2024

7. To remove location restrictions for Renewable energy and allow aggregation of consumer accounts (under the same prosumer) for Net Metering and Net Accounting contracts – deadline by 31 March 2024

8. To negotiate, restructure and reduce finance cost (interest rates) – deadline by 31 December 2024

9.To complete and commission the Kothmale – New Polpitiya 220kV Transmission Line – deadline by 31 August 2024

10.  To submit a plan to reduce Transmission and Distribution losses over the next five years – deadline by 31 March 2024

11. To submit a plan to encourage energy conservation and efficiency (deadline by 31 March 2024)

12.  To reduce employee costs –

·  No bonus or other incentive payments for employees for the year

·  To ensure succession planning in the years ahead to eliminate/ reduce employee turnover

·  Optimal utilisation of existing human resources and minimise new recruitments

13.To eliminate the waste and non-productive expenditure to minimise/eliminate such expenditure in the electricity supply cost

But the question remains whether the CEB will abide by these conditions. What it has done in the past does not inspire much confidence as for its compliance.

Welcome as these conditions are, they are not likely to help sort out the mess in the power and energy sector. The author proposes the following:

·  The CEB should not be allowed to seek further tariff increases, based on increased use of fossil fuel or their cost escalations.

·  Reimpose the 2.5 hr power cut until achieving the desired average cost of generation

·  Cancel all emergency power (Supplementary power) contract for oil-based power generation forth with and do not approve any more contracts in the future

·  Plan for continued lowering of average cost of generation over the ensuing years, and impose penalties on the CEB for none achievement

·  Settle all outstanding payments to RE developers within six months and avoid any increase in the debt.

·  No payments in foreign currency for any RE developers local or foreign.  Foreign developers must bring in all the capital required for their development and not be allowed to tap the Sri Lankan banking system to obtain debt funding.  Their investments to be recovered and repatriated using the already existing mechanisms of the BOI

·  Set in place a program to reach the development of 1,000,000 roof top Solar by 2025 as already targeted and the CEB to be mandated to remove any road blocks with the collaboration with the large number of EPC contractors already registered with the SLSEA under the programs in Surya Bala Sangramaya.

·  Declare a time targeted program to retire all existing oil-based power plants before 2030 so that the 70% RE target or better could be achieved while meeting the above generation cost targets.

Way out

Although it is claimed that there will be no more electricity tariff increases until June 2024, nobody takes such pledges seriously. There could be another tariff revision by January with the war in the Middle East pushing the price of oil to $100 or even more.

So, it is time for the consumers to adopt measures to insulate themselves from such further shocks , even if the CEB and the Ministry of Power and Energy continue on the present disastrous path. Fortunately, such options do exist now.  From a national perspective it is time to appreciate the need for a paradigm shift in the way the energy sector is viewed. (See Fig 3 )

Consumers can abide by this change and their collective efforts will generate many benefits to the country and pressure the CEB to mend its ways.

Even on the basis of current tariff and interest levels, it is very attractive for the medium to high end domestic consumers to install solar rooftop PV (photovoltaic) systems. They must be encouraged to generate surplus energy so that the export proceeds would be adequate to cover the loan instalments under the Net Accounting system. Although the CEB will lose some revenue from these high-end consumers, it will be able to more than offset such losses by reducing expenditure on coal and oil imports and buy solar power at Rs 37.00 a unit.

This potential has been proved by a study on a sample of 1,500 consumers with monthly consumption exceeding 200 units per month. (See Table)

The CEB must be made to realise that the tariff increase is only a temporary measure and it will not be able to secure further price increases to cover increased costs due to use of fossil fuels and inefficiencies in management.