Power sector reforms- urgent need to revisit them

 

by Dr Janaka Ratnasiri-September 7, 2020

The government of Sri Lanka (GoSL), in a policy decision made in 1998, expressed its commitment to power sector reforms and embarked on a programme to restructure it by unbundling the Ceylon Electricity Board (CEB) into separate companies for generation, transmission, and distribution, as reported in the ADB Report on Country Assistance Programme Evaluation: Power Sector Assistance Evaluation, August 2007. To give effect to this policy, a Bill was drafted to introduce reforms in the power sector as far back as 2002.

ELECTRICITY REFORMS ACT 28 OF 2002

The draft titled Electricity Reforms Bill was presented to the Parliament in 2002, outlining sector reforms comprising restructuring of the electricity industry by breaking the Ceylon Electricity Board (CEB) and Lanka Electricity Company (LECO) into several independent state-owned companies to carry out generation, transmission, and distribution functions.

The Bill proposed that independent companies be incorporated for the following purposes:

One company to take over the functions of the CEB relating to hydroelectricity generation and thermal electricity generation,

One company to take over the functions of the CEB relating to transmission and bulk procurement of electricity,

Three or more companies to take over the distribution of electricity, and

One or more companies to take over other functions of the CEB and LECO.

The Bill when presented to the Parliament brought in strong protests from many quarters including the CEB trade unions and other trade unions as well as from several political parties. They saw this Bill as an initial step towards privatizing the CEB and consequently loss of employment for its staff. Once the government gave the workers an assurance that the workers’ rights would be safeguarded, the protests died down and the Bill was passed in March 2002. It was gazetted as Electricity Reforms Act No. 28 of 2002 on 13 December 2002. However, the necessary order to give effect to the Act was not gazetted by the Minister and as a result the Act did not come into operation.

 

ENERGY EXPERT’S RECOMMENDATIONS FOR UNBUNDLING THE POWER SETOR

Prof. Priyantha Wijayatunga, Director of the South Asia Energy Division of Asian Development Bank (ADB) said at the launching of the Techno 2019 exhibition held in July 2019, that “Sri Lanka still needs to go a long way in relation to sector governance, compared to other countries in the region. It is time that we look at this closely so that we do not lag behind. Reforms will undoubtedly help the energy sector and hence the country’s economic development,” (Daily Mirror, 18.07.2019).

He specifically pointed out that improved governance in the energy sector in India and Bangladesh enormously helped conceptualizing and implementing clean energy initiatives, while enhancing their energy security. He highlighted the important role played by independent energy regulators and separation of functions of the energy sector in these countries, which had paved the way for breakthroughs in clean energy initiatives. 

Prof. Wijayatunga elaborated “By now, a large majority of the countries, including many in the developing world around us, have fully unbundled the energy supply industry with a reasonably independent regulatory environment. If we look at South Asia, India and Bangladesh have already significantly advanced and are rapidly progressing in these areas,”.  Further, he noted that “reforms also led to an increase in private sector participation in all sub sectors, including generation, distribution and even in transmission business in these countries”. 

 

RECOMMENDATIONS OF INTERNATIONAL ORGANIZATIONS

The GoSL, from time to time, engaged the services of international institutions such as World Bank (WB), Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) to make recommendations to improve the power sector. Among the reports produced from these studies are:

JICA Master Plan Study on the Development of Power Generation and Transmission System in Sri Lanka, February 2006,

Asian Development Bank report on Assessment of Power Sector Reforms in Sri Lanka, 2015,

JICA Report on Electricity Sector Master Plan Study in Sri Lanka, March, 2018, and

World Bank Group study on Sri Lanka Energy Infrastructure Sector Assessment Programme (InfraSAP), April 2019.

The 2006 JICA report observed that “political intervention is making it impossible for the CEB to manage itself autonomously. As a result, its management has been criticized as inefficient by external parties. Moreover, it has piled up a debt big enough to jeopardize its continued sustenance. One of the areas where politics has been heavily involved is the tariff question. Thus far, political considerations have worked against attempts to raise tariffs, and tariff revisions to reflect the costs have consequently been delayed. To put a halt to political intervention in CEB management as well, it is necessary to lay down the proper conditions for corporate business. This is to be done by unbundling the current CEB, which is a vertically integrated government-owned monopoly; making the generation, transmission, and distribution divisions completely independent”. The report further recommended that “a fundamental reform of the sector is absolutely essential for promotion of long-term investment and increase in the overall efficiency. To this end, the government must present a detailed vision and schedule for CEB unbundling, and swiftly complete the reform, which is currently stalled.” But no follow up action was taken by the GoSL towards unbundling of the CEB.

The 2015 ADB report in its concluding paragraph said that “The next stage of reform requires establishing six independent companies out of the CEB’s generation, transmission, and four distribution licensees. The organization culture in the government-owned company LECO needs to be replicated in the CEB’s distribution licensees by creating corporate entities that report to the CEB holding company. The functional business units currently established within the CEB are adequately staffed and organized to enable the formation of six corporate entities. The corporatization need not involve privatization if political decision makers do not wish to involve private capital more fully in the sector, provided the state-owned firms operate as independent commercial companies”.

The ADB report further said that “The electricity sector was proposed to be restructured to ensure increased efficiency, transparency, autonomy, accountability, competition, and financial viability. The CEB functions were to be vertically and horizontally unbundled. For this purpose, the CEB owned subsidiary companies were planned to be established under the Companies Act No. 17 of 1982. The electricity sector was proposed to be restructured to ensure increased efficiency, transparency, autonomy, accountability, competition, and financial viability. The CEB functions were to be vertically and horizontally unbundled. For this purpose, CEB owned subsidiary companies were planned to be established under the Companies Act No. 17 of 1982”.

The 2018 JICA report reviewed and updated the 2006 JICA Master Plan. However, it did not refer to the issue of unbundling the power sector but recommended incorporation of renewable energy projects as well as natural gas in the energy mix for generation of electricity up to 2040 including consideration of financial commitments. It also considered the option of generation with 100% renewable energy sources by 2040, recommending that to meet the deficit of power arising out of continuing high cloud cover for several days, storage batteries need to be installed at an estimated cost of USD 1,000 million.

The 2019 World Bank report says “Apart from a few recent competitive outcomes, the country has not yet been able to develop utility scale non-conventional renewable energy (NCRE) projects at tariffs comparable with other projects globally or in the region or to tap into commercial financing and private sector participation in larger scale projects. As part of the preparation of the InfraSAP, two pre-feasibility assessments for potential large scale NCRE park sites were conducted for sites in Pooneryn and Moneragala, respectively, totaling about 500 MW of potential generation capacity”.

“The Solar and Wind power has the potential to further optimize the cost of power in the country. In line with what is being witnessed across the globe (i.e. low tariffs in solar and wind-based generation), it seems reasonable to assume that by opening the sector to international players with adequate incentives and risk mitigation mechanisms in place, a significant reduction in cost of power could be achieved in Sri Lanka. The solar and wind-based generation could be potentially used to replace some of the expensive imported oil-based power, which is currently utilized to offset the low availability of hydro resources” (p. 17).

Though the government sought the assistance from these multilateral agencies for improving the performance of the CEB, it has not taken any initiative to implement them, particularly those on reforms. The CEB is also rather slow in pursuing building of large-scale solar energy systems despite the government giving high priority for them and availability of funding from India on a credit line to the extent of USD 100 million specifically for solar energy project development (See The Island of 03.09.2020)

 

PRE-REQUISITES FOR UNBUNDLING OF CEB

Once the CEB is unbundled, separate companies are to be set up to take over the generation, transmission, distribution and other functions. There will be one company each for generation and transmission and three or more for distribution, according to the draft Act. However, it will be more prudent to have separate generation companies for each of the generation complexes, Kelanitissa, Laxapana, Mahaweli and others including large renewable energy plants. These companies will serve as independent power producers (IPP) and will have to sell the energy they generate to the transmission company, along with other IPPs. Electricity generated at power plants other than from small power plants, is transmitted to grid substations using 220 kV and 132 kV transmission lines.

When the available capacity exceeds the demand, the System Controller will have to decide the amount of power to be purchased from the IPPs based on a merit order system. Generally, plants providing firm output at low cost is given priority according to which power from renewable sources may get low priority. However, with the government policy to meet a minimum of 80% of generation from renewable sources, a mechanism will have to be worked out to accept power from RE sources, possibly by providing storage facilities which will even out their fluctuations.

Before selling energy, it has to be measured to an accuracy of at least ±0.1% using instrumentation which need to be type approved by the Department of Measurement Units, Standards and Services (MUSS) as required by the relevant law. Further, the instruments need to be regularly calibrated by an accredited laboratory. The CEB is already having a Meter Laboratory and this may have to be brought under the control of the transmission company with updated instrumentation serving as secondary standards with accuracy traceable to international standards. This can be verified by calibrating them against the primary standards available at MUSS Department, which is a legal requirement. Every generating unit before being connected to the grid for transmission, needs to go through the metering unit which will monitor the energy dispatched on a daily or monthly basis and transmit the data to the transmission company. It will then pay the IPP at rates agreed to in the power purchase agreement entered into between the IPP and the transmission company, based on the energy dispatched.

For distribution, the CEB has already divided the country into four regional divisions and a subsidiary company, Lanka Electric Company Ltd, covering the Western coastal townships from Negombo to Galle, excluding the city of Colombo. Electricity distribution from 220 kV/132 kV grid substations to the rest of the country is carried out using 33 kV lines which are again converted to 11 kV at load centres for local distribution. The 33 kV or 11 kV line voltage is again converted into 230/400 V for supplying to consumers. Currently, one 33 kV line may extend across two division boundaries, but if these two divisions are to be set up as two independent companies, there has to be separate distribution lines, each covering only one division receiving electricity from one or more GSSs located within the division. It will be then possible to measure the amount of energy transferred to this particular distribution company separately. Hence, certain amount or modifying the distribution system may have to be undertaken prior to unbundling.

 

FINANCIAL VIABILITY OF CEB

The CEB has been selling electricity to most of its consumers below cost price which is around Rs 20 per unit. For example, the tariff for households consuming up to 90 kWh per month is only Rs. 10 per unit for the last 30 units and less for lower slabs. For industries with demand up to 42 kVA and for other industries during daytime, the tariff is below the cost price. The average cost of generation per unit of electricity in 2017 was Rs 20.40, while the average selling price per unit in 2017 was Rs. 16.26. The corresponding values for 2018 were Rs. 19.12 and Rs. 16.29, respectively. These low tariffs resulted in the CEB incurring a net loss of Rs. 47.6 billion in 2017 and Rs. 30.5 billion in 2018 (AR, 2018).

In view of these losses, the CEB has not been able to settle its dues to the Ceylon Petroleum Corporation (CPC) for supplying fuel in 2016 amounting to Rs. 12.43 billion and also to settle the payments to IPPs for supplying power which amounted to Rs. 21.52 billion in 2016, according to General Manager’s Review appearing in the 2016 Annual Report (AR). Further, the total long-term borrowings as at end of 2016 were recorded as Rs. 220.5 billion, while that for 2018 were recorded as Rs. 281.3 billion, as given in respective annual reports. This poor financial status of CEB is an impediment for it to raise any borrowings from commercial banks.

The subsidies given to low-end consumers amounted to Rs. 70 billion in 2017 and Rs. 60 billion in 2018 (AR 2018). These were partly recovered by selling to high-end consumers at above-average cost price. The surplus recovered by these means in 2017 was Rs. 15.2 billion and Rs. 20.6 billion in 2018. Had the CEB was operating as a commercial enterprise, the logical measure that would have been done was either to increase the selling price above the cost price for all consumers and also reduce the cost of generation.

Being a government organization, the tariff is determined by the government policy to provide electricity to low-income households at an affordable price and hence the CEB is constrained against raising the tariff. However, this issue needs to be carefully studied and an upward revision of the tariff should be considered, removing the subsidies at least partly. Even for industries, to make them competitive in the global market, the government policy is to supply electricity to small and medium industries at below cost, but this policy too needs to be reviewed.

There is also the possibility to reduce the cost of generation. The CEB has been generating electricity from petroleum oil to the extent between 25% – 35% with the generation in 2017 being 5,000 GWh. According to 2016 Generation Performance Report of the Public Utilities Commission of Sri Lanka (PUCSL), the cost of generation from oil-fired power plants has been between Rs/kWh 22 and Rs/kWh 38. On the other hand, the cost of generation from NG fired power plant is no more than Rs/kWh 15 as quoted in the tender for the 300 MW gas power plant to be installed at Kerawalapitiya. If the thermal power plants presently operating with diesel are converted to NG, the saving is of the order of Rs. 50 billion annually.

 

The Cabinet of Ministers as far back as December 2010 decided to introduce natural gas (NG) in all sectors including power and industries and authorized the Ministry of Petroleum to pursue the matter, but no action was taken either by the Ministry of Petroleum or Ministry of Power and Energy. It is hoped that with the mandate given to the Ministry of Renewable Energy to convert all oil power plants at Kelanitissa complex for operation with NG, will inspire the CEB to give priority for this conversion which will reduce the losses incurred by the CEB.

The other matter that needs to be resolved is the delay in public sector organizations not paying up their bills for electricity on time, and this has caused liquidity problems in the CEB. As a result, the CEB is unable to pay the CPC for the fuel it purchases from the CPC on time and also unable to pay the IPPs for the power it purchases from them on time. With the unbundling of the sector, this system could be improved. Every Distribution Company (DC) should collect the payments due from the consumers on time giving a grace period of say one month. The Transmission Company (TC) should collect the payments from every DC for the electricity sold to them on time and settle the payments due for each of the Generation Companies (GC) on time. The GCs could then settle the payments due for each of the IPPs for the electricity they purchase from them. With the availability of on-line banking facilities and smart metering systems, all these operations could be undertaken without human intervention, other than occasional verification.

 

PRESENT STATUS OF SRI LANKA’S POWER SECTOR

In 1969, the Ceylon Electricity Board (CEB) was established by an Act of Parliament for the purpose of developing and coordinating of generation, supply and distribution of electricity island-wide, taking over the functions of the Department of Electrical Undertakings. By the end of 2018, the total installed capacity has grown to 4,045 MW of comprising 1,400 MW of hydropower plants, 1,137 MW of oil power plants, 900 MW of coal power plants and 608 MW of other renewal energy plants owned by both CEB and independent power producers. The total electricity generation in 2018 was 15,300 GWh, with the per capita electricity consumption 650 kWh, which is only above the least developed countries in Asia. The forecast for generation in 2030 given in CEB’s long term generation plan is around 31,000 GWh.

In 1983, Lanka Electric Company was established as a subsidiary company of the CEB and took over the distribution of electricity in coastal townships between Negombo and Galle, which resulted in reducing the distribution losses. In 2007, the Sri Lanka Sustainable Energy Authority (SLSEA) was established with the main objective to identify, assess and develop renewable energy resources in the country. However. The SLSEA has been operating more as a regulator than as a promoter of RE projects.

It is noteworthy to compare Sri Lanka’s power sector situation with that of another Asian country, Taiwan, where the population in 2018 (23.78 million) is similar to that of Sri Lanka (21.67 million) and land area (36,200 sq. km) is almost half of Sri Lanka’s (65,610 sq. km). Taiwan’s installed capacity in 2018 was a staggering 44,600 MW comprising 13,000 MW of coal power plants, 16,000 MW of natural gas power plants and 4,500 MW of nuclear power plants, generating 275,500 GWh of electricity in 2018 giving a per capita consumption of 11,585 kWh compared to 650 kWh for Sri Lanka (Wikipedia). The rapid growth of industrialization has been the main driver of the power sector, with a GDP (nominal) per capita of USD 24,800 in 2018 compared to USD 4,100 for Sri Lanka. It will be interesting to find out how Taiwan was able to achieve such high performance in the power sector – whether superior competency and dedication of professionals or correct policies in place or strong political leadership.

 

LACK OF TRANSPARENCY IN SELECTING MAJOR PROJECTS

Unlike in many Asian countries, Sri Lanka has been able to provide electricity to almost 100% of households, which was made possible through funding made available through decentralized budgeting in which provision of electricity to rural villages has been given priority. While the national grid was extended to cover almost the entire island to meet the power demands of every industry, commercial establishment and household, the CEB has not been able to expand its generation capacity correspondingly.

Efforts to build a coal power plant kept dragging for over 20 years at the beginning of the mid-eighties due to the CEB’s failure to initiate a dialogue with the public and concerned parties and vacillating policies of the government. Instead of inviting bids for building a power plant meeting performance and emission specifications from reputed manufacturers internationally and selecting a plant in a transparent manner, the CEB accepted a plant based on outdated technology offered by China on credit. The plant is known to breakdown repeatedly and the CEB is compelled to retain Chinese technicians even today to attend to its maintenance. Though the CEB claims that the coal power plant generates at the lowest cost, when the cost of financing is added, the cost gets more than doubled as revealed by a study undertaken by World Bank team.

On three occasions between 2000 and 2010, Sri Lanka government announced calls for expressions of interest for building thermal power plants on BOOT basis with capacity 1,000 – 1,200 MW, but pursued none. This gives a poor image of Sri Lanka within the international power industry, as the investors have to incur heavy expenditure on site visits and making bid bonds. In one announcement, the fuel option was kept open to solid or liquid or gas and the site to be selected by the investor while in another, the fuel option was specified as coal with the site to be near Hambantota.

In 2005, India offered to build a 500 MW coal power plant at Sampur, near Trincomalee on cost-sharing basis. Negotiations between the Indian party and the CEB kept dragging for five years before the final agreement was entered into and another five years to get feasibility studies and environment impact studies completed as well as other clearances obtained. By that time, the new government had changed its policy to adopt gas power rather than coal power on environmental grounds and the project was aborted. Had the CEB not taken such a long time to finalize the terms and commenced work sooner, the plant would have been built by now. It needs to be stressed that the proposed coal power plant at Sampur was abandoned because the CEB was dragging the project for nearly 10 years. The project took so long to commence work, obviously because it had problems both technical and operational which the CEB was unable to resolve. Hence, it was best to cancel the project and consider a new project afresh.

The latest attempt to build a 300 MW gas power plant at Kerawalapitiya on BOOT basis also got dragging for nearly four years mainly because of the manner in which the project selection process was handled by the CEB. A 500-page request for proposal (RFP) was announced in November 2016 seeking unnecessary details while the more important information essential for making a decision was left out. Such detailed information would have been in order had CEB was paying for the capital expenditure. With a BOOT project, the investor will ensure that a plant worth the money would have been purchased. The CEB will only have to know the price at which energy be sold to CEB and whether the plant satisfies performance and emission specifications laid down by the CEB.

The lack of clarity in the RFP resulted in the matter taken to the courts for a ruling. Though the approval of the Cabinet has already been granted for the project and the new President has directed this project be given priority soon after he was elected, the CEB has still not finalized its acceptance. Instead, the CEB is pursuing building a 300 MW coal power plant at Norochcholai against President’s policy. Incidentally, China was allowed to build a 400 MW gas power plant along with an LNG terminal at Hambantota with no such detailed RFPs announced.

According to a SLSEA Report dated 27.03.2019, several RE projects submitted by investors that have received the approval of the SLSEA since 2016 have been held up as CEB has not agreed to sign power purchase agreements with them, citing a section of the Electricity Act. This includes 101 RE projects with total installed capacity of 3,052 MW comprising 264 MW of mini-hydro plants, 2,028 MW of solar plants, 673 MW of wind plants and 87 MW of other plants, which could generate over 7000 GWh of energy annually. This situation is shown in Fig. 2 in 2018 Annual Report where the growth of energy added from RE projects to the system shows a stagnation between 2015 and 2018, with the value for 2016 showing a drop of 200 GWh compared to other years. It appears that there was no coordination between the CEB and the SLSEA.

 

FLAWED LONG TERM GENERATION EXPANSION PLAN

The CEB during the last few decades has been preparing biennially a long-term generation expansion (LTGE) Plan and the mandate of the Power Ministry specifies that the sector should be developed to comply with the CEB Plan. It is supposed to determine which power technology will be the cheapest in 20 years hence based on current prices. With the cost of generation depending on plant capital cost and fuel prices both of which could vary widely within a span of 20 years, it is futile to make forecasts now as to which technology is the cheapest in 20 years hence and to adopt it. Therefore, to give a mandate to follow the CEB’s LTGE Plan which is highly flawed for the development of the sector, does not make sense. The CEB Plan for 2018-2037 recommends adding 2,700 MW of coal power plants between 2023 and 2037 under Base Case scenario saying it is the cheapest option. However, the 2019 World Bank report cited above says in p. 18 that “coal ceases to be the least cost source of power generation, as cost of power from LNG and NCRE could potentially be lower than US cents 9 / kWh” which is the estimated coal power price.

When the CEB submitted its LTGE Plan for 2018-37 to the Public Utilities Commission of Sri Lanka (PUCSL) for approval as required by the Sri Lanka Electricity Act No. 31 of 2013, PUCSL did not approve it but proposed an alternative plan incorporating natural gas power plants in place of coal power plants included in the CEB Plan. The CEB refused to accept this recommendation and the dispute between the PUCSL and the CEB kept dragging for over a year, and the matter was finally referred to the President who gave a directive to the PUCSL to approve the CEB Plan, fearing disruption to the power supply in the country after the CEB Engineers’ Union threatened to resort to industrial action if their demand for coal power plants is not acceded to. This is a clear indication that Sri Lanka’s power sector is being governed not by the PUCSL nor the Ministry nor the Governing Board of the CEB, but by its trade unions. This justifies Prof. Wijayatunga’s statement that “Sri Lanka still needs to go a long way in relation to sector governance”.

 

CONCLUSION

The CEB ha a staff strength about 23,000 with over 1,400 professionals. It is the opinion of several international agencies that this organization be split into several organizations each responsible for different functions undertaken by the CEB, including generation, transmission and distribution. It is expected that such an unbundling process will improve the efficiency, transparency, autonomy, accountability, competition, and financial viability. The CEB has failed miserably in the recent past to increase the generation capacity to meet the growing demand with due consideration for environmental concerns even after granting Cabinet approval for many of them. It has also failed to initiate work on large renewable energy projects for several years, particularly during the last seven months even after the President’s policy of pursuing renewable energy and gas power projects was announced.

Possibly the high inertia of the CEB with its large staff prevents it from being flexible to undertake new projects in keeping with international trends and hence continues to insist on outdated technologies. Hence, it is desirable if the government initiates unbundling of the CEB urgently as recommended by reputed energy experts to make it more flexible. The unbundling will also give an opportunity for the government to get rid of dead wood after giving them a golden hand shake.