23 Jun Energy sector series: The dis-Economics of Sri Lanka’s Energy policy
Over the last few weeks, certain high-level decisions made by the Cabinet of Sri Lanka has become a major discussion topic leading up to the Parliamentary polls in August 2020. We feel this renewed public interest is a good step in the right direction to talk about the complex yet important world of energy politics, policies and economics and how it impacts everyday citizens like you and me. We promise not to talk about technical matters. So, in that spirit we want to discuss the basics problems facing the energy sector right now and how to think about the future of Sri Lanka’s electricity sector.
The problems and energy sector challenges in Sri Lanka are not very different from that of the experiences of other countries who electrified before us. As others have pointed out, they can be neatly summarized as:
A highly politicized process of investment, inefficiencies in choice of technology, construction, and maintenance, and difficulties in regulation and pricing.
- Sally Hunt, from “Making Competition Work in Electricity" -
Background
Fossil fuels are the primary energy source for Sri Lanka’s electricity generation right now. Let’s look at two examples. In 2017, the total electricity generated from coal and thermal oil constituted a whopping 69% of the total electrical energy generated to meed the needs of the country. Some might even say that’s a two-thirds (2/3rds) majority for fossil fuels. That number was 55% in 2018, still constituting a large percentage, a simple majority [2]. Although 2018 looks slightly better than 2017, that was not because of an improving trend towards cleaner sources or the result of a magic policy decision. It was an act of the gods, we had more rain in 2018. However much the gods decide to help Sri Lanka, this scenario of petroleum/ coal majority is unlikely to change in the long run. We know this from the Long-Term generation plan put forth by the Ceylon Electricity board (CEB), the country’s single buyer electric utility. By 2039, CEB expects to generate 41% of electricity from coal. Natural gas is technically supposed to substitute expensive liquid oil-based generation by 2025. Yet, here we are in 2020 with no natural gas policy or plans for Sri Lanka.
Macroeconomic Impact
Now, Sri Lanka’s energy dependency on imported petroleum and coal is a major problem for two main reasons. The high cost of environmental impact from coal and oil on local communities and the world from global green-houses gases. But this impact is well documented and people generally have a pretty good idea about it. But not much is understood about the other problem. The other problem is the macroeconomic impact on the national economy. As the country does not have local petroleum resources or coal right now, 100% of the petroleum and coal resources needed have to be imported and paid in full by foreign currency. In 2019, Sri Lanka spent 3.9 Billion USD to import of fuels according to the Central Bank. This cost is for importing coal, refined and unrefined petroleum products. That is 20% of the country’s total imports, and one fifth of the total import bill [3].
*(The total import budget for 2019 was 19.9 Billion US$ according to the Central Bank of Sri Lanka). It’s important to note that these fuels are used for both electricity sector and transportation.,
Below is a historical chart of how much Sri Lanka paid for importing coal and liquid petroleum in USD millions from foreign markets. The amount of coal imports has sharply risen since Lakvijaya Coal Power Plant began operations in 2011.
Figure 2 is the import bill of liquid petroleum, refined and unrefined petroleum over the years. The values are represented in million US Dollars (1 billion = 1000 million) and reflects the final cost of imports and not the quantitates imported. The chart does not reflect the changes in the global price of crude oil. Because the global price of oil changes everyday, the import bill does not represent the quantity of petroleum that was actually imported.
The problem with such a large import bill for fuel for energy is that it directly impacts the foreign exchange rate of the Sri Lankan rupee. An economist at the Sabaragamuwa University determined that a 1% increase in crude oil imports affects the depreciation of the Sri Lankan rupee by a whopping 14.98% in the long run [4]. And this was supposedly more impactful on the depreciation of the rupee than the interest rate.
This is the impact of the energy sector on the national economy as a whole on the world stage. Let’s look at the impacts on the domestic economy and government debt.
Fiscal Impact
In 2018 the Ceylon Electricity Board sold one unit of electricity (kWh) at an average price of Rs. 16.29 while the actual average cost per unit was Rs. 19.12 [2]. The same year, CEB sold a total number of 14 billion such units. So, from a simple calculation we understand that the total CEB loss for 2018 should be roughly Rs. 39.77 billion. But because CEB generated other revenues of Rs. 9.37 billion from non-energy related services, the real CEB loss of 2018 was Rs. 30.40 billion according to the Annual Report of the Ministry of Finance. From analysis conducted by Advocate Institute, we learn that the CEB’s total financial losses between 2006-2020 were a whopping Rs.186 billion [5].
How did we end up here?
The long-term decision-making process for the energy sector is complicated and requires a high degree of specialized knowledge, experience and long-term planning for infrastructure assets. We’ll give you that. And it is subject to many special interests, from industry lobbies, political pressure to pressure from environmental organization and civil society.
Some of the biggest challenges of promoting investments in electricity sector is deciding which investments to make and who should pay for them. Electricity sector investment tends to be very capital intensive. Because of this the sector used to be highly regulated and state owned in many developing countries. These controversies are still highlighted in the continuing balancing between markets and regulations, between central planning and risk and reward from market signals [6].
What is Energy Policy?
The International Energy Agency (IEA) defines energy policy as a framework that binds consumers to markets, technology, stakeholders, regulation and information and data [7]. Elements of a national energy policy should include considerations of energy security, environmental protection and economic growth. The end goals should be improving flexibility and promote cooperation and sustainability in an environment that does not distort prices.
In an open and transparent decision-making process, it is always a tug-of-war between the economic costs of different technologies, domestic resource endowment, renewable penetration, fuel diversity, equity and fairness to name a very few. That is why independent regulatory agencies were created to manage different social, political and economic interests in a transparent manner while adhering to specialized knowledge and standards to ensure the uninterrupted operations of the system. In the case of Sri Lanka, the Public Utilities Commission (PUCSL) was introduced in 2002 for this purpose.
Unfortunately, the PUCSL has been unsuccessful in managing different stakeholder interests and ensuring an open and transport process of decision making. To make matters worse, Energy experts seems to understand the proper role of the PUCSL very differently. There is also confusion whether PUCSL should be making or at least facilitatating the process of making Energy Policy at all? Is Energy Policy the realm of one person, one institution, or one single Ministry? Of course not. It should be the realm of each and every individual citizen, expert or otherwise. Because we are all affected by it, if not by the price you pay for energy, then by the externality costs of bad energy policy.
Coming to the issue of the independent regulator, we are able to map out some of the influential and stakeholders who influence the outcome of decision as seem below. An arrow represents influence in a not so subtle fashion (Please don’t hold us accountable to this map). Some say there is a subtle hidden dark hand of a coal mafia inside this map? Is it true? The institutional structure maybe too confusing and maybe the PUCSL lacks the level of independence required for it to do it task properly in the face of an all-powerful state owned utility?
Now that we have identified some of the major challenges, maybe we will do another article outlining what can be done to fix the problems. We don’t promise quick fix silver bullet solutions. Let’s brainstorm. Let us know what you think and comment below, We’d love to hear from you and listen to your ideas on how to fix the system.
Works Cited
[1] S. Hunt, Making Competition Work in Electricity, 2002.
[2] CEB, “CEB Statistical Digest 2019,” 2019.
[3] Central Bank of Sri Lanka, 2020.
[4] W. A. Senathissa, “Impacts of Increasing Demand for Vehicles and Crude Oil on Exchange Rate in Sri Lanka,” Australian Academy of Business and Economics Review (AABER), 2017.
[5] D. N. Ranawaka, “A light at the end of CEB’s 50-year tunnel?,” Advocata Institute , 19 July 2019. [Online]. Available: https://www.advocata.org/commentary-archives/2019/07/29/a-light-at-the-end-of-cebs-50-year-tunnel-w8xrr#:~:text=During%20a%20period%20of%2010,incurred%20in%20the%20year%202018. [Accessed 2020].
[6] W. W. Hogan, “Electricity Market Structure and Infrastructure,” in Acting in time on Energy Policy, Brooking Institution, 2009, pp. pp. 128-161.
[7] J. Simpson and K. McNamara, Elements of Energy Policy, International Energy Agency, 2011.
No Comments