NewsPower crisis: Worst yet to come

February 20, 2002

Dr. Tilak Siyambalapitiya electrocutes top deregulation forum with shocking revelations

If the people had thought that the power crisis was at its peak at present then they are in for a shock as the worst is yet to come according to a top energy expert.

Resource Management Associate Managing Director Dr. Tilak Siyambalapitiya literally electrocuted leaders in both the public and private sector including several Ministers present at a top deregulation conference held during the weekend at Marawila with some shocking revelations, which prompted Deregulation Committee member Cubby Wijetunga to describe the power presentation as the “most frightening” of all.

In a nutshell, Dr. Siyambalapitiya said that the current power crisis was due to inaction and indecision in the past and not because of low rainfall in catchment areas. He warned that a worse crisis was expected from 2004 till 2010 with much longer power cuts and the Sri Lankan public probably paying the highest tariffs for electricity in the world if urgent are actions are not taken immediately. He forecast a severe shortage in an economic environment of an average GDP growth of 5% and demand for electricity growing at the historical average of 7 to 8% per annum. Dr. Siyambalapitiya expects electricity tariffs to be increased from May 2002.

“The CEB is unable to or not allowed to implement new generation projects in their long-term plan,” Dr. Siyambalapitiya said adding that the overall energy sector is characterized by several inherent weaknesses such as pricing not reflecting the true costs, poor employee productivity, high operating costs, lack of competition while the electricity sub-sector had been plagued by recurrent shortages of generating capacity (in 1979, 1983, 1987, 1992, 1996, 2001-2).

With regard to regulation he said that the electricity sub-sector had seen only limited liberalisation in generation with only six Power Purchase Agreements (PPAs) and over 15 small power producers (mini-hydro) and entry into the sector was limited by a solicitation process and licencing while no licences were granted for public distribution. “Since the PPAs fix prices for 10 to 20 years there is no effective competition while all decisions have to be approved by the Government,” Dr. Siyambalapitiya said in his paper presented at the two-day deregulation conference organised by the private sector comprised Deregulation Committee appointed by the Ministry of Enterprise Development, Industrial Policy and Investment Promotion. Over 200 persons participated including key Ministers, officials, business leaders, professionals, donor agencies and the media.

He said that coal power was critical to ensure a reliable and cost-effective supply and five major power projects were needed overall to meet the medium to long-term electricity needs of the country. Work connected to these projects must start now.

It was pointed out that at present one would see ceremonial openings or commissioning of power projects. “The public should not be misled that those are solutions to the current crisis but on the contrary those are the causes,” he added.

The Norochcholai coal plant is currently three years late and still there is no decision with the country considering a shift of the site for the third time having moved it from Trincomalee to Matara. He also said that a second coal plant was needed and now was the time make decisions as it takes five years to build and two years to find finances; but knowing the Sri Lankan mindset and regulatory framework Dr. Siyambalapitiya said it would be late.

He said that the impact of the prolonged delay and indecision is power cuts and/or high electricity prices until 2010 to 2012. He said that the cost of the six-year delay in the Upper Kotmale is Rs. 4 billion worth of electricity lost every year while delay in the combined cycle plant has ensured power cuts and higher electricity prices from 2004 onwards.

It was emphasised that major and simultaneous decisions were required immediately to arrest the power crisis and noted that such decisions are mutually exclusive rather than complementary to each other. He said that the CEB in 2000 earned Rs. 15.2 billion for the Government but its eventual loss was Rs. 16 billion. Dr. Siyambalapitiya estimated the value of the total energy market to be over Rs. 100 billion in 2000 with petroleum worth Rs. 76 billion, electricity Rs. 28 billion, LPG Rs. 5 billion (forecast) and biomass Rs. 1 billion. In all these sub-sectors there are no regulators.

He said that the objectives of deregulation and liberalisation should be to ensure lower prices and transparent pricing, higher reliability of supply, improved services and customer care, higher state revenue and employee productivity. It was opined that at present the Government is the owner, operator and regulator and these roles must be separated and a strong regulator and effective competition should be established.

The prospect of an electricity tariff revision is likely he said, if the Government is keen to ensure the viability of the CEB. It was indicated that 100MW of emergency power was being bought at around Rs. 8 per kWh while at present electricity is sold at Rs. 3.80 per kWh for households and over Rs. 4 per kWh for industrial customers whereas the cost of generation and supply is Rs. 8.40 per kWh.

Dr. Siyambalapitiya in his paper done in partnership with Noel Selvanayagam of Senok Power and Energy Ltd., said that the energy industry in Sri Lanka is by no means efficient or reliable. “State monopolies with their inherent inefficiency have not been able to hold customer confidence.”

The paper also called for restructuring and liberalisation of the industry though with or without liberalisation the industry needs a strong regulatory framework.

At the forum, CEB’s non-executive Chairman Maxi Prelis explained that when the new administration took over the CEB didn’t have hydropower and money. “The ship was on fire and the new administration had to first extinguish the fire,” he said. He pointed out that power cuts unfortunately were the best option though they caused inconvenience and an incentive scheme for private sector self-generation was in place along with the purchase of emergency power. He said that reducing staff or overheads would not help very much in improving the bottom line, as the total overhead cost per unit of electricity generated is 90 cents inclusive of 60 cents of personnel cost.

In summarizing the energy sector discussions the deregulation committee Chairman Dr. Bandula Perera said that in the case of petroleum, restrictions on private sector activity can go and in the case of electricity proposed coal fired plans should start now. Preparation of environmental impact assesments for three more locations should also start now.

By Nisthar Cassim

(Reproduced from Daily Mirror of February 20, 2002)