Sri Lanka Power Sector: From the frying pan into the fire?April 22, 2013, 12:00 pm 

Another grave mistake done in the electricity supply was setting up of private power plants in mid 1990s on negotiated power purchase agreements. Corrupt officials in the then government forced CEB to sign these agreements with intolerably unfavorable payment terms for project lives in the range of 15 to 20 years. Some of these agreements signed on the same day, for the same technology, have vastly different tariffs which cannot be justified on any government. Private power plants which came to be through competitive tendering have usually given fairly good tariffs for CEB. Even today CEB is paying undue tariffs honouring these corrupt power deals of which the accumulated costs we are now trying to pass to the poor consumers by way of an increased tariff.

by Eng. WDAS Wijayapala,

Senior Lecturer, Department of Electrical Engineering, University of Moratuwa.

Former Vice Chairman of Ceylon Electricity Board

Background

Electricity, being one of the highest quality energy forms, is in heavy demand everywhere. Though we talk of conservation, the demand for electricity has been growing at an amazing rate in Sri Lanka over the past few decades. Figure 1 shows how the demand growth has been by year 2010 compared to year 2001. On one hand the demand growth shows an increase in the quality of life while it also shows that we are getting more and more carbon intensive. On average we need to add a 150MW power plant to our system every year.

Figure 1 - Daily Load Curves of

2001 and 2010

Our electricity supply comes from the government monopoly, Ceylon Electricity Board. Lanka Electricity Company established in 1980s does a small amount of electricity distribution while several private power plants provide electricity to the CEB based on Power Purchase Agreements (PPAs). These private power plants are owned by both local as well as foreign investors and works on different technologies ranging from diesel engines to heavy fuel driven gas turbines. The power purchase agreements are mostly negotiated, and tariff varies over the years as per different conditions laid out in the PPAs.

Ceylon Electricity Board reorganized its operations in line with the Electricity Act No 20 of 2009 and now operates on separate management bases on Generation, Transmission, Distribution and common functions. The original ideas emancipated one decade ago was to unbundle CEB into respective Generation, Transmission, and Distribution utilities and to operate them as limited liability companies or equivalent units. However due to intervention of the employees this was not to be and as an intermediate measures the present management structure was developed.

Crises

There are two types of crises the country has faced through electricity supply industry. First being the intermittent shortages of supply due either to extreme drought conditions or breakdown of the large power plants which put the supply demand equation in unbalance. At several occasions the balance was made by hiring short term power from emergency power plants which made a heavy burden on the CEB finances. At a few other occasions with or without such emergency power CEB had to resort to power cuts inflicting unbearable hardships to the people. One of the excuses brought up by some officials on these power cuts is that in the neighbouring countries there are longer power cuts!

The second crisis is the heavy cost of electricity generation. This has devastated the financial management at CEB and even reflected on the financial viability of other institutions such as CPC and government banks. The average generation cost of a unit of electricity for CEB in 2012 was around Rs. 22.00 and the sales were on average at Rs. 16.00 per unit and CEB sold some 11000 million units in the same period. This obviously results in a shortage of about 66 billion rupees for that year alone. Now the easiest seen solution is to increase the tariff to make it profitable or at least break even. This theory is simple, straight forward and bypasses any management theories. It also forgets the crucial role played by electricity on all sectors of the economy letting alone the heavy burden on the common man for watching a little TV and breaking darkness for a few hours a day.

Mistakes

For both the above crises the main cause has been crucial mistakes made by officials in the CEB as well as in the Government during last several decades. Of course corruption has been a part reason as well.

Against severe drought situations, one can do little but proper water management at reservoirs can help. This has to be done with a foresight and of course the generation of electricity gets third priority where supply of drinking water and irrigation receives, understandably, higher priorities. Figure 2 shows how the electricity generation capacity of the reservoirs has varied during the years 2011, 2012, and 2013. The extreme drought situation in 2012 is vividly seen by comparing these curves.

Figure 2 - Reservoir Energy Storage Variation (in million units)

We have seen excessive amount of breakdowns in some of our major power plants at crucial junctures. The Norochcholai power plant being one of the most infamous.

Coal Power Plants

Coal and Nuclear power plants provide comparatively cheaper electricity in the world. Nuclear power plants are not in our list of immediate generation options due to a variety of reasons including security issues. Therefore, for cheap electricity we have no options but to go for coal power plants. Unfortunately, we have a bad history in setting up coal power plants in this country. At first place, they were not implemented in a timely manner. The whole issue of siting coal power plants was so politicized that even it was used in election platforms vowing that one would not implement coal power plants in their region if selected to power. CEB wanted the first coal power plant in 1990s and this was not achieved until 2011. In this regard full credit should go to His Excellency President Mahinda Rajapakse for the bold decision he took in 2005 to go ahead with the Norochcholai coal power plant despite political opposition. Unfortunately the president's effort did not bring the intended benefits to the people due to mismanagement of the purchase and implementation of the plant. At first place the contract signed with the Chinese equipment supplier was one of the weakest in our history and gave all the benefits to the Chinese. On the other hand the supervision done by CEB engineers was hardly sufficient to get a quality plant done. This was again due to the weak contract with the suppler as well as inherent deficiencies of some of the CEB officials. The total project cost for the 1st phase of the project of 300MW plant was 455 million US$ while CEB had incurred another 50 million US$ as the pre project development costs. The second phase of 600MW is understood to cost nearly another 900 million US$. By any standard these costs are excessively high for a subcritical coal power plant from any part of the world be it from Europe or Japan or elsewhere. So, for a Chinese plant, where equipment costs are expected to be considerably low, the price seems to be pretty excessive. Another grave mistake in implementation of this project was the acceleration of implementation. One can argue that the cheap electricity generated one year in advance has saved so many million dollars. However the undue acceleration has given a free hand for the contractor to implement the project with low quality equipment as well as low quality construction, which now have well proven by the consequences. Letting alone the numerous breakdowns during the first year of operation, the plant can hardly resist the severe saline environment in the coast of Putlam. The equipment is not designed with proper corrosion protection and it is a matter of time when a major structural breakdown occurs in the plant. It is a common sight at the plant that already corroded doors and windows and other equipment are hanging about the partly broken hinges. It is unfortunate that without learning a lesson from the acceleration of the first phase, the government officials have

requested acceleration of the second phase which will definitely put it also in low quality implementation. One should remember that these plants are expected to operate for the next 25 years and not for the next 5 years. Of course the Chinese contractor should be more than willing to accelerate the project partly due to the free ticket for low quality implementation and partly due to the early money received will give him a financial advantage in converting US$ to value gaining Yuans.

Private Power Plants

Another grave mistake done in the electricity supply was setting up of private power plants in mid 1990s on negotiated power purchase agreements. Corrupt officials in the then government forced CEB to sign these agreements with intolerably unfavorable payment terms for project lives in the range of 15 to 20 years. Some of these agreements signed on the same day, for the same technology, have vastly different tariffs which cannot be justified by any means. Private power plants which came to be through competitive tendering have usually given fairly good tariffs for CEB. Even today CEB is paying undue tariffs honouring these corrupt power deals of which the accumulated costs we are now trying to pass to the poor consumers by way of an increased tariff.

Project Costs

CEB receives soft loan for implementation of some of its power plants and other infrastructure needed for power transmission and distribution. Although the soft loan interests are pretty attractive, the other terms and conditions such as limited competition in tendering raises questions over overall economics of such projects. For example, it will be interesting to know the overall project cost of the JAICA funded Upper Kotmale Project versus the expected energy generation over the next, say 25 years! This is not to undermine the importance of the project but at the end of the day if the returns of the project are not attractive, be it soft loan funded or otherwise, the public will have to pay from their pocket, the balance.

Renewable Energy

There is a myth in the minds of some that Sri Lanka is endowed with so much of renewable sources such as solar, we should get our bulk electricity generated by such means. The cost of a unit of electricity produced from a solar PV plant will stand well over 30 rupees! Mini-hydro and wind power is cheaper but opportunities for mini-hydro power generation are limited and the technical difficulties in harnessing wind power into the grid prevents large scale wind generation , at least for the time being. Table 1 below shows the proposed purchase tariffs for renewable technologies for 2012 1013 by the Public Utilities Commission of Sri Lanka (PUCSL). One can clearly notice the heavy burden on CEB in purchase of renewable energy and at the end of the day these costs will have to be passed onto the consumers as well.

Table 1 - Renewable Energy Purchase Tariffs for 2012/13 (PUCSL)

One should not forget the long term environmental benefits of renewable plants and the need to get away from conventional power source such as coal in the longer term. However as a nation trying to get on its feet with a per capita GDP below 5000 US$, we should wonder whether we can play a substantial role in cutting down carbon emissions while strong countries such as US, Australia, Canada and even Japan refused to honor their carbon -cut

obligations under the Kyoto Protocol.

Corrections

Making corrections to the above multifaceted problems in the electricity industry in Sri Lanka is not easy. For this there should be technically competent balance minded officials with proper financial knowledge at all key levels, be it at the ministry of power and energy or the CEB or in the other related agencies.

For the Norochcholai plant, corrections are difficult. At least the second phase can be implemented with reasonable quality if the correct CEB officials are allowed to take control even within the loose contractual terms and force the contractor to do a quality job. If the project is unduly accelerated and the CEB engineers who are supervising the project are kicked out of the site, we will see similar results as the Phase 1 and a prematurely ageing plant in the longer run.

As to the private power plants on Power Purchase Agreements with unreasonable payment terms, a high level commission should be set up to investigate and if found to be ill termed they should be renegotiated on reasonable terms. Probably this may save up to several billion rupees annually and will ease the pressure on the proposed tariff increase.

Future projects done by CEB, be it power plants, transmission lines or any other, proper project evaluation should be carried out to see the overall project economics.

Way Forward

Sri Lanka will never achieve a substantial economic growth without an electricity tariffs of reasonable

Level.

We can take a good example from our friendly nation, South Korea which has achieved an amazing economic growth during the last few decades. It is interesting to note that their electricity tariff is half of our present tariff. This makes their products more completive which is one reason why we see an increasing number of Korean products on our roads, our homes and our shelves.

Our Industry, our hotels, and our other service sectors will receive an unbearable blow and some may be even crushed if the proposed electricity tariff is introduced without moderation. Government should look at other options such as mandatory conservation of electricity by all parties, renegotiation of PPAs while allowing a part increase in the tariff as an intermediate measure until all 900MWs of coal power is made available and CEB's cost of generation is reduced. CEB will have to revisit their technical criteria and dispatch this plant fully despite stability limitations which may cause large power failures in case of a coal power plant outage. But the low cost generation may be more beneficial than avoiding an occasional blackout in view of the serious tariff issues we are currently facing.

CEB has a well trained and skillful workforce. From senior engineers down to unskilled workers they are well looked after by way of salaries and other benefits. What lacks is a conducive and competitive environment for obtaining their service to the full mark. This is partly due to the inherent shortcomings of the government service and partly due to the monopolistic nature of the service. However the engineers at CEB are more than willing to do a dedicated professional job together with their subordinate staff. They have everything save a strong political guidance with freedom to work with right amount of regulation.

Government should understand that the present issues at CEB are not created by CEB being not unbundled. Unbundled or not we must get our cost of generation down and get out of the corrupt power purchase agreement which we are blindly honouring. Therefore if one sees the present proposal of unbundling CEB as the sole solution, we will keep on deceiving ourselves for another decade and it will not be too long before Sri Lanka go to the Guinness book with world's highest electricity tariff!