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!