31 October, 2020

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Electricity Economics: Pointless Populism

By Kumar David

Prof Kumar David

On April 28, in this column, I discussed the design of the proposed electricity tariffs and made three points; the domestic tariff structure is moronic (no exaggeration), Fuel Adjustment is a fraud that has nothing to do with fuel and less with adjustment, it is a swindle to increase tariffs by a further 40%, and thirdly the Public Utilities Commission’s (PUC) consultative document is slip-shod, with incoherent accounting, replete with undefined terms and incomplete presentations. The PUC and President Rajapakse capitulated, and on May 9 the former issued a statement partially abandoning the Moronic Tariff Structure (MTS) and also lowering the charges for consumption less than 60 units to the previous level. Sustained pressure works; I am glad to have been instrumental. PUC, CEB, Power Ministry, Cabinet and President, were well aware of the folly of MTS when they endorsed and implemented it with effect from 20 April before partially abandoning it 20 days later. This tells a story about their intelligence, jointly and severally. Public and trade union outcry against raising electricity prices at all, however, will continue, but this is a different matter from MTS per se.

My April 28 column was a little weighted to the technical side, but as the results have proved, it was necessary to debunk the theoretical basis of MTS before taking on the political side. This piece has three objectives; to analyse other aspects of the tariffs, to comment on the climb down as it remains to be seen by what means the CEB is will make good the revenue shortfall to reach a balanced budget as promised to the IMF, and third to show that the government has no economic plan or perspective; hence fiddling with electricity and fuel prices is a UPFA survival tactic. If that piece was technical, this one is more straightforward.

Comparative tariffs

The tariff paid by domestic consumers consist of a unit charge depending on consumption, a Fixed Charge which is not fixed but rises with tariff slab, and a fraudulent quantity called the Fuel Adjustment Charge which is no adjustment at all but simply raises the unit charge by another 40% (25% if consumption is up to 30 units; 35% if up to 60 units) without rationale. The de facto average charge, per unit of consumption, is the sum of these three components divided by the units consumed. Defined thus, the average, de facto, cost per unit, for different domestic consumer categories, after PUC and Rajapakse’s 9 May capitulation, is as follows.

The mad hatter’s tea party of juddering prices has been ameliorated, but not eliminated. Consumption of 30 units costs Rs 142.50, but 31 units Rs 188; a bigger jolt is at 60 units which cost Rs 372, but 61 cost Rs 763. PUC-CEB really jerks it off at 90 units which cost Rs 1146 but if you go to 91 you pay Rs 1696! A smaller moron-jolt of Rs 164 is when you cross from 180 to 181. This is mainly because the FAC applies to the whole unit charge, not block by block; hence when the FAC jumps (from 25% to 35% to 40%) there is a big jump in the total charge. Continuous piecewise differentiable functions, much loved of Prof. Freddie Bartholomeuz, are anathema to the PUC! Wonder where these chaps picked up their arithmetic?

I am unable to make precise estimates of the loss of revenue caused by May 9 backtracking because it depends on the exact consumption at every de facto average price, and also because of price elasticity of demand. That is, due to price increases some consumers may try and slip down from just above 61 to just below 60, just above 91 to just below 90 and from just above 181 to just below 180. Also, in general, high-end consumer demand is likely to decline while low-end consumption will remain unchanged, or even rise for psychological reasons. This spells trouble for the CEB because the subsidisers will decline, and the subsidised remain static or increase. As an educated guess, I would say, CEB revenue shortfall due to the 9 May concessions will be about Rs 12 billion (PUC says Rs 5 billion; I disagree), or the expected 2013 revenue will decline from Rs 220 billion to Rs 208 billion.

According to the PUC, the cost of supply, including fuel, capital servicing, transmission and distribution, for each unit of electricity sold, is estimated for 2013 at Rs 20.80 per kWh. Consumers using below 105 units pay a lower price than this. I am providing a table of tariffs charged in several countries. The statistics are recent, but not all for the same year, and are based on a conversion rate of Rs 130 to one US$. These apply to the domestic sector and are per unit (kWh).

Denmark; Rs 52 – High surcharges to encourage expensive, fluctuating, wind power.

Philippines; Rs 39 – I don’t know why so high in this developing country.

Italy; Rs 36

Hong Kong andSingapore; Rs 20 to Rs 28 – Cost plus regulated, “reasonable”, profit.

UK; Rs 26 – Competitive commercial pricing.

New Zealand; Rs 25 – ditto

Malaysia; Rs 9.10 to Rs 19.50 – There are many subsidies.

India; Rs 10.40 to 15.60 – There is a complex regimen of subsidies and cross-subsidies.

Vietnam; Rs 8 to Rs 13 – ditto

Thailand; Rs 5.80 to Rs 12.70 – ditto.

It is difficult to make cross country comparisons because Denmark and Northern Europe levy a massive surcharge to support wind and carbon-free renewable technologies. At the other end, developing countries employ a variety of subsidies, cross-subsidies between rich and poor, and whole-sector subsidies where the exchequer bears part of the cost. The best examples of natural undistorted prices are Hong Kong,Singapore,UK and New Zealand, and as a rule of thumb Rs 25 per kWh (fuel + capital + T&D + maintenance + management) is a guide.

It is a little less in Lanka for two reasons. About 32% of our supply is from hydro sources which incur no expenditure on fuel (but capital charges, and T&D i.e. transmission and distribution costs, are unavoidable) and secondly, unlike say Hong Kong’s 99.999% reliability, we get away with less onerous and therefore less costly equipment and maintenance outlays. It is sometimes said that Putlam coal power costs only Rs 8.30 per kWh, but this is misleading; we must add Rs 3.50 for T&D before electricity can reach the consumer, and another, say Rs 2 (depending on the terms of financing) for interest charges and to repay capital.

The bottom line is that the Rs 20.80 per kWh claimed by the CEB and the PUC as the total cost of supply in our mixed hydro-thermal (coal and oil) system is reasonable and in line with international figures. We can have subsidies, we can charge less, we can charge more, these are policy matters and we can do as we like, but we cannot get away from this twenty rupee and eighty cent ogre. Somebody must pay it until the next 600MW of plant comes reliably on stream at Norochcholi, after which the average cost of supply will decline to about Rs 17 per kWh.

Distribution of charges

The psychological impact of these biting tariff increases is noticeable; households are cutting back on consumption, switching off lights, not using fans and commercial establishments switching off air conditioners. These conservation measures will be economically helpful if low-end consumers (paying less than supply cost) curtail consumption, but on the other hand, if high-end consumers, paying in excess of Rs 20.80 per unit reduce consumption, the effect will be that the CEB will run short on the revenue stream it relies on to cross-subsidise low-end consumers. Cross-subsidies, such as affirmative action in employment and education, are unworkable as permanent measures; they have to be phased-out over time. Electricity, like onions and arrack, eventually, has to be offered to everyone at the same price.

Non-domestic tariffs

Leaving aside the peak period (6.30pm to 10.30pm) the General Purpose tariff for shops and commercial establishments varies between Rs 13.50 and Rs 20.50, depending on category, Hotels pay between Rs 9.00 and Rs 22.00, and Industry between Rs 6.00 and Rs 12.50. The peak time tariff is only a little higher than the top end of these bands. Government offices pay between Rs 14.35 and Rs 14.65 at all times. The so-called Fuel Adjustment Charge for all these sectors is only 25% compared to 40% in the domestic sector. (Roughly 40% of our consumption is Domestic, 35% Industrial and 25% General Purpose; other sectors are small).

Compare these numbers with the CEB’s stated supply cost of Rs 20.80 per kWh. Domestic consumers using over 105 units are cross-subsidising business and commercial premises, hotels and tourists, government offices and industry, in addition to subsidising low-end domestic consumers! If the public is agreeable as a matter of principle, I have nothing to add, but how can the public agree or disagree when none of this has been brought into the open transparently? The disparity is not as bad as it looks because these sectors pay a fixed charge of Rs 240 to 3000, depending on category, and a kVA charge of Rs 1000 (or Rs 1100) per kVA of maximum demand, but a disparity there is.

It is not only the PUC that is to blame for not spelling all this out explicitly; the media and “learned” commentators who have confined themselves to superficial off-the-cuff wisdom are also to blame. The political opposition, and the odd quantum physicist who weighs in from afar, are as trivial as they are ignorant of public policy issues, and their social and economic impact.

Governing without policy

This government has no industrial policy; it lives by day to day decision making. It has undertaken a great deal of infrastructure development, some of it very creditable, some useless white elephants, but on industrial policy it is cluless. I was in Taiwan for a few days overlapping May Day and saw at first hand what a dirigisme economic policy with long term planning, not only of the state sector but also in partnership with private investors, has achieved.

Lanka’s electricity price increase will render exports less competitive, discourage investment and further slow down growth that has been stalling since August 2012. There is no long-term thinking, planning or strategy. The mish-mash in the electricity sector, the President jumping this way and that, the inability to reform the CEB for enhanced productivity (I am not a CEB basher and I do not support wholesale privatisation) and a similar state of affairs in the petroleum sector, all have the same root; absence of, policy, managerial discipline, and political will or understanding. You can’t teach old dogs new tricks; this government will not learn or reform; we have to wait for the next – but then, oh hell, I wonder!

[The Socialist Study Circle will conduct a seminar on Electricity Tariffs at the NM Centre, 106 Cotta Road, Borella, on Thursday 30 May, 4.45pm to 6.45pm. All welcome, admission free, language Singlish. Speaker Dr Tilak Siyambalapitiya; Discussion and Q&A, Dr Siyambalapitiya and Prof Kumar David]

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Latest comments

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    It is not pointless populism but clever politicing by Mahinda R. Prof. Kumar David had done politics for decades but doesn’t understand how to win in politics. He even thinks his article (written in Englsih) had an effect on Rajapaksa! MR let the CEB raise prices, and MR comes in like Santa Clause and lowered the tariffs for the low-end consumers. Brilliant politics. CEB is the villain, and MR is the saviour!

    But Kumar David agrees that the Rs 12 average is too low and suggests about Rs20-24 (prevailing in his old Hong-Kong) as the ideal – so the price hike is justified and needed. If he lived in Germany (as I did, for a short time), he should propose the Rs 50-60 per unit as the ideal, where the excess tariff is used to subsidize sustainable energy sources (incidentally, there was a big discussion about the appropriateness of subsidized Solar energy for Sri lanka in the CT-columns by an ex-patriate scientist that Prof. KD may have missed, as he was traveling in anti-Marxist Taiwan – are Taiwanese going to become Trotskyites?).

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      The tactic has completely backfired on MR. He is the butt end of no end of derision as the slogans at the 10,000 strong anti electricity price hike rally on Wednesday proved. “Kole vahala Maydineedi gahuva netha”; “Pachakaraya”; “Do you think we are such fools”; these were the chants. The strike building up for 21 May is also likely to be successful.

      Far from ‘clever politicking’, MR seems to have fooled only the dimwitted Kautaliya!

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        The `dim-witted’ Kautilya is impressed by the high level of civility that E W Golding has shown in a public forum. People resort to abuse when they feel unequal to the task, i.e., his capacity for polite discussion has diminished in proportion to his claimed super-wittedness? Is he/she going to post a nude picture of his/her shining back next time to prove that he/she is so polished that he/she can only cast reflections?

        Don’t be misled or impressed by the noisy hollering of pela-paali class people who utter slogans that were manufactured by their puppet masters the night before.. They are unrepresentative of the vast majority of people in Sri Lanka who do NOT go on `pela-paali’.

        Those who make the most noise have the least good sense.

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        The strike building up for 21 May is also likely to be successful.. “
        May be we should tap the hot air generated by these strikers, and by the Cotta road ruminations, and send all that into a gas turbine and generate electricity. The number of Watt-hours generated would be a measure of the success of the strike. Or is it all going to be lamentations about the lethargy of the masses not rising up in classic revolt, as predicted in the books of the old Pothe Guraas ?

  • 0
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    The fixed charge is supposed to cover maintenance, T&D. The tariff should look after the COP. CEB being a service oriented govt institution should not make profits. It should also be free of exhorbitant tax ie govt should not make profits out of it but can levy tax to cover the administration charges.

    If such a regime is implemented the cost per unit could be around Rs 15. As stated the fuel adjustment charge cannot be 40%. It can be applied but must be more realistically tied to the cost of the fuel component.

    Also there must be a better management of hydro resources. Sluice gates are being opened during the rainy periods whereas the excess water can be used to generate additional power. We have 6 months of rainy weather a year. CEB is not looking for solutions other than increasing the price.

  • 0
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    we have settle in for a soul-searching talk about the future of Sri lanka economy-enegry path of developement.In your view sense of uncertainty hung in the air political school of thoughts and main political parties as well in S L.An energies resources and technologies having new and diverse
    innovation in ongoing industrial revolution.
    1 fossil fuels is aging and in disrepair
    2 442 nuclear reactors in the world timely generated about 6% of our total energy.According scientific community nuclear power would have to take up 20 % of world energy generation.Fifteen hundred (1500) nuclear power plants and building new plants cost of $12 trillion.Now Fukushima nuclear plants had been reveal that human disaster even such cost is going born by tax payers money is undermine human being survival.
    3 we have look for techonlogy for renewable energies is giving rise to NEW INDUSTRIAL REVOLUTION.Internet communictaion will rise new energies.

  • 0
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    I do not believe this government has done any cost benefit analysis for any of the infrastructure projects. A group of morons takes decisions and convince the president to get the green light. There is no transparency in handling projects and project finances. In this climate how can one expect a fair go for everybody. They messed up the tariff without having thought about the cascaded effect to the economy. Sadly several learned people have written in support for this change.

    • 0
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      What is amazing is why `the govt has to do it” is the perennial chant. If a commodity is in short supply, why can’t those who have capital produce it, and sell it? since the prices are going up.
      Clearly, using emergency diesel generators during power cuts is a very expensive option. It is cheaper (even at current solar rates, e.g., from Uni-Solar in the US) to set up solar electricity. But instead of organizing to do it, our people either (ii) waste their energy organizing strikes and demonstrations (ii) blame the government. This is all talk and no USEFUL action. I see that they are planning to discuss electricity tariffs at Cotta raod. Instead, they should form a power consortium, call up some bankers, engineers, and sales agents from China and India, and put together a plan to install solar capacity. Instead, they will continue to talk of `cost benefit analysis’ etc., and blame the govt.

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        You have highlighted the basic economic concept the Supply and Demand cycle. But here this is more complex than that. The sole reason for the proposed price hike is to recover the losses made over the years. This could be due to various reasons, but the first thing that comes to my mind is the wide spread corruptions at all possible levels of the government and commissions factored in by the supplies when selling coal, diesel fuels and equipment.

        If CEB’s issue is meeting the peak demand, then the course of action to resolve the power crisis should be different to what has been proposed. In this situation the authorities must resort to flatten the demand by providing consumers smart electricity power meters with encouragement to use power at a lower rate in the off-peak hours rather than competing with businesses who run mostly during daytime.

        Without understanding the complex nature of the issue I have seen people are suggesting Solar and Windmills as an alternative solutions. Windmills are not environmentally healthy, destroy livelihood of people who live around the area due to excessive noise- Noise pollution. Further destroy the existence of fauna

        Solar: Sri Lanka is a cloudy most of the day, dusty and has high rainfall, this prevents to extract power as as proposed by many writers in this column. If you want to retain your power for future use (in the night)it requires high end batteries, this takes sufficient space and hazardous. Or there should be a mechanism to deliver power to the grid what you generate during the day at a competitive rate. I know few countries have promoted solar giving high price for the power you/household delivered to the grid but later abandoned due to financial losses.

        These factors need to be weighed before going ahead with large scale projects.

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          “Sri Lanka is a cloudy most of the day, dusty and has high rainfall, this prevents to extract power”

          The above statement is incorrect
          . The average solar power (on a flat fixed plate) is 5 kWh per day. If you track the sun it is even more. In the Hambantota-Ampara Area the fixed-plate average is 7 kWh/day, and this is true for Auradhapura-Pollonnaruwa and places in the North. These numbers are better than in Germany where they are going for Solar in a big way, using expensive solar cells (but made in the EU, so good for them). Furthermore, the aerosol level (dust etc) on Lanka is also constant and less unimportant -the air gets cleaned by evening rain. Seasonal variations are small as we don’t have to worry about snow and fog.

          Jay is making statements based on his `gut feeling’, and we know what is in every one’s gut. He is ready to blame corruption’ or the regime for all problems, and do nothing. Corruption and mismanagement exist even more in other parts of the world. The richer the country, and the larger the rich-poor gap, the bigger the corruption.
          Corruption or not, tariffs in Lanka are too low compared to the rest of the world, but our hotels charge the international room prices, so let them pay international power tariffs.

          Those who do not set up cheap alternative power will have to depend on emergency Diesel power at Rs 100 per kWh when power-cuts come in.
          Check the cost of an emergency Diesel installation, and an equivalent solar installation (try, e.g., googling solar panels in China for typical prices and you see you do far better than using Diesel emergency power plants).

          Meanwhile, our leftist sahodarayas can organize more and more debilitating strikes, now joined by the UNP which signed up many of the disastrous deals for fossil power. This government too has followed their avaricious steps. But that is how business works – to make a profit.

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            Where did you get these figures 5- 7 Kwh/day? Show me a reliable source. Further countries that have clear skies have abandoned subsidies for Solar because it was not viable for domestic consumers

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        It is the government that has to do it and not anyone else. That is why they are elected. If the government has been neglectful the people have a right to point it out. That is what the people are doing. Demonstrations and protests are one way of doing so.

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          According to you, the voter has to merely keep his mouth open, and it is the government that should spoon-feed them.

          So you think there is no room for individual enterprise? Everything should be done by government bureaucrats while the population exist as dependents?

          Vote the other side in, and the game would be the same.

          • 0
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            Don’t be obtuse. Enterprise does not work on it’s own. They have to be regulated by government. An enterprise cannot fix a price for services such as power and energy on it’s own can it? An enterprise, particularly a private enterprise, is structured on a reasonable profit margin, which is why most developing countries opt for state enterprises, BOT and BOO types. If private enterprise is to be encouraged it is the state that must take the initiative with a regulatory framework. This is not about working for any side or the voter keeping his mouth open. This is how enterprises work anywhere. As a voter why don’t you start up power generation? Please wise up before you comment.

            • 0
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              No, the government’s new electricity tariffs are stimulating for those (private and corporate) entrepreneurs who want to invest in power production. Already those who are making Dendro power etc., are happy. That is how to STIMULATE the industry. So, instead of being upset by the tariff hike, we should support it. If you keep power (or agricultural products) artificially low (by govt. subsidies or what amounts to subsidies), the private sector will not invest into it. Special bank loans etc (as in EU, Canada, japan) just when the tariffs are going up should also help – instead, our fellows are asking for the price to be lowered. Should we go back to give everybody two bushels of free rice, two free gallons of petrol or kerosine, two lbs of dhal etc., on coupons as it was the case when the state was in full control? They can gloat over those good old days at the Cotta road meeting.

          • 0
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            Yogi, a point I want to make. The protests are about the high cost of power for domestic consumption. The big businesses and industries get it at much lower cost.

  • 0
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    I think the numbers given by Kautilya for the incident solar radiance are basically correct for per sq. meter per day if the objective is simple discussion. Mode detailed numbers for it, and the Aerosol index (this includes contibutions from Could-cover data) may be obtained from NREL (lab) in Boulder Colorado.

    Most of Europe (indeed most places north of the Loire valley) appear quite cloud-covered, but the Germans use higher efficiency solar panels. However, Jay is correct in that Sri Lanka is no so well placed as many places in India or Deserts in Africa. On the whole we are better off than the northern European union in terms of available sun light.

    Solar energy is the kind of industry which can keep many many Panchikawatte types in gainful employment, once we build some experience in it.

    Also, it brings in the possibility of `distributed control of energy’, optimized by each village community having a small computer linked to the smart network to supply or consume power to-and-from the central grid optimally. So the central control (of the CEB) will automatically diminish, and we would ideally end up with a Wiki-like control of energy, where the control is in the hands of consumer-producers and not bureaucrats. Of course, hydro- and other big installations will be under them, but once the distributed content rises above the contribution of the central power facility, the latter simply becomes the source that tops up to smoothen the overall supply. So introducing not only smart meters, but wiki-like interfaces in each power-producing users home for power-usage optimization will come before long.

    Sri Lanka has a very literate population as well as good technical people (who may be a bit one-track minded because they have not been sufficiently exposed to the world of modern technology). CEB has to have the right leadership (which involves adult education for consumers, distribution of solar kits, holding course and workshops to the public) where they have to realize that their job is not just selling the electricity and running the machines, but also participating with vision in a massive technological revolution. However, although I have known some of the CEB chairmen over the years from the mid 1970s onwards, I have not come across such thinking ever. When such thinking is presented, the usual answer is Hi Chandre, what you say is nice in participle, but we can’t do that sort of thing in this country – we have a definite mandate, we are rushing from one crisis to another, we are eternally over budget and have no funds for new ventures, and pie in the sky is definitely not in the cards ! .

    The planned meeting at the N. M. Perea Hall at Cotta Road should also take a visionary approach to problems, remembering that N. M. Perera was in fact one of the great visionary people of 20th-century Sri Lanka.

    So I disagree with the `phoo-poohing’ attitude of Kautilya regarding the efforts of leftist intellectuals, although I am willing to say that much of what Kautilya says is correct at the technical and business level. I think that a social safety net for those who have no means is absolutely necessary for the good health of a society (hence some subsidies are needed), and hence everything cannot be handed over to the private entrepreneur .

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      To add my two cents worth – Solar panels have now been developed to be
      turned out by Printers! A4 size Panel has been done experimentally. Special 3D printers are also in the making.

      A project should be undertaken to electrify a sea-coast town or village
      with a model of sea-wave flaps to generate electricity – a students
      model in India.

  • 0
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    I agree that there is no rationale for domestic consumers using over 105 units cross-subsidising business and commercial premises, hotels and tourists, government offices and industry, in addition to subsidising low-end domestic consumers!

    The generation of thermal electricity should be handled by an independent organisation. It should allow the industrialists and the hoteliers to fund the construction of a coal power plant in Norocholai or Trincomalee. The electricity supplied by it and supplied to the grid can be supplied to the shareholders on cost recovery basis, allowing for transmission costs and losses. Then there is no need for domestic consumers to subsidise the industrialists and hoteliers.

    The alternative is to call for open bids to supply coal power produced either in Trincomalee or Norocholai, on Build, Own & Operate (BOO) basis with a transparent pricing formula.

    There is a conflict of interest when shareholders of oil based power plants in CEB are responsible for the running of the Norocholai coal power plant. It is not too late for the 300 MW Norocholai power plant to be leased to a Chinese Company who will make the loan repayments and supply power based on a pricing formula. The additional 600 MW can be on BOO basis.

    There should be no room for the overburdened consumers consuming over 105 units per month to feel that they are paying high prices to subsidise everyone else and for the corruption and inefficiencies of CEB. This impression is capable of a vote swing away from the ruling party to the opposition in future elections.

    • 0
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      Oh no, not more and more coal or fossil fuels.
      Those who are not happy with solar should go for Dendro (i.e., grow Girisidia or some fast growing plant, dry it in the sun and burn it in high efficiency furnaces to get electricity. This is carbon-neutral as the CO2 released is what the plant took in while growing).
      What is your long-term vision?

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