20 September, 2020

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The Call For An Electricity Pricing Formula

By Tilak Siyambalapitiya

Dr Tilak Siyambalapitiya

There is nothing more to discover. The truth is that a pricing formula is already in place for electricity. Pricing formulae have been introduced many times in the past, but more recently since January 2011, after the new Electricity Act was approved in year 2009. Over a period of one year, a pricing formula evolved with the participation of many stakeholders.

Past Pricing formulae sabotaged

Each pricing formula in the past was shot down or blocked by the politicians, who wanted to continue with the populist policies of “showing off” that electricity is given at low prices to certain customers. What is not told is that the customers are taxed indirectly, to bridge the gap between what it costs and what they pay. In the end, it is a wasteful exercise, because one state bank effectively exists to provide overdrafts to Ceylon Electricity Board (CEB) whereas precious bank funds should be lent to industries and businesses to enhance economic output. The other more dangerous issue is under-pricing of electricity to subsidized customers, which is against the principle of pricing a depleting resource: it should be priced at least at what it costs. However, while being overly worried, ahead of the rest of the world community, about the depleting energy resources, the energy hierarchy has been encouraging subsidies on energy prices, which causes undue use of the very resources that require protection.

Repeated occasional displays of a half-hearted approach to proper pricing electricity by both the Power Sector hierarchy and the Public Utilities Commission, and in the background, the Finance Ministry, do no good to the overall objectives: to provide the best deal to customers from the electricity industry that is a monopoly. What is required is a focused effort to implement the pricing methodology already approved, to achieve the overall target to get (i) customers to pay the cost of electricity, nothing more, nothing less, (ii) electricity sector institutions to return to profitability, over a period of time, ideally over five years.

Need to implement the pricing reform plan

So what is required is to implement the pricing formula already approved, not to make a new one. There is one essential element linked to the pricing formula: a road map for tariff reform and rebalancing.

Sri Lanka’s electricity tariff structure has to be reformed to make it simple. For example, a business premises pays double the price for electricity when compared with the adjoining manufacturing industry. Both companies receive electricity from the same line, use the same quantity of electricity, but the commercial concern pays double the bill. Engineers and customers argue endlessly to decide whether a business is engaged in commercial activity or manufacturing. These archaic concepts and rules that do not match the modern knowledge and thinking of the electricity industry must go. Customers should pay for electricity on the basis of the level of the network they purchase from (bulk or retail) and the time at which they use electricity (those using at peak hours should pay more). No customer should be asked to pay more for electricity just because his business is “going well”. That is why there is a call to charge more from hotels. If hotels are doing well, that’s fine, and let them pay their taxes if the profits are good.

Fuel surcharge: another anachronism

Sri Lanka cannot avoid using fossil fuels for power generation in the foreseeable future. Therefore, there is no meaning in hanging on to the outdated concept of “fuel surcharges” on electricity bills.

Imposing fuel surcharges was a measure adopted in late 1970s when Sri Lanka’s population was only 12 million, 100% of electricity supply was from hydroelectric power plants, and when less than 20% households had electricity. Now the population has exceeded 20 million, with 90% households using electricity. Now, even a year with best rainfall can produce only 50% of the electricity requirements from hydropower. Fuel surcharges were introduced in 1970s and 1980s when rains failed, to cover the cost of fuel used, and withdrawn when things returned to normal. However, in the present situation and for decades to come, use of fossil fuel cannot be avoided, and hence the term “fuel surcharge” has no meaning, because it is here to stay. Therefore, there is absolutely no meaning in imposing a fuel surcharge. The only purpose, if there is any, would be to mislead the electricity customers, industries and businesses, that this “surcharge” is a temporary measure. No it is not.

What the Public Utilities Commission introduced in 2011, and now being prevented from implementing, is a more systematic approach to electricity pricing, where there will be no fuel surcharges, but the cost of fossil fuels and all other expenses smoothly distributed across all years, transparently calculated and disclosed in periodic documents and clarified further during public consultations. What will bring the electricity prices down is first and foremost, the implementation of the remaining components of the long term generation plan (ie the next coal-fired power plant, designated to be located in Trincomalee). When the Puttalam power plant is completed by 2014, the use of oil for power generation will be down to 25% from the 59% in 2012. Oil use will further reduce to 13% of generation by 2017 when the Trincomalee power plant is operational, and further down to 8% by 2020.

Ministers do not need to announce that they advocate to reduce dependence on oil for electricity generation; just allow the long term plan to be implemented.

Year 2016-17 critical

Years 2016-17 are critical, because the Trincomalee coal power plant was to be operational by that year. If the negotiations with India are not going to be successful, as it certainly appears to be, we still have time to finance and implement this USD 500 million power plant using other investors/financiers. Eternal negotiations will not do good for Sri Lanka.

The power sector can rise from two decades of miserable financial mess by 2017, only if the Trincomalee power project is implemented on time, and until then and thereafter, the customers are told the truth about electricity costs and prices. Implementation of large power plants, cheaper to operate such as Puttalam and Trincomalee, does bring a reduction in costs, and such benefits should be partly used to settle the debts of the sector, and partly to bring relief to electricity customers who have been so unfairly treated for nearly two decades of our “experiment” with oil-fired power generation…. Only if the political and finance hierarchy allow the Public Utilities Commission and the electricity suppliers to tell the truth, and work according to sound business principles.

The plan for reforms and the pricing formula are already in place, there is nothing the politicians need to re-discover. Just allow the professionals and the regulatory commission to implement it.

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Latest comments

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    Sri Lanka’s energy crisis commenced when President Premadasa vetoed the proposed Mawella Coal Power Project which had been reserched and found suitable.
    Mawella was an ideal site with a deep bay for coal ships,plenty of fresh water availability and very few residents in the area to be relocated.
    President Premadasa had been advised that the south “would become a desert” by some professor.
    Now we worry about the cost distribution among consumers.

  • 0
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    Siyambalapitiya, you are one of the persons who proposed the coal power project. Did you not know that coal supply is on it’s way out.The peak supply was within the 2000-2010 decade.What is the country to do with a white elephant when the good quality coal is all harvested? Let the Chinese keep the Norochcholai plant.Hydro is the only solution.Work on it.To make the CEB profitable seek additional subsidiaries. Do not milk the already half dead citizen

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    The call by Dr Tilak for a cost based electricity formula is timely. However, a strategy is required to minimise the job losses from the sudden increase in the electricity tariff.

    The cost of funds can be reduced by the use of long term bonds to supplement loans from IMF & World Bank. The reduction in the cost of funds by the use of long term bonds should help CEB to supply power to everyone at the cost of the coal power inclusive of the administrative and distribution costs, when the Norocholai power plant commences generating the designed capacity in 2014.

    We need to eliminate the use of oil based power generation as early as possible. A Public-Private joint venture company is suggested for the further expansion of the Norocholai Coal Power Plant, to eliminate the use of oil based power.

    We cannot continue with this crazy pricing under which consumers who use more than 300 units a month are charged more than double the rate charged from commercial establishments and three to four times the rate applicable for hotels and industrial establishments.

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    The electricity tariff should be two tiered, domestic and industrial / commercial. There can be a base rate assuming maximum use of hydro electricity plus a variable component pegged to the price of fossil fuel. Before anything is decided we need to end the inefficiency and corruption in the state energy sector. State players are not settling their bills as well. Consumers are paying for these inefficiencies in the form of high prices and taxes.

    Norochcholai was supposed to bring down the cost but is ending up as huge white elephant. The cause of these breakdowns and failure to reduce cost, which is linked to efficiency, needs to be investigated.

  • 0
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    From what one gathers from Dr Siyambalapitiya’s occasional interaction with the media, where what he speaks/writes seemed to be wisdom coming
    from one who knows the subject well, reader No Justice takes an exception. CEB is one critical source of public interest in the country where politicking is pretty high. There has been a great supply of rhetoric but little supply of electricity at affordable prices. One time key official in the CEB, whose name is also equally well respected in Cricketing circles, was forced to wonder publicly if the New Wonder Boy there was “a super-accountant or magician” because a few months after the abrasive young man arrived he told the nation CEB, from its years of continued huge losses, was “now making profits” There was a public hue and cry with experts pointing out the man is being economic with the truth. He went into hiding and embarrassed the Boss in the process. He could not be sacked because he came from the side of the Holy Cow – and so he remained. His performance was so below par he was recently booted out. But the man uses his influence in the media and blames a foreign power for his ouster – one more spin from his massive supply source of mendacity
    and over-estimation of his own poor ability.

    The truth is electricity consumers country-wide – nearly 90% of the population – are forced to pay much more than what they should. The sum so eked out is to pay for the CEBs losses in its own mal-administration as well the Govt’s extravaganza in most fronts. It is the same with Fuel and the CPC. Consumers are unlikely to hear good news for a long time with asses doing the work of thoroughbreds.

    Senguttuvan

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