Electricity Constraints: Can CEB Profits Lighten the Burden on the Industrial Sector?

 

By Buddhika Brahmanage, Research Assistant – IPS


Electricity: Continued Constraint for Sri Lankan Industries
Speak to any major industrialist in Sri Lanka, and they will tell you that electricity is a critical constraint on their operations. A forthcoming World Bank report entitled ‘More and Better Jobs in South Asia’ reports results from country-level Enterprise Surveys that shows that electricity is the number one constraint for enterprises in Sri Lanka, and is in at least the top 5 list of constraints for all South Asian countries1.

The World Bank report investigates major constraints hindering employment generation and expansion of enterprises, and their severity, through the surveys. While in Sri Lanka electricity is reported as the top constraint, it is second most severe constraint for a South Asian benchmark firm in the urban formal sector (a benchmark firm is defined as a medium-size manufacturing firm with 30 employees that is domestically owned, does not export or import and, is located in a large city).

More significantly, according to the Enterprise Survey results contained in the jobs report, electricity in Sri Lanka out ranks other constraints such as business licensing, corruption, political instability and macro instability. It is the top constraint for medium-size and micro benchmark firms in the urban formal sector and second most severe in a micro benchmark firm in the rural sector in Sri Lanka2. These results indicate the severity of electricity related issues for the commercial sector in the country.

Industrial firms in Sri Lanka are faced with three main bottlenecks with regard to electricity – accessibility, reliability and affordability. The problem isn’t new. Even in 2004, a World Bank report Sri Lanka: Improving the Rural and Investment Climate identified that over 40% of urban manufacturing firms and 25% of rural enterprises in Sri Lanka found electricity to be a major bottleneck for enterprise growth. The report noted that less than 70% of rural enterprises received electricity from the national grid3. This has no doubt changed since then. Electrification levels in Sri Lanka have improved significantly and by the end of 2010 it was estimated at 90%. Yet, we must remember that this was achieved partly due to the host of rural electrification schemes, many of which are not yet connected to the national grid.

Apart from urban centers, particularly in the Western Province, few areas enjoy uninterrupted power supply in the country – 52% of medium-size enterprises in Sri Lanka are compelled to use generators to cope with power outages5. Generators could account for as much as 12% of a firm’s fixed assets on average. So, the lack of reliable power supply significantly impacts operational costs of Sri Lanka’s industries, which in turn impinges on their competitiveness.

Electricity: Impacting Enterprise Profitability

Maintaining cost competitiveness is crucial for the industrial sector. However, the industrial sector in Sri Lanka, along with the hotel sector, cross subsidizes other categories of consumers such as households and religious establishments.

The Public Utilities Commission of Sri Lanka (PUCSL) has started implementing a new tariff rebalancing exercise since the beginning of 2011 with a view to bringing the power sector back to profitability4. Mandating time-of-use (TOU) tariffs (applying differential tariffs depending on the time of the day electricity is being used such as daytime, peak, and off-peak) for all medium and large industries as well as medium and large hotels since January 2011 is a salient feature of this exercise. This has further driven up the costs of hotel and industrial categories.
Tariff increments in the hotel category affects the key growth sector, tourism, where it is estimated that top city hotels will incur additional costs of Rs. 120 million due to electricity tariff increases in 20115. Similarly, electricity-intensive industries such as textile, cement, ceramic, metal and aluminum, ship building, and food and beverages are also affected. Industry sources expect a cost increase of 4% to 8% on average, which adversely affects the competitiveness of export-oriented manufacturers in particular (with the current exchange rate policy). In the ceramic industry, for example, the electricity component alone accounts for about 50% of total costs. A statement by the Sri Lanka Ceramics Council, the industry body of the sector, noted that, under the new measures, the cost of electricity of their member companies could increase by as much as 20 to 42%6.
CEB Profitability: Passing on to Users


According to the tariff rebalancing exercise, the licensees (i.e., entities tasked with generation, transmission and distribution) are to be “compensated transparently for external or market related features of the business” such as weather7. Similarly, any direct or indirect subsidy received by the CEB is to be “clawed back and passed-on to customers as a discount, as provided in the approved Methodology for Tariffs”8. Tariff revisions are to take place every six months in order to facilitate this process.

The recent financial turnaround of the CEB should be viewed in this light. In 2010, the CEB recorded profits worth Rs. 5 billion after a decade of steady losses. According to the methodology outlined above, these profits should be passed on to consumers as discounts. A careful look at the factors behind CEB’s profits indicates that this may not be possible.

According to the Ministry of Power and Energy, numerous reasons contributed to the financial turnaround of the CEB. First, is the implementation of the Ten Year New Plan which brought the CEB a profit of Rs. 8,006 million9 (the details of this plan are not available in the public domain). Second is the reduction of unlawful usage and wastage of electricity by strengthening the Investigation Unit of the CEB. As reported by the Ministry of Power and Energy, total wastage in 2010 was 1.19% lower than in 200910. Third is the adoption of “stringent methods of staff administration” at CEB which improved productivity and financial efficacy11. In addition to these, the increment in hydro power generation during 2010 reduced the dependence on the more expensive, thermal power generation.

While the above measures undoubtedly had a significant role in the CEB’s profitability, it seems likely that other factors also contributed strongly to this result.

CEB Profitability: Taking a Closer Look

The heavy rains experienced in 2010 favoured hydro electricity generation, a fact which may not have received enough significance when considering recent reports on CEB profitability. At present, Sri Lanka is heavily dependent on oil-fired thermal generation. The average cost of thermal electricity generation by the CEB licensee is Rs. 18.11 per kilowatt hour. This is significantly higher than the average cost of hydro electricity which is just Rs. 1.35 per kilowatt hour12. In 2009, the generation mix was 60% thermal and 34% hydro. While in 2010, thermal generation was 47%, hydro electricity generation increased to as much as 47% due to heavy rainfall13. Thus, the reduction of thermal generation was a key contributor to CEB profitability, without which the generation costs incurred by the CEB would have escalated much further.

The financial assistance provided by the government to the CEB also needs to be considered. As the ‘Consulting Paper on Setting Tariffs for the Period 2011 – 2015’ by the sector regulator, the PUCSL, states – “the total outstanding debt stock (of CEB licensees) to the Treasury and Ceylon Petroleum Corporation as at 31.12.2009 should be considered as zero”14. This includes dues to the Ceylon Petroleum Corporation (CPC) for Heavy Fuel supply amounting to Rs. 46 billion as at the end of 200915. This moratorium was continued in 2010 as well16.

The fuel subsidy given to the CEB is also an important element. The CPC has remarked that 80% of their losses are due to selling underpriced Heavy Fuel to the CEB17. Although the exact percentage cannot be verified, it is established that the CEB receives heavily subsidized fuel from the CPC, also a state-owned enterprise afflicted with profitability issues. While the price of furnace oil is Rs. 81 per litre, the CEB has been paying Rs. 25 per litre until September 2010, at which point it was revised to Rs. 40 per litre, still half of the market price18.


Therefore, it is clear that even though administrative reforms taking place to streamline the CEB as an entity would have contributed to the profitability of the CEB in 2010, it has also been significantly dependent on favourable weather and direct government assistance. Moreover, due to very low water levels in major reservoirs during the middle of this year (reducing to as low as 20%19), the CEB had to increase the share of thermal power generation to cater to the demand in the country. Thermal power generation has been stepped up further as the second inter-monsoonal rains have been delayed. The CEB states that hydro power generation has dropped to 20% as of October20. This would no doubt mean that generation costs would be higher again in 2011, unlike in 2010. In fact, the CEB has already requested the PUCSL to increase electricity tariffs in order to cover their monthly losses of around 5 billion21. Moreover, according to the forecasts by a renowned energy specialist, electricity costs will keep rising until 2013, which will burden industries further22.

So, it is unlikely that the concerns of the industrial sector could be effectively addressed amidst the attempts by the CEB to make the power sector financially viable. It seems that the industrialists would have to continue to grapple with their electricity issues at least until financial viability is restored to the sector by 2015, assuming the tariff rebalancing exercise is executed on schedule. Meanwhile, the Sri Lankan industrial and commercial sector (including tourism) needs to place greater focus on energy efficiency and go ‘lean and green’ in their energy consumption. These changes take time and won’t be easy in the short-term, but would no doubt reap rewards in the longer run.

Citations

1 The World Bank, 2011, More and Better Jobs in South Asia: Overview, Washington D.C.; 2 Ibid; 3 The World Bank, and International Finance Cooperation, 2004, Investment Climate Assessment. Sri Lanka: Improving Rural Urban Investment Climate.; 4 Public utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 5 http://www.porcelaintablewares.com/news/news32.html; 6 Ibid; 7 Siyambalapitiya Tilak, 2011, The New Electricity Pricing Policy in Sri Lanka, Prof. R. H. Paul Memorial Lecture.; 8 Public Utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 9 Official website of the Ministry of Power and Energy – http://power.lk/2011/03/ceb-has-made-profit-of-5-billion-for-2010-financial-year-after-incurring-losses-running-into-115-billion-in-the-previous-10-years/; 10 Ibid; 11 Ibid; 12 Ministry of Finance and Planning, Annual Report 2010.; 13 Ibid; 14 Public Utilities Commission of Sri Lanka, 2010, Consultation Paper on Setting Tariffs for the Period 2011-2015.; 15 Ministry of Finance and Planning, Annual Report 2010.; 16 Ibid; 17 http://www.lbo.lk/fullstory.php?nid=1668399651; 18 Ministry of Finance and Planning, Annual Report 2010.19 The Daily Mirror, July 18, 2011. The Real Truth Behind the Power Crisis.; 20 The Daily Mirror, October 4, 2011. Rain delayed: Threat to food, hydro-power. 21 Lanka Business Online, October 24, 2011. Sri Lanka power sector facing bankruptcy: minister. 22Siyambalapitiya Tilak, 2011, The New Electricity Pricing Policy in Sri Lanka, Prof. R. H. Paul Memorial Lecture.

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