Energy Policies in Sri Lanka:
Key Elements to Address Social Equity
Dr Tilak Siyambalapitiya
tilak-rma@sltnet.lk
1
Introduction to the Paper
1.1 Written and Unwritten Policies
Sri Lanka has a written energy policy, which was subject to public review through print media
over 2006-7, discussed at various bodies in the democratic system of government such as
the Cabinet and the Parliamentary Consultative Committee, tabled in parliament and
published in 20081. A review of the energy policy published in 2008, and the publication of a
new policy document, is now over due. The written policy is hardly ever followed by the
government: what is followed is a mix of written and unwritten policies, and a largely ad-hoc
series of actions, that cause confusion, waste of precious human resources and funds in
various sector institutions and to the public. Energy policy has many aspects cutting across
both the supply-side and the demand-side, different energy sources, applications and
markets, which require a detailed analysis beyond the time frame of this study. Instead of
examining what policies are not implemented by which Government or what other policies
should have been implemented, this paper focuses on three key elements of energy policy
that (i) affect the target group of this analysis, the lower income groups and small businesses,
(ii) renewable energy development to replace fossil fuel use, and (iii) efficiency and demand
management. These three issues are interlinked, but in this analysis they will be considered
separately.
1.2
Market Principles in the Energy Industry, freedom of choice and the world
community
This paper is written in the context of Sri Lanka’s present principles of ownership and
operations of the energy sector, and without any changes to the basic principles of providing
an energy supply: adequacy, economy and reliability of energy supply. It also assumes that
modern energy supplies have to be provided to the people in adequate quantities to ensure
their basic needs are met and to ensure that energy supplies are also served to industries
and commercial activities under the same principles (adequacy, economy and reliability) so
that such institutional users would remain competitive and improve/expand their presence in
the market by selling their goods and services, thereby providing employment to the people in
the society to maintain and improve their living standards. The paper also assumes that the
energy industry should be financially breakeven from the point of view of its operator, to
ensure that the principle requirements of the modern society can be met adequately,
economically and reliably.
The paper also assumes that people are afforded the freedom of choice, and would not be
prevented from elevating themselves to any level of the society from where they presently
are. Peoples’ participation of the energy supply industry and as energy users, therefore
requires to be based on market principles, guided by the policy. Accordingly, the paper
refrains from assuming that poor will always remain poor and should continue to use only a
small amount of lower quality, unreliable and subsidised energy, and that a section of the
1
See National Energy Policy & Strategies of Sri Lanka, Gazette extraordinary1553/10, 10th June 2008. available
in http://powermin.gov.lk/?page_id=90 or http://www.energy.gov.lk/sub_pgs/elibrary_policy.html
Page 1
society will remain dedicated to the energy supply for a below-average wage, while the
remainder of the society enjoys the fruits of their labour. The paper therefore assumes that
any person participating in the supply and delivery of energy would do so on the basis of
market principles, out of his or her own choice.
1.3
Status of the focus issues
Energy availability and affordability: Energy for household needs and for small businesses
requires to be available and affordable, to enable the lower strata of the society to develop
their living standards and livelihoods. The three main sources of energy used for such
activities are biomass (both grown and waste), petroleum fuels and electricity. By way of
availability, biomass and petroleum fuels are widely available in the country, but scarcities of
biomass occur in certain areas and the corresponding increase in prices, causes such
biomass to be unaffordable. Petroleum fuels are used for household lighting (kerosene),
agricultural and commercial activities (kerosene and diesel), and for transport (diesel and
gasoline). Availability of petroleum products for retail purchase depends on the distance of
the user from a petroleum distribution facility. As the distance increases, and if there is a
demand, the practice of selling petroleum products at local shops (in smaller quantities, at an
enhanced price) is common practice in rural areas. By such means, the access is improved,
but the price controls no longer exist after the petroleum product leaves the distribution facility
of the official distributor. Price increases up to 30% between the official petroleum retailer and
the local shop, have been reported. Electricity is the energy source of choice for lighting,
entertainment and small commercial and industrial activities, now widely available to about
90% of households. The strongest focus of the political administration, and investments have
been to extend the grid and to provide electricity services to households, with a declaration
that all households will be provided with electricity by the end of 2012. While this target is
unlikely to be achieved owing to distances involved in connecting some households to the
grid, and the willingness and affordability of such households to invest on off-grid facilities to
generate electricity, significant efforts are continuing to maximise the grid coverage. Pricing of
commercial energy (electricity and petroleum) remains a key issue, and a variety of pricing
and subsidy schemes have been tried out. Poor management of subsidies (not only for the
low users but to all users across the board), has caused the main petroleum and electricity
suppliers to report large losses for several years.
Renewable energy development: Sri Lanka’s per capita energy consumption is about 500
kg or oil equivalent. Sri Lanka presently secures 61% of the country’s primary energy
requirements from renewable sources2. The dominant users of renewable energy are
households (biomass for cooking), small and medium enterprises (biomass and other agrowaste), industries (biomass, to replace fossil fuel), and for electricity generation to the grid
(hydro, wind, biomass and solar). Traditions, affordability, economic realities and policy
initiatives have enabled Sri Lanka to attain such a high share of renewable energy input to
the country’s social and economic activities. While the quantity of renewable energy used is
stagnant or increases only slightly, the challenge is the imminent reduction of this share of
renewable energy use in the country and correspondingly higher quantities of fossil fuels that
dominate the inputs to economic growth. The compound average growth in demand over
2000 to 2010 for each form of energy has been estimated to be biomass: 1.4%, fossil fuel:
1.6% and renewable (excluding biomass) energy: 5.3%. Growth figures of energy quantities
may be misleading because (i) biomass use in households is largely an estimate, based of
previously conducted sample surveys, (ii) there are large fluctuations in renewable energy
available for electricity generation, owing to the dominance of hydropower. For electricity
generation, Sri Lanka has an industry in itself, where private investors have been offered
2
Energy Balance 2010, Sri Lanka Sustainable Energy Authority, 2011.
Page 2
attractive terms and tariffs to develop projects and sell electricity to the national grid. Off-grid
facilities for remote locations are generally managed by community organisations, which have
been supported by various agencies in their inception.
Figure 1: Shares of Conventional, Fossil and Renewable Sources in the National
Energy Mix
100%
Share of Primary Energy
80%
Hydro+non-conventional
Petroleum and coal
Biomass
60%
40%
20%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Efficiency and demand management: Issues related to demand management are many.
From the household end-user point of view, energy efficiency is of a lower priority because
electricity is provided substantially below the cost, to lower-end users. Kerosene, the other
widely-used form of commercial energy, is not priced at cost, but the energy policy itself has
expressed the desire of the government to provide a targeted subsidy to low income
households. The impact of household and other lighting demand, and televisions, on the peak
demand on the national grid is significant, causing excessive losses at peak time and idling
investments on capacity and energised supply-side equipment in the off-peak periods. The
share of electricity used for household requirements is gradually increasing, along with the
average consumption per household.
Figure 2: Household electricity use
Page 3
Share of electricity used in households
Monthly average
41%
85
Monthly average household electricity use
(kWh)
Share of electricity used in households
43%
75
39%
37%
65
35%
55
33%
31%
45
29%
35
27%
25%
25
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
1.4
Questions on policy
With respect to the three key areas introduced in this paper, the questions that need clear
policy guidelines and most importantly, their implementation, are:
(a) Are the direct and indirect subsidies provided for household use of commercial energy
reaching the intended beneficiaries, using a correct methodology ? If not, what
corrections are required ?
(b) Is the renewable energy development activity proceeding at the required pace, and under
the correct economic principles ? If not, what corrections of course and approach are
required ? Are the benefits of renewable energy being passed on to the society, to which
the natural resources belong ?
(c) Are the on-going initiatives adequate for energy efficiency and demand management, and
if not, what additional measures are required to promote a more vigorous
implementation?
As presented before, the policy debate will not compromise the rights of the society to receive
an adequate, reliable and economically efficient of energy supply.
2
Energy availability, affordability and subsidies
Availability of energy was discussed earlier. Affordability and subsidies are the issues in
hand. With regard to kerosene, the approach until February 2012 (in spite of the national
energy policy making a different declaration) has been subsidise all users of kerosene. An
announcement has been made in mid-February 2012, that households with no electricity
connection will receive a kerosene subsidy. In the case of electricity, sales to low user
households is subsidised, and all households too receive their low-end usage at the same
level of subsidy. With regard to kerosene, the level of subsidy has not been published by any
agency. However, the subsidies on electricity for 2011 were published by the Public Utilities
Page 4
Commission of Sri Lanka (PUCSL) and summarised in Table 1. The disparities in costs and
price, are described in Figure 3.
Table 1: Cost of Supply and subsidies to electricity customer categories3
Customer Category in
year 2010 tariffs (and
kWh/month for
households)
Subsidy or surcharge as a %
of cost of supply
Customers
Subsidised
paying a
customers
surcharge
Volume of cross subsidy
received or provided (LKR
million/year)
LV Retail
0-30
80%
(4,373)
31-60
77%
(12,135)
61-90
70%
(14,001)
91-120
40%
(4,672)
121-180
20%
(2,066)
181-600
29%
2,429
>600
122%
1,802
Sub Total
45%
(33,016)
Other LV
Religious
61%
(614)
General Purpose 1
36%
7,500
Government 1
3%
Industrial 1
18%
(558)
Hotel 1
34%
7
Street Lighting
100%
(2,310)
Sub Total
18%
4,024
LV BULK
General Purpose 2
87%
9,942
Government 2
38%
Industrial 2
10%
1,947
Industrial 2 TOU
10%
214
Hotels 2 TOU
33%
9
Hotels 2 (GP)
36%
299
Hotels 2 (IP)
30%
195
Sub Total
38%
12,606
MEDIUM VOLTAGE
General Purpose 3
89%
2,347
Government 3
35%
Industrial 3
14%
1,583
Industrial 3 TOU
29%
403
Hotels 3
40%
31
Hotel 3 TOU
41%
256
Sub Total
30%
4,619
Total
8%
(11,767)
Note: 1. The cost of supply and tariffs, and therefore, are for year 2011, and should not be considered to be
valid for year 2012. Similar figures for year 2012 are yet to be published.
Note 2: The customer categories for bulk and medium voltage are those that prevailed until 2010.
Analysis of consumption by individual customers over a period of time has not been
conducted, to examine the issues of affordability. Certain studies have been conducted to
examine what basic needs for electricity are, but the results of these studies are yet to be
published. Thus, there is minimal information on how affordable electricity is to the low
income customer and the growth patterns in consumption by specific customers over time.
Thus, the subsidy on electricity, ranging from 20% to 80% of the cost of supply, is not
targeted and its beneficiaries are unknown. The value of this subsidy has been 37.2 billion
LKR in 2011, and is likely to be higher in 2012. The subsidy so provided is cross subsidised
by other customer groups (higher end households, small commercial customers, and all the
large institutional customers) and finally by a grant from the government (which in turn is also
collected through taxation). However, PUCSL has not reported whether the amount due from
3
Public Utilities Commission of Sri Lanka, 2011
http://www.pucsl.gov.lk/download/Electricity/Decision%20on%20Electricity%20Tariffs-2011.pdf
Page 5
the government has been paid, and thus, the entire subsidy would be termed as losses for
the transmission licensee, Ceylon Electricity Board (CEB).
Figure 3: Comparison between Cost and Price of Electricity for Households in 2011
35
Cost
Price
Cost or Price (LKR.kWh)
30
25
20
15
10
5
0
0-30
31-60
61-90
91-120
121-180
181-600
>600
Therefore, the crucial question is whether (i) the non-targeted subsidies provided to
households are serving their intended purpose, (ii) who pays these subsidies, and given the
fact that the government regularly defaults on dues to CEB on account of subsidies, (iii)
whether it is economically efficient to retain a loss making state entity.
The national energy policy declares that from year 2008, electricity and kerosene will be
priced at the cost of supply and that there will be a direct subsidy (not flowing through energy
supply institutions) to the value of 50% of the cost of supply of 30 kWh per month.
Accordingly, if the national energy policy was implemented, the price of electricity for a
household in the first block (30 kWh/month) would have been 705 LKR/month. Out of this,
deserving households would be provided with a grant of about 350 LKR/month. Moreover, the
policy declare that this subsidy would also be provided to households that do not have a grid
electricity connection, to be used either for kerosene or for other off-grid electricity supply
systems such as solar, wind or small hydro systems.
Recent initiatives (mid February 2012) by the Treasury has attempted to implement a portion
of the national energy policy by (i) pricing kerosene at a level close to the cost of supply, thus
preventing the subsidy flowing to other users who are not low-income customers that use
kerosene for household lighting, (ii) raising the electricity tariff by 15% for low-end users
(which however does not raise the prices to anywhere close to the cost of supply. No
information has been published on the calculations of the cost and price of kerosene, and the
cost and price of electricity, and the impacts of price increases to utility finances. Therefore, in
spite of the regulatory framework established and implemented since year 2009 by way
establishing and empowering the Public Utilities Commission, the degree of transparency of
Page 6
costing and pricing of electricity has not improved. Accordingly, subsidies continue to remain
non-targeted to the intended beneficiaries, and would continue to give rise to losses to the
petroleum and electricity suppliers, which degrades the performance of these institutions.
With the available information, it is clear that the government and its various Ministries,
departments and the treasury, are not supportive of a transparent mechanism to price
electricity and to provide a targeted subsidy to the deserving households. The overwhelming
desire is to be keep the energy supply institutions eternally in debt, so that they can be
blamed for all the problems with the sector. However, keeping state institutions in a predefined loss making status prevents innovation and encourages lethargy and lack of
commitment, to make such institutions to be financially responsible. In conclusion, it is clear
that the systematic procedure established in year 2011 for the pricing of electricity has been
diluted by all the players, and a return to unclear, non-transparent pricing and costing
mechanisms is imminent. The end-result is most likely to be a general subsidy, enjoyed by all
in society, eroding the principles of cost-reflective pricing and targeted subsidies.
3
Renewable Energy Development and Delivery
It is a question of cost, technical viability and reliability. If not for these constraints, fossil fuels
would not have any place in electricity generation and most of the thermal energy
applications. Liquid fuels would still be required to power mobile user, meaning vehicles and
ships, and to a certain extent trains. With the imminent end of the era of fossil fuels, the
options available to Sri Lanka are only a few. Maximise (or is it optimise) the use of
renewables and move to Nuclear power to replace electricity produced by other fossil-based
thermal sources. For industrial applications, such as for heating, there will be two options:
move to biomass use where possible, or switch-over to electricity, which will make the
movement to nuclear power inevitable and faster.
The question is: how should Sri Lanka meet the end of the era of fossil fuels. Should Sri
Lanka move faster than the rest of the world or at the same pace as the rest of the world ?
The next question is on an entirely different issue: Sri Lanka has been the example to the rest
of the developing world in encouraging the private sector to develop renewable energy
resources for electricity generation. Of late, Sri Lanka’s mature renewable energy program
has been offering the highest prices in the world for such electricity produced from private
power plants. Moreover, such investments that have matured contracts are now being
lobbied for the same high prices to be continued into the future. The question is: where and
when do the so called benefits of renewable energy passed on to the society to which
renewable energy belongs?
3.1
Technical viability and reliability
All forms of renewable energy have their technical and reliability constraints, coupled with
economic realities. Hydropower is dependent on the weather, and failure of successive
monsoons in Sri Lanka, is not uncommon4. To increase the storage capacity of hydropower
plants, reservoirs are needed, which in turn are perceived to be harmful to people and the
environment. Backup capacity using another fuel (fossil or storage biomass) is required to
ensure a hydropower plant operates perfectly and provides the required service. Without
backup capacity, hydropower will be a seasonal source, but electricity customers do not
4
From the power generation point of view, Sri Lanka is experiencing the second successive failure of the
monsoons in 2011.
Page 7
accept a seasonal supply of electricity5. The constraint in wind power is its variability, for
which a similar, fast acting backup power supply should be available. If not, wind power
customers would have to accept frequent fluctuations and outages of power supply. Solar
power has similar constraints. Power system dispatchers have constraints, too. All forms of
renewable energy, except for hydropower with storage, is non-dispatchable. They have to be
used when the resource is available. This means, the amount of non-dispatchable generating
capacity should not exceed the demand for electricity in the power system. Some other power
plants, such as those power plants operating on the steam cycle (nuclear, coal, waste heat
recovery, and biomass), are must-run, meaning that they cannot be switched off and on a
daily basis, for any reason. Furthermore, a private sector investor cannot be encouraged to
invest on a renewable energy power plant (perhaps promising very high tariffs to encourage
him to take undue risks) and then be told to off-load his power plant, because there is more
generation than the demand for electricity, when all such power plants are added up.
Therefore, there is a requirement for an honest and truthful approach to the issue of
renewable energy development from the technical point of view, without making false and
misleading declarations on the capacity that can be absorbed to the grid. This capacity of
each technology is solidly linked to the portfolio approach proposed in the next section.
3.2
Feed-in Tariffs
Sri Lanka is currently searching for that optimal economic and technically feasible
development plan for renewable energy. Arguments are many, ranging from a fast drive for
renewable energy effectively ignoring economic realities and technical constraints to a
moderate path of development. On the economic front, Sri Lanka is currently offering the
world’s highest price for renewable energy-based electricity geenration to the grid, as
summarised in Table 2.
Therefore, customers in Sri Lanka are being called upon to pay a price that is higher than the
norm elsewhere in the world. the real reasons for the high prices are the exorbitant interest
rates and rates of return on equity assumed in the determination of cost reflective feed-in
tariffs. A detailed analysis of where the shortcomings in tariff determination occur, is beyond
the scope of this analysis.
Other major issues are the absence of any form of governance in (a) the process of
determination of feed-in tariffs and the limited/sketchy and incomplete documents published
by the Public Utilities Commission in 2010-11, (b) lack of analysis of impacts on the
generating system, costs and impacts on customers before approvals at various levels are
granted for renewable energy projects, and (c) the collapse of a system in which a renewable
energy portfolio was to be established by Sri Lanka Sustainable Energy Authority (SLSEA).
A renewable energy portfolio is an arrangement where the development of renewable energy
will be managed with a focus on the following: (i) renewable energy developers will be paid a
due price for the energy served into the grid, not too high, not too low. (ii) electricity
customers will not pay anything more than what they would have paid for other conventional
means of electricity generation, thereby ensuring Sri Lanka’s customers are not unduly
burdened with higher electricity prices, (iii) mature renewable energy projects will be offered a
price that would be sustainable in the longer term, (iv) more expensive forms of renewable
energy and less economical development sites can be supported.
5
Note that one of the principles on which this paper is based is reliability of energy suppies.
Page 8
Table 2: Sri Lanka’s feed-in tariffs are the world’s highest6
SPP Tariff in equivalent LKR/kWh
25
Mini-hydro
Biomass
Municipal Waste
Wave Energy
Landfill Gas
20
Wind
Agricultural & Industrial Waste
Waste Heat Recovery
Biogas
Geothermal Energy
15
10
5
China (Taiwan)
Germany
Canada (Ontario Province)
Great Britain
(England+Scotland+Wales)
USA (Minnesota state)
India (Madhya Pradesh)
India (Karnataka)
India (Tamilnadu)
India (Andhara Pradesh)
Tanzania
South Korea
Malaysia
Uganda
Thailand
Sri Lanka
0
Note: Information valid as of August 2011
The current approach to renewable energy development does not satisfy any of the above
requirements, and offers uncontrolled prices to renewable energy developers, thus leaving
the electricity customer to pay higher prices, while more expensive renewable energy
technologies continue to be kept aside owing to lack of funds to support/subsidise.
3.3
Renewable energy for non-power applications
Already, a significant number of industrial and commercial facilities have been converted from
fossil fuel to biomass. Replacement of fossil fuel used for thermal applications with biomass is
more cost-effective than using biomass for electricity generation. One obstacle to wider use
of biomass in industrial heating applications is the issue of supply constraints or the absence
of a reliable supply chain. Buyers would ideally be interested in contracting out the supplies,
with guarantees of supply by way of timely delivery and quality. The quantities required are
large and difficult to handle when compared with oil. Nevertheless, further assistance is
required to enable the biomass supplies to be stabilised through larger, semi-mechanised
plantations and delivery mechanisms. The likelihood of labour becoming too expensive or
6
Based on author’s own research. This research is confirmed by other independent studies by other authors and
agencies. For example, see Gabriela Elizondo Azuela, Luiz Augusto Barroso, The World Bank, Washington, DC,
Design and Performance of Policy Instruments to Promote the Development of Renewable Energy: Emerging
Experience in Selected Developing Countries, Energy and Mining Sector Board Discussion Paper No 22, April
2011
Page 9
unavailable to support a large-scale labour intensive biomass supply operation has to be
considered.
4
Energy efficiency and demand management
Past and current initiatives include appliance labelling and energy efficiency standards,
capacity building, and promotion. There is no effective mechanism to carry the energy user
forward with the entire package of interventions and incentives to save energy and to manage
demand. Under-pricing of electricity supplies to households (and now for smaller industries)
does not encourage energy efficiency and encourages wasteful use. The recent initiatives to
price petroleum fuels at cost (not below international prices, but higher taxes to certain fuels)
had taken the petroleum fuels outside the vicious circle of under-pricing, at least temporarily.
Subsidies and incentives would not be useful as long as the customer does not experience
the correct price of the energy product he uses. In spite of apparently large enthusiasm
among institutional energy users (buildings, hotels, industries), the degree of implementation
of energy efficiency initiatives is extremely poor. Recommendations of energy audits are not
implemented, except in about 5% of audit, where some of the recommendations have been
reported to be implemented.
Accordingly, what is required is a combinations of (i) efforts to hold hands and take energy
users to optimum energy use, (ii) regulatory interventions to ensure appliances and systems
are designed and built to Sri Lanka’s energy efficiency standards.
Demand management requires to use modern techniques such as smart metering and online information to customers, so that the cost is used as a tool for management of demand
and enforce efficiency. Partial implementation of efficiency by way of raising prices to high
end users only, does not satisfy the desire to be more efficient and socially responsible.
5
Written and unwritten policies
Policies are written since a policy is required by the government and the stakeholders, and
often by international development partners. In the Sri Lanka energy sector, policy documents
are never ever looked at when decisions are arrived at. Policy is a loosely used word. At one
moment, petroleum pricing policy is said to be required to support the public transport sector,
and subsidised fuel is justified on that basis of that “policy”. A few months later, pricing at
international levels is the best way to enable petroleum suppliers to remain viable, and that is
the “policy” at that moment. Similar features are observed in managing other sub-sectors of
the energy sector, in terms of pricing and managing all other sector dynamics.
What is largely implemented are unwritten policies, which are effectively not policies but ideas
of individuals. A written policy requires wide stakeholder consultation, and constant reference
by those responsible for its implementation. However, what happens mostly is to ignore the
written policies and implementing individuals preferences and other ideas (which cannot be
termed as policies).
Sri Lanka requires to graduate from the disorderly manner in which energy “policies” are
implemented, towards a mature, systematic approach of articulating policy options,
quantifying their impacts and then agreeing to implement them. The Ministry of Power and
Energy, the institution in charge of policy making, and the institutions charged with the
Page 10
responsibility of implementing such policies, have failed to reach the maturity required to
manage policy in a manner worthy of a middle income country.
6
Relevance of Schumacher principles to modern energy systems
Modern energy systems survive of market principles and commercial viability, but within a
policy framework that guides such industries. Unless an energy system is “economic”, the
supply or the institution is bound to fail, or use other resources which are meant to satisfy the
basic needs of the society. Therefore, dismissing projects in the energy sector as
“uneconomic” is a reality, which comes into conflict with principles articulated by Schumacher.
The use of nuclear energy too, falls into the same category of economic justification, in spite
of its safety concerns and issues of long-term viability.
People and the environment matter when planning energy supply and services. Small energy
systems are unfortunately not economical, or if economics are completely left out, they are
not efficient. Hence, being small is in direct conflict with the objective of being efficient and
environment friendly, and as defined in this paper, being reliable. Making a small system
more reliable means building more capacity, wasting resources that would otherwise be used
for other people or other services.
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