• Energy Analyst Dr. Vidhura Ralapanawe on electricity tariff hikes and the need of the hour

In October 2022, Sri Lankans faced an unprecedented electricity tariff hike of 75% and Minister of Power and Energy Kanchana Wijesekera is currently proposing another of about 70% more. The Public Utilities Commission of Sri Lanka (PUCSL) has opposed this latest hike, however the Cabinet recently granted approval for the hike on a cost-effective tariff formula, which is to be reviewed by the PUCSL in 40 days.  

According to Energy Analyst Dr. Vidhura Ralapanawe, who was on Kaleidoscope this week, Sri Lanka’s present crisis is due to an issue of supply security, affordability, and the escalation of fuel prices due to the country’s high reliance on fossil fuels.

Following are excerpts:

What is Sri Lanka’s present electricity crisis?

Our present crisis is an issue of supply security and affordability because of the inability to produce sufficient electricity for consumption, and whether the public can afford the proposed tariff hikes.

The rapid escalation of prices in the fuel market, along with the depreciation of the rupee against the dollar, has made electricity generation expensive. The current economic crisis has resulted in the Government being unable to acquire sufficient dollars to purchase fossil fuels, on which Sri Lanka is heavily reliant for our electricity supply. 

These issues arising out of our high fossil fuel dependency have been made worse because of the Ukraine-Russia war and Sri Lanka’s economic crisis, which has caused an affordability crisis for our people. 

Looking at the recent tariff hike, has there been an increase or decrease in consumption?

A 70% electricity tariff hike was imposed in October 2022, and the implications of that hike can be seen in the economy. There has been a dramatic reduction in demand from October 2022, when the tariff hike came into play. Industrial consumption, for example, has decreased by 16%, as per PUCSL data.

If consumption is compared between 2021 and 2022, while adding the electricity that has not been supplied due to power cuts, the first nine months of 2022 experienced more consumption of electricity than in 2021. After the tariff increase, however, consumption reduced about 10% in the last quarter of 2022, compared with the same period in 2021.

In most countries, the basic price elasticity of electricity is between 0.08 and 0.1. So, if the price of electricity is doubled, demand will contract by 8-10%. This is what is seen from October 2022 – and a steep tariff increase will see demand contract again. It appears that the Ceylon Electricity Board (CEB) does not understand price elasticity, and it also admitted it is unable to present a detailed basis for its demand projections.

Estimating the correct generation level is the first step to identify pricing. If the CEB overestimated demand by 1,000 GWh, it overstated expenditure by about Rs. 90 billion – which is equivalent to an unnecessary increase of Rs. 8 per unit!

Do we need another electricity tariff hike as proposed by the Minister of Power and Energy?

The CEB has been periodically subsidised by the Government, and although the subsidy hasn’t always been there, given the current economic context and as per our agreements with the International Monetary Fund (IMF) and economic revival plans, the energy sector cannot be further subsidised by the State. This means the “reasonable” costs incurred by the CEB in generating electricity have to be passed to consumers.

The CEB has made a request for a tariff increase to PUCSL as per the correct process. The Cabinet has requested the PUCSL to impose an interim tariff, which is outside its legal remit. The Electricity Act does not allow the Minister of Energy or the Cabinet to impose a tariff or the Cabinet to force the PUCSL to impose a tariff. The only way a tariff can be imposed by the CEB is through a formal request for a tariff revision from the PUCSL and the PUCSL in turn evaluates the tariff filing, discerns reasonable cost allocations, and then revises the tariff accordingly.

Whether a tariff hike is needed, and the scale of it, is dependent on multiple factors. Proper demand has to be identified and meeting this demand “efficiently and reasonably” has to be finalised by PUCSL, after a public consultation. There are multiple issues in the CEB filing, starting from demand calculation to fossil fuel costs, that are problematic.

My calculations indicate that we may need a smaller increase in the tariff – nowhere close to the Rs. 27 per unit increase requested by the CEB.

I want to emphasise that the Cabinet paper and what CEB has submitted to PUCSL are different. The Cabinet paper mentioned a generation requirement of 16,520 GWh without power cuts. The CEB proposal is for 17,106 GWh and envisages a two-hour power cut for the next six months. The CEB has filed three cost proposals in a period of 10 days, which clearly shows how weak its systems and processes are.

What happens now that the Cabinet has given the green light for a tariff hike?

The PUCSL will go through the process and determine demand and the least cost to meet that demand. The CEB projections are significantly higher – about 1,500 GWh higher than the requirement for next year. Adjusting for this will result in a reduction of approximately Rs. 125 billion, or a 45% reduction of the current proposed tariff increase. 

But we also must see if the cost of electricity generation is optimised. Some of the fossil fuels the CEB gets from the Ceylon Petroleum Corporation (CPC) appear to be overpriced compared with global market rates. Adjusting those by perhaps allowing CEB to purchase through other licencees can lead to a significant cost reduction.

What do you think about the proposed tariff structure?

What I’ve noted is that the cost is disproportionately allocated to the poor and middle class in the domestic sectors. A person consuming 30 units will see their current bill of Rs. 360 rising to Rs. 1,300. Those with 60 units will see the current bill of Rs. 780 grow to Rs. 2,560. Energy costs of those consuming 150 units and more than 180 units have not changed, which means this massive burden is being placed on the middle- and lower-income population, way outside their affordability domain, which is wrong. One of the main factors to consider when setting tariffs is affordability and equity, which the CEB appears to not understand.

The industrial tariff is three-phased: Daytime, evening peak, and off-peak, with the latter increasing from Rs. 15 to Rs. 34, which is a 125% increase. This will completely erode the competitiveness of heavy industries both in local and global markets and have several economic implications. 

Haven’t these social and economic implications been thought through? 

Many pertinent documents on these calculations are in the public domain. These and discussions with senior officials lead me to believe the implications have not really been thought through. There is no understanding of the price elasticity of electricity and no understanding about economic conditions that affect the consumption of electricity. Hence, they massively inflate demand requirements and reallocate the burden in an unequitable manner. There is no understanding of the concepts of affordability and implications to the social fabric and economy.

Electricity to the consumers is a public good (at least the basic consumption levels) and must be treated as such. Electricity to industry and commercial organisations relate to competitiveness. Tariff-setting should be done in a nuanced manner – like a fine surgery – with understanding of its many implications. This type of an approach is like taking a fishmonger’s knife to the surgery. 

How do we overcome this in the short and long term?

As consumers, our efforts to reduce electricity costs have a large impact on the overall cost of the CEB and the tariff. Adding rooftop solar or renewable energy into businesses has a personal and organisational benefit, as well as a national benefit.

However, our core problem is an overreliance on imported fossil fuels. There was a period when Sri Lanka was 100% driven by renewable energy, but that has now decreased to about 40%, because both CEB and other power sector “experts” have been promoting fossil fuels including coal, Liquefied Natural Gas (LNG), and oil, which have to be imported. These are subject to price fluctuations and foreign exchange risk. The real problem therefore is the lack of renewables, and the only way out of this is to fast-track the adoption of renewables. 

Even after almost one year into the crisis, there’s no real urgency to fast-track renewables; there’s just one large-scale solar tender on the ground, but nothing close to our requirement. There’s much rhetoric about renewable energy, but no action to make it happen. 

As citizens, if we stay passive, there will never be change. We need to be active, have our voices heard, and demand accountability. 

If the CEB is allowed to run its fossil fuel agenda, this conversation will continue every six months, with tariff increases pushed down citizens’ throats. Unless there is public and institutional pressure to change, we will not be able to reduce this or impending electricity tariffs in the near future. I hope the power sector reforms will happen with urgency and will lead to radical change in the sector, so that we can talk about reducing tariffs rather than increases.

(Savithri Rodrigo is the host, director, and co-producer of weekly digital programme ‘Kaleidoscope with Savithri Rodrigo,’ which can be viewed on YouTube, Facebook, Instagram, and LinkedIn. She has over three decades of experience in print, electronic, and social media)