- Advocata Institute on the way forward following the latest tariff revision
Although restructuring the Ceylon Electricity Board (CEB) and increasing electricity prices have been identified as the main solutions to the prevailing power crisis, such steps alone are not sufficient to deal with this issue. While such measures are crucial and beneficial, the country should go beyond that and consider reforming the entire electricity sector. This involves unbundling the electricity sector, allowing more private actors to be a part of this sector, and getting rid of traditional, ineffective practices.
According to Advocata Institute Chief Executive Officer Dhananath Fernando and Advocata Institute Researcher Akhila Randeniya, who discussed these matters at a recent online discussion titled “Electricity Crisis: Way Forward From High Tariffs’ and organised by think-tank Advocata Institute,” it is high time for Sri Lanka to adopt novel and effective measures to save the electricity sector and electricity consumers.
Cost reflective prices
During the discussion, the two speakers discussed the concept of cost reflective pricing, which, in the context of the discussion, refers to setting the prices/tariffs of electricity to cover the costs of electricity generation, and stated that the CEB’s recent decision to increase electricity tariffs is understandable given the fact that the CEB is one of the highest loss-making public institutions. However, there needs to be more clarity as to how exactly the increased electricity prices cover electricity generation costs, according to them.
Noting that cost reflective pricing essentially means that the costs associated with producing electricity is reflected through the prices of electricity, Randeniya added that when these costs are bundled up, there is no awareness or clarity as to whether increased prices would be used to cover operational costs, staff costs, or to purchase necessary goods such as coal, among others. The two speakers noted that it is crucial to comprehend what cost reflective pricing means in the Sri Lankan context, and that although the CEB increasing prices is more prudent than continuing to suffer losses, this process has to be transparent.
Shedding some light on how various factors have increased the costs and losses of the CEB and also the CEB’s debt situation, Randeniya said: “Yes, we do have private investors. The problem is that they are also losing faith when there is so much debt incurred by the CEB that is supposed to pay them. There seems to be a repeating history and a pattern of non-competitive tendering processes where such tenders are given to a single entity as opposed to them being given transparently, and I think that is something we should all be a bit concerned about at this juncture where we can have reforms to existing structures of electricity and electricity generation.”
Meanwhile, the two speakers discussed how the CEB having a monopoly over electricity supply has affected competitiveness in pricing and the quality of services. Adding that Sri Lankans have zero alternatives when it comes to changing their electricity supplier, Fernando added that having more service providers in the electricity sector would be beneficial and allow consumers to choose better service providers.
In addition, the impacts of this financial crisis within the CEB has impacted on certain ongoing and expected initiatives as well, according to Fernando. He noted that even though Sri Lanka has commenced renewable energy projects, since suppliers of goods and services have not been paid, the suppliers’ potential to reinvest in those projects has diminished. Speaking of the plans to give the control of Sri Lanka’s renewable energy projects to companies run by India-based Adani Group, Fernando opined that such control should not be given singlehandedly, due to, among other reasons, the possibility of such companies trying to make massive undue profits.
Breaking the electricity monopoly
Fernando and Randeniya emphasised the importance of getting rid of the monopoly in the provision of electricity, adding that the existence of monopolies creates a situation where consumers do not have the freedom or opportunity to choose service providers based on the quality or price of services or other factors, and service providers do not have an incentive to improve their services due to the lack of competition. The two speakers identified unbundling the electricity sector through restructuring and allowing private actors to be a part of the electricity sector as two of the most important aspects of improving the electricity sector. It was further stressed that regardless of the sector (private or public), monopolies are detrimental under any market condition.
Noting that allowing the CEB to take decisions as to what it wants to do is not the sole solution that could alleviate the power crisis, Fernando explained: “It is mainly about opening up the (power) market, or to basically unbundle the electricity sector to separate the generation, distribution and transmission of electricity. Bring multiple players for each sector, and then there will be a choice as to who (service providers) to pick.”
Speaking of the concerns as to whether there will be any electricity price-related adverse impacts of unbundling, especially since this process will increase the number of stakeholders such as intermediaries in the electricity sector, Randeniya added that he does not advocate for complete privatisation of the electricity sector, and that doing so will render consumers with no safeguard. Even if the electricity sector was unbundled, the Public Utilities Commission of Sri Lanka (PUCSL) should still act as the authorised regulator in order to ensure that there are no practices that limit consumers’ access to electricity, according to Randeniya. It was also noted that allowing private actors to enter the electricity sector does not necessarily mean that the price of electricity would increase drastically.
Randeniya explained: “In my opinion, restructuring is something we can really push for. In 2009, when the Electricity Act was to be passed, unbundling was a criterion that was material to that Act. But, with political persuasion and other situations, unbundling was not done in a horizontal manner where you completely take it (the entire process of providing electricity) apart. It was done in a more vertical way, which essentially led to nothing. Transmission, supply and generation are separate entities; but they all fall under the CEB. That is not what we are looking for. We want the three aspects of electricity provision to be not monopolised. This relates to the renewable energy sector as well. As has been stated, even if Sri Lanka paid more attention to wind and solar power generation, that cannot be handled by the existing grid and the necessary infrastructure development is also necessary. For this, we need investments, and since the State cannot afford it, foreign investments are the way forward if we want to improve our existing infrastructure and to make sure that electricity prices are not monopolised just by the State.”
He further opined that the lack of choice is something that is abundant in the electricity sector.
Allowing the electricity sectors’ growth and evolution
The two speakers pointed out a number of factors that have hindered the evolution and growth of the electricity sector, and noted that employing effective approaches to deal with those factors would significantly improve the state of the electricity sector reducing the financial burden on the CEB and consumers.
They stressed that there is a pressing need to gradually do away with the system of meter readers visiting each household to issue printed bills, and that it is time to pay serious attention to using digital meters.
“Having an individual to go and read the meter and then print a bill are additional costs in the long run. When you multiply that cost by the number of users, it is an arbitrary cost. It costs around Rs. 800 to generate a bill including the costs of the individual that reads the meter,” Randeniya said, adding that these are systems that could be automated, and that there are ways to deal with inefficiencies pertaining to the existing bill issuing method.
The existing bill issuing system, Fernando noted, is a waste of human resources and time, and there is also a possibility of errors occurring. Noting that it should not continue in a context where the same could be more effectively achieved with the use of digital technology, he added: “We cannot do it overnight. If you have that (a digitalised system), you can control the usage on the demand side, because then we can go for pricing based on the time (of the day) electricity is used. The main concept of electricity is that the cost of each unit is different. If you generate electricity during the daytime, the cost is low. During peak time, in addition to hydro power, thermal, coal, and other power generation methods have to be activated, and therefore, the price is high. So, basically, when you charge a higher price during the peak hours, the people can use it very carefully and their demand can be lowered, and as a result, the cost can be reflected through prices.”
Adding that such measures would save the CEB a significant amount of money, Fernando added it could also help prevent practical issues pertaining to meter readers visiting every household to issue a bill. He noted that sometimes, the number of days taken into account by meter readers when calculating the total amount that needs to be paid (for a given billing period) change depending on the date on which meter readers visit a household. Adding that this could result in consumers having to pay more for electricity used in a billing period when meter readers do not visit households on time, Fernando explained that such issues could be mitigated through the use of digital meters as they could calculate the exact number of units used within a billing period.
In addition, the two speakers paid attention to national security related concerns put forward by various parties with regard to allowing foreign actors to be a part of Sri Lanka’s electricity sector. In this regard, Randeniya said that depending on another State entirely on the generation or the supply of electricity is dangerous. However, it also shows a slightly nationalistic sentiment where the authorities believe that Sri Lanka needs to be the owner of everything that the country produces, according to him, who further pointed out how Parliamentarians opposed when a suggestion was made to sell a certain power plant back to its developers and purchase electricity from them. He explained that even if Sri Lanka were to enter into an agreement to obtain electricity from another country/State, Sri Lanka will still be in a position to sustain its sovereignty through the agreements it enters. In addition, any such project would have the involvement of Sri Lankans as well. Although certain elements of such a project may involve national security concerns, he added, the larger issue has been slightly blown out of proportion than it should be.
CEB-centred reforms are inadequate to deal with the power crisis; unbundle the electricity sector, and allow private actors to join: Economic researchers