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Tuesday September 27th, 2022

Explainer: Sri Lanka’s electricity tariff hike and how it works

ECONOMYNEXT – Sri Lanka’s electricity tariffs were raised for the first time in nine years this week. The 75 percent overall hike came after a series of internal investigations and stakeholder consultations, at a time when the state-run Ceylon Electricity Board (CEB) is operating at massive losses, and the country is spiralling into an economic crisis.

Background

Electricity prices were last hiked in 2013 however in 2014 the tariffs were slashed by 25 percent. Since then, the CEB has had to deal with rising fuel prices coupled with the rapid depreciation of the rupee.

From 2013 to 2022, diesel, coal and furnace oil prices rose by 255 percent, 550 percent and 365 percent respectively. Prices went up by 225 percent for diesel, 380 percent for coal and 280 percent for furnace oil just in the first eight months of 2022.

Dollar rates have risen by 190 percent between 2013 and 2022, with the government’s foreign exchange policies Sri Lanka rupee depreciated by 80-percent against the US dollar between January and August 2022.

With depleted forex reserves, increasing prices and rapid depreciation of the rupee, Sri Lanka was left unable to import fuel and coal, which generate two-thirds of the country’s electricity.

The scarcity of fuel and an intense drought season plunged the country into blackouts that once lasted up to 13 hours. The power cut durations have since been decreased to one hour, as monsoon rains have filled reservoirs.

The CEB had on several occasions this year asked the regulator, the Public Utilities Commission of Sri Lanka (PUCSL), to hike rates by at least 229 percent.

The CEB had filed a revenue requirement of 505 billion rupees excluding Lanka Electric Company (LECO) costs, requiring an 82.4 percent increase in revenue to cover costs this year.

The approved tariff hikes are expected to bring in 500 billion rupees in revenue, including LECO sales, which is only a 75-percent increase of profit, compared to the needed 82.4 percent.

The final tariffs and associated changes were made after a public consultation drew 1,380 oral and written stakeholder submissions.

The PUCSL has said that waiting for the country’s economy to stabilise to impose hikes might not be prudent, as the required revisions are high and the utilities’ financial position was at risk of further deterioration.

Subsidies and cross subsidies

PUCSL data states that electricity generation costs 32 rupees per unit. Despite the tariff hikes, consumers who use up to 90 units of electricity are still getting subsidised rates.

“I must emphasise that 75 percent of consumers are still getting subsidised even with the new tariff revision,” said PUCSL Chairman Janaka Ratnayake.

“The category with under 30 units of consumption will get charged 25 percent of the cost. They get a 75 percent subsidy. Consumers using 31 to 60 units are charged 40 percent of the cost. They get a 60-percent subsidy. Consumers using 61 to 90 units get charged only 50 percent of the cost, with a 50-percent subsidy.”

These subsidies are then recovered by charging the higher-end consumers.

Earnings from the high-end domestic users and industry sector tariffs are used to cover costs for lower-end domestic consumers, in a process called cross subsidisation.

Cross subsidisation is needed to give relief to the lower-end consumers, as the government cannot cover costs.

The Treasury had already granted a subsidy worth 80 billion rupees to the CEB, and informed the PUCSL that no further subsidies could be awarded, given the country’s economic situation.

Therefore, subsidising lower end consumers is only possible by using revenue from other sectors.

In the general purpose category, the low consuming GP-1 group and off peak bulk consumer rates are subsidised by increasing the day rates.

The low consuming I-1 sector in the Industry category is subsidised by increasing the day rates for the bulk consumers.

Impact of increased tariffs on the domestic category

In all sectors except the over-180-units sector, tariff increments have been significantly lessened compared to the requested amount with the aid of subsidisation.

“Don’t be alarmed when hearing the percentages. For the lower-end consumers, even with the new tariffs they will have to pay less than the cost of a loaf of bread,” said Ratnayake, adding that the PUCSL had done what was possible to provide relief while covering the costs.

Tariff decisions on hotel and industry sectors

Sri Lanka’s tourism industry has also taken a major hit, and the PUCSL has attempted to soften the impact of hiked tariffs by only implementing the hikes in two steps.

Fifty percent of the tariff increase has already been implemented, and the remaining fifty percent will be implemented in three months, “as an incentive and relief, facilitating the tourism industry to recover,” said Ratnayake.

Hotels adversely affected by the country’s economic situation will be merged with the general purpose category, which had a lower overall increase in tariffs.

Electricity bills of consumers generating over 60 percent of income in forex will be charged in dollars according to the new system, and consumers who pay in dollars will be granted a 1.5-percent discount.

This is to assist users in the hotel and export industries to cope with hiked rates.

The PUCSL said that in dollars, the tariffs were changed from 4.6 US cents per kWh to 8.6 US cents per kWh.

Religious category

Tariffs for the religious category have undergone a 555% increase, as opposed to the 189% increase proposed by the CEB.

“Overall tariff of the category was increased with the objective of encouraging energy conservation and distributed generation, while safeguarding low consuming groups,” the PUCSL said.

Solar power users

The PUCSL took the input received during the public consultation into account when forming the policies for solar power users.

Fixed charges for solar users will be determined based on the net export. Under Net Metering and Net Accounting schemes, users who generate more electricity for the grid than they consume will not have to pay the fixed monthly fee.

The PUCSL also said the Ministry of Power & Energy was working on a revised purchased price for solar rooftops.

The PUCSL will incorporate taxes and other incentives for solar panel and battery importers in a policy advice, it said.

Conditions for the CEB

The PUCSL has laid down a list of requirements to be fulfilled by the CEB, considering legalities and suggestions from the public.

The CEB will have to establish a Bulk Supply Transactions Account by the end of November, Ratnayake said, and conduct an Independent Dispatch Audit for 2022 by February next year.

The regulator has also requested that the CEB start paying interest on electricity consumer guarantee deposits from October. LECO has been doing so from the previous year.

“The commission will impose financial penalties for non-implementation of the conditions,” the PUCSL said.

Further studies

The PUCSL has said that it will be conducting studies on several areas, including the effects of price elasticity on tariffs and cost of service studies.

The commission has also been pushing to increase renewables.

Power & Energy Minister Kanchana Wijesekara said on Wednesday August 10 that a new tariff scheme will be introduced for low income households.

The increased electricity tariffs attempt to cover the losses made due to years of selling at subsidised rates, inefficient operations and economic crisis.

Several parties have already expressed displeasure at the new rates, but the PUCSL maintains that the hikes were necessary to avoid future losses.

“Even with the tariff increase, the rates do not cover the projected coal power plant costs,” the commission said, highlighting the dire situation the country is facing, and the ever-growing need to diversify the energy mix of the country to be less dependent on imported fuel and coal for energy generation. (Colombo/Aug13/2022)

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