Mini-hydro to gain from new fixed tariff: ICRA

ECONOMYNEXT- Profitability of mini-hydro developers in Sri Lanka will rise despite environmental risks, due to a new tariff structure which was approved in January, ICRA Lanka, a ratings agency, said.

In January 2020, Power and Energy Minister Mahinda Amaraweera had called for a fixed rate to be introduced for renewable power supply.

The state-owned power supplier and regulator, the Ceylon Electricity Board (CEB), had signed Power Purchase Agreements(PPAs) until 2008 on the avoided cost principle, paying private producers the equivalent unit generation cost of the CEB.

However, as the CEB had large inefficiencies, this arrangement was seen as disadvantageous to the state, ICRA said.

A three-tier tariff scheme was introduced in 2008, but was once more reformed in 2016 with the introduction of competitive bidding.

Mini-hydros were initially considered for exclusion from bidding due to complexities in constructing the power plants, but that decision had not been finalized, ICRA said.

However, renewal of PPAs at a fixed rate effective from January 2019 will boost profitability, ICRA said.

Most of the avoided cost 15-20 year PPAs signed prior to 2008 had expired, and were generating power at a nominal rate, but extending the new rates back to January 2019 will boost profits, ICRA said.

CEB had considered reviewing the PPAs earlier but the action was delayed.

The renewed tariffs are fixed, with an escalation on annual basis.

“The revised tariff structure for such power plants is favourable as this is a further increase from the previous transitory tariff levels.”

“In addition, the new tariff plan will be applicable retrospectively from January 01, 2019, allowing the power producers to recover some profits.”

“Therefore, the CEB’s decision to renew expired PPAs is a credit positive for minihydro power producers, whose PPAs had expired in the recent past.”

Mini-hydro plants generate around 6-8 percent of Sri Lanka’s energy.

However, profits fluctuate due to weather risks.

Mini-hydro firms had a favourable fourth quarter in 2019 due to rain, but given volatility in weather conditions in the country, the ability to operate power plants at an optimal level is low, ICRA said.

The ratings agency also said with revival of economic growth, power demand will grow 5-6 percent over the next two years, surging demand for private power producers.

Further, for the few remaining old-style avoided cost PPAs, profits will rise for the next two years due to increasing costs of thermal power production on the back of US-Iran tensions, ICRA said.

However, the positive developments for mini-hydro developers are shadowed by delayed payments from CEB, ICRA said.

CEB made 85 billion rupees in losses for 2019, and is expected to face further losses of 120 billion rupees in 2020, according to the minister.

Sri Lanka has been procuring costly thermal power on an emergency basis as the state had not commissioned new power plants since 2014. (Colombo/Feb10/2020)