ECONOMYNEXT – Sri Lanka is proposing new Standardized Power Purchase Agreements (SPPA) for renewable plants below 10 MegaWatts which have features which makes it impossible to get financing from banks, an industry association said.
Sri Lanka’s state-run Ceylon Electricity Board and the Ministry of Energy is trying to reduce costs as part of efforts to reduce selling prices and make the country’s energy affordable and competitive.
The industry says while they could agree to a reduction in feed in tariff, the proposed cuts are too steep.
Smaller renewable power plants are typically not ‘dispatched’ or switched on and off by the system control, unlike thermal plants or large hydros and utilities usually buy all the power generated by them, regardless of whether the energy is needed or not.
With a larger share of energy coming through renewable sources, power grids have faced instability and utilities are looking for ways to balance demand and supply to improve system reliability.
Some countries have phased out promotional feed-in-tariffs, moved to self-produced/self-consumed models and and capped limited exports of rooftop solar to the grid.
One method is to curtail supply when demand is low such as during weekends.
Dispatched plants usually have a minimum capacity to charge to cover the cost of investment regardless of the energy sold.
The new SPPA have features that make them unbankable or impossible to get financing from banks, Thusitha Pieris, President of Sri Lanka’s Federation of Renewable Energy Developers says.
Unknown Curtailment
The biggest problem is that the curtailment is not capped or predetermined and therefore the developer may not be able to service loans.
If the curtailment is pre-agreed to a number beforehand, then revenues could be predicted to satisfy banks, FRED officials say.
“We don’t mind if we put a limit of 2, 3 percent,” FRED comittee member Riyaz Sangani said.
“We understand. Anything beyond that, you should compensate us. And if there is a curtailment, it should be taken into the financial model which is prepared to work on the tariff.”
In Africa where some Sri Lanka firms are operating, there is a pre-agreed cap on the power purchase agreement, and any curtailment above the limit is compensated by cash, according to FRED.
The new SPPA also proposes a retention of 2 percent of revenues to cover for not providing power through the lifetime of the contract.
However, FRED says that is not fair since there is no material record of small renewables in Sri Lanka not supplying power, and practically all plants have continued to supply power throughout their contracts. They have also supplied power when CEB delayed payments.
FRED says companies could provide a bank guarantee if required, but depriving the cashflow should be avoided.
Low Returns
A further problem industry officials say is that the SPPA does not give adequate profits to developers due to assumptions made on interest rates and returns on equity in the tariff model.
Returns are calculated based on Treasuries rates, which do not compensate for the risks of operating a business, Prabath Wickremesinghe, Executive Committee Member of FRED said.
There is no point in getting into business to get Treasury bills, industry officials say.
Interest on borrowing are also made on average weighted prime lending rate plus premium which is also disputed by the association.
The new SPPA also removed the ability to trade carbon credit from the developer and had given it to the government. Trading carbon is a difficult process and the government has so far not been able to make any headway, FRED officials say.
Tariff Determination
FRED also say proposed feed-in-tariffs for renewable plants are too low. The rates have not been formally announced but there is a proposal to Cabinet available on the public domain, the FRED officials say.
On that basis the price paid for solar SPPA could come down to around 14.50 rupees, one official said.
With global renewable energy costs falling and technology improving costs are being lowered in many countries.
Renewable firms sell power to utilities avoiding competitive bidding on pre-determined tariffs on the basis of costs determined through administrative calculations and lobbying and using techniques such as avoided cost to boost tariffs.
In Sri Lanka, feed-in tariffs for SPPA have been controversial and even small plants which are subject to competitive bidding have come at lower prices in the past, depending on plant factors and the project management skills of the promoters.
The industry could agree to some reduction, but the proposed reduction which amounts to around 30 percent, is too steep, Pieris said.
Coupled with other problems in the SPPA, small power projects would be completely unviable, Peiris said.
The FRED would like the Public Utilities Commission to be involved in determining feed in tariffs and also a public consultation.
In the current committee that determined new feed in tariffs determination, the regulator was not involved and the suggestion presented by FRED has also not been adequately taken note of officials said.
Uncounted Benefits
There were a number of benefits from SPPA which are set in rupees and the utility in the past has benefited when the currency depreciated, FRED officials say.
In Sri Lanka the rupee had depreciated steeply after 1978, due to flaws and anchor conflicts in the central bank’s operating framework.
The large plants are now paid on a US dollar denominated tariff after steep depreciation seen under so-called data driven monetary policy potential output/flexible targeting which has made the local currency an unreliable as a means of deferred payments in recent years.
Sri Lanka’s power grid has to make substantial investments to the grid to allow it to accommodate renewable power.
FRED says they could supply plants with batteries which will provide the power during night peak if a tariff is given.
Even though there is no explicit storage of energy, in actual fact the CEB has been able to conserve hydro storage into the dry season, due to rooftop solar and other renewable plants, FRED said.
Utility officials have said that Sri Lanka’s Public Utilities Commission’s failure in economic regulation has made it run large losses in the past, which it called ‘regulatory losses’ which has led to big increases in short term debt and missed payments to private renewable and thermal power suppliers.
Some of the debt has already been absorbed by taxpayers.
Under an IMF program, the CEB has been forced to operate on cost-based tariffs after a sovereign default. The IMF has said the latest tariff cut by the regulator, has likely breached a structural benchmark of the program.
In Sri Lanka’s first sovereign default, losses at energy utilities – which partly also came from central bank depreciation of the rupee – played a significant part. (Colombo/Apr02/2025 – update II)