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Thursday August 18th, 2022

Sri Lanka could face long power cuts, water shortages, Southern grid failures

PARCHED: Hydro reservoirs are down and the bottom is exposed.

ECONOMYNEX T- Sri Lanka could face multi-hour power cuts, blackouts in large parts of the grid and water shortages in Colombo if the current policy of avoiding one hour load shedding at any cost is continued, industry watchers familiar with the ground situation have warned.

Sri Lanka Ceylon Electricity Board has sought permission for around hour power cuts to conserve water in the drought period of February and March after a coal plant outage was compounded by liquid fuel shortages.

Without Samanalawewa the 132kV grid of the CEB which serves the highly populated Southern grid faces serious power deficit. The CEB is also running short of water at Kotmale and Victoria which is used to maintain the frequency of the grid at 50 cycles.

Sri Lanka is facing forex shortages due to money printing which made it difficult to suddenly import extra fuel when the coal plant broke down.

Sri Lanka’s political authorities as well as the regulator have denied permission for one hour planned cuts.

Water Crisis

Avoiding one hour power cuts is leading to further severe depletion of water storage.

Industry analysts say it is no longer practical to continue to run down hydro reservoirs to avoid planned load shedding.

Petroleum Minister Udaya Gammanpila had warned of 3 to 4 hour power cuts from late March.

“What the minister said is correct,” an industry official familiar with the situation said. “This can happen and also water to Ambatale pumping station in the Kelani River will be reduced and Colombo could face water cuts. It will be especially bad if the usual April inter-monsoonal showers are delayed.”

“I do not think the President has been properly made aware of this.”

In order to ensure water supply to Colombo, the Ceylon Electricity Board stores water in the Moussakelle reservoir in the Maskeli Oya and Castlereigh in Kehelgamu Oya, the two largest tributaries in the upper reaches of the Kelani River.

The water is then systematically used during the dry season to generate power, allowing Colombo to be supplied water in March and April until the showers return.

Moussakelle storage has already depleted to around half its capacity and Castlereigh to 30 percent.

Based on the current usage to avoid power cuts at any cost, Castlerigh Reservoir is expected to run dry (minimum operating level) by the end of February. Moussakelle will reach minimum operating level by end March.

With minimal rains, Kelani River water levels will fall to low levels without water from the two reservoirs.

Other reservoirs such as Laxapana and Canyon are small ponds with no storage.

The CEB generally operates a priorty of drinking water first, irrigation second and their own power the third, industry officials said. It has now been turned upside down under in the bid to avoid power cuts at any cost, which is increasingly looking like a gamble with the wrong odds.

However to avoid power cuts, water has been released which would have been better left for farming.

The CEB has also not renewed the ACE Matara and ACE Embilipitiya private plants.

There is also heavy opposition to renewing existing plants in times where there are no emergencies, forcing the CEB to buy power at high prices at the last minute when the bargaining power of the owners are high even if competitive tenders are called.

Perfect Storm

In two other serious complications, water in the Victoria and Kotmale reservoirs which are used to match generation to demand and keep the frequency of the grid at 50 hertz is also running dry.

Samanala Wewa is expected to reach minimum operating level by the second week of March and its use has to be stopped immediately according to industry analysts.

The lack of Samanalawewa, which is complex problem involving the CEBs 220kV and 132kv transmission line interconnections.

Without Samanalawewa the 132kV grid of the CEB which serves the highly populated Southern grid faces serious power deficit.

Most of the larger generators in the CEB system are connected to the 220kV system.

Some of the most expensive plants which are expected to be used only for peaking are connected to the 132kv system.

Overloading of the 132kV system could result in tripping of sections of the grid, tripping of generators including coal power plants which would lead to blackouts in sections of the grid or cascading failures.

The CEB has called tenders and are building interconnection as demand grew, but Covid and other factors have also delayed some projects.

Due to the complexities technicalities of running a national power grid as well as fears of running afoul of authorities, CEB officials are often at a loss to explain to the public exactly what the problem.

The CEB has also got down in infighting amid the New Fortress Energy deal and an internal Power Crisis Committee which usually meets and takes decisions ahead of time in other years has also not met for many months, sources said.

Most of the problems in Sri Lanka’s power sector stems from not building plants planned in the long term generation expansion plan in time, sometime due to political or other opposition as well as tender benders, critics say.

The current situation had long been predicted by analysts and the CEB as soon as the Trico plant was scuttled and the tender for the dual fuel plant was delayed. Power shortages were predicted from 2018 onwards in the dry season.

However the Covid crisis delayed demand growth.

Related</b.

Sri Lanka consumers warned on impending ‘electric shock’ after coal plant scrapping

Sri Lanka faces power shortage with coal plant delay

The forex and fuel shortages have also been predicted due to increasingly discretionary aggressive monetary policy that intensified after the end of a 30-year war. (Colombo/Feb12/2022)

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Selling price in Sri Lanka’s apartments increase by over 47 pct: property tracker

ECONOMYNEXT – Overall selling prices of apartments in Sri Lanka increased by 45.17 percent when compared to June 2021, according LankaPropertyWeb’s housing price index.

Devaluation of the Sri Lankan rupee against the US dollar which has resulted in shortages of raw materials for construction which has in turn led to skyrocketing costs of construction and rising interest for housing loans, a report said, has prevented the construction of new houses leading to an increase in the purchase of houses and apartments.

The overall asking prices of houses in Sri Lanka had increased by 21.85 percent and prices of apartments for sale in Colombo had increased by 32.9 percent when compared to June 2021.

The Construction Industry Development Authority showed that the average price of a 50Kg cement bag sold by public and private dealers has increased by 187 percent from June 2021 to June 2022.

LankaPropertyWeb’s Development Consultancy and Research Team data showed that the top five searches for apartments for sale were from Colombo 2, Colombo 3, Colombo 5, Colombo 6 and Rajagiriya.

A resident from an apartment in Colombo 06 said, “We moved to this area due to the convenience, we spend less on transport and can go by bus, train or even walk to destinations. This was a massive save for us during the peak of the fuel crisis.”

Sri Lanka’s overall residential land price has dropped by 62.90 percent, a seasoned constructor told EconomyNext. This is because people are no longer interested in investing in lands and are less motivated to build houses because of the high rates of interest for housing and loans and there is value for money, he said.

Geethal Perera, an apartment builder in Colombo said: “Locals are not investing in assets or real estate because of the tumor in the economic conditions. However many overseas are investing because the international value for money on the rupee is favorable.”

The website also recorded a surge in search traffic from countries such as the UK, Australia, the US, Canada, and the UAE, said Tharindu Jayarathne, Head of Research at LankaPropertyWeb. (Colombo/Aug18/2022)

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Sri Lanka economy to shrink over 8-pct in 2022, inflation may peak below 70-pct: CB chief

ECONOMYNEXT – Sri Lanka’s economy is likely to contract more than 8 percent in 2022 and inflation may peak below 70 percent, central bank governor Nandalal Weerasinghe said.

“According to an earlier projection, we thought economic contraction would be 7.5 percent. And it looks like it will be a little more like that and it will probably pass 8 percent this year,” governor Weerasinghe told reporters after holding the policy rate at 15.50 percent but market rates around 25 to 30 percent.

Weerasinghe said at a discussion on Thursday August 15 that the sharper the economic contraction is, the faster the recovery will be.

“If there is a sharper negative growth this year means, we should be able to recover in next year, mainly in the second half,” he said.

Adding that uncertain factors such as changes in global prices of goods and services can affect the situation, Weerasinghe said if Sri Lanka manages to maintain normal economic conditions at current levels, sectors such as tourism will recover faster.

“Due to the decisions we took in the recent past, we see a favorable result now. Especially last time we saw a possibility of inflation rising more than 70 percent. But now we see it won’t go that high and with the electricity tariff being increased we have the hope it will come down going forward,” said Weerasinghe.

“On the other hand, our forex crisis has gotten better than the last time. We have been able to allocate forex for essential items likes petrol, diesel, and medicine due to the decisions we took. Import cost has reduced and exports have increased to a satisfactorylevel.

He said Sri Lanka is at a level of taking care of the basic needs of the country without going for short term loans.

Sri Lanka had to raise rates to stop private credit, reduce outflows and restore the credibility of a peg which was broken by two years of money printing.

As a result of high interest rates, credit growth should be decelerating. There is a purpose of having high interest rates. That is to decelerate private sector credit and reduce the growth in private sector credit, reduce monetary expansion, and then curtail the inflation, said Weersinghe.

There is a strong correction of the external sector with slowing private credit and also inflation.

Sri Lanka’s inflation grew 60.8 percent in the 12 months to July 2022, in the wake of failed float of the currency after two year of money printing, official data showed.

Governor Weerasinghe said inflation may peak around September below 70 percent before showing a downward trend.

“Inflation will be going up until September and we will see a downward trend after that. This is an assumption and no one can say how much it will be exactly.  It will certainly increase gradually to around 70 percent. But we can’t give an exact number,” he said.

“Earlier it was projected to go to around 70 percent but I do not think it will reach that level now. It will peak around 65 and it will trend down,” he said. (Colombo/Aug18/2022)

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Sri Lanka expects to wrap up staff-level agreement with IMF end-August: CBSL

ECONOMYNEXT  – Sri Lanka is expecting to wrap up a staff level agreement with the International Monetary Fund (IMF) when a team visits the country at the end of August, Central Bank Governor Nandalal Weerasinghe said.

“The IMF mission is coming to Sri Lanka by the end of the month with the intention of reaching  staff level agreement on the policy package.

“We are making good progress with the IMF mission and we’re hoping to reach staff level agreement,” Weerasinghe said at a monthly policy review meeting held on Thursday August 18.

“We have achieved our policy level targets so we hope to reach staff level agreement. This will certainly improve our situation,” he said.

At the moment, the Central Bank is in the process analysing its creditors before it reaches out to them.

“Once the staff level agreements with the IMF are concluded, the country hopes to reach out to its external creditors. Once the IMF agreements are in place, we will reach out to all our bilateral and commercial creditors,” he said.

Weerasinghe said a staff level agreement with the IMF will give the country a “clear picture on debt sustainability and debt targets for the country to  achieve in the next 10 years and an overall macro-fiscal programme.”

He said using these programmes endorsed by the IMF they will be able to reach out to the external creditors including first party commercial creditors and International Sovereign Bond (ISB) holders, the Paris club including Japan (which is a major partner of the Paris club) and non-Paris club creditors like China and India.

“All [creditors] will be officially approached and we will present our overall macro programme that has been endorsed by the IMF and also the debt targets we have to achieve going forward.

“So, with that information we will approach different groups and the process will commence from there with the assistance of France-based Lazard and Clifford Chance legal advisors as well as the other agents.”

Weerasinghe said the government is confident that debt can be made sustainable without restructuring domestic debt.

Related:

Sri Lanka debt can be made sustainable without re-structuring domestic borrowings: CB Governor

(Colombo/Aug18/2022)

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