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Tuesday January 25th, 2022
Energy

Sri Lanka CPC demand end to circular debt in power amid forex crisis

ECONOMYNEXT – Sri Lanka’s state run Ceylon Petroleum Corporation is seeking an end to ‘circular debt’ from the island’s power utility as losses of the utility due to controlled prices is landing on the petroleum firm as unpaid debt.

Sri Lanka is facing sporadic power cuts in January as the utility runs out of fuel with a 300 MegaWatt coal plant out of commission, while its debt to the CPC is mounting due to losses.

The losses are then funded by borrowings from state banks or suppliers.

Circular Debt

Energy utility debt ratchets up every time the Central Bank prints money to keep interest rates down, which also cause forex shortages and eventually currency collapses, adding to the loses and never ending ‘SOE price reforms’.

In countries with soft-dollar pegs that print money and run into forex crises and end up in the International Monetary Fund, ‘circular debt’ between petroleum and power utilities and the power utilities, and the Independent Power Producers continue to build up in each credit cycle.

The losses of the utilities mount as the Fed prints money and drives energy prices up in loose policy. As the Fed later tightens policy the currency of a soft-pegged central bank collapses, adding more losses to the state owned power and petroleum utilities.

Energy prices are then hiked in ‘SOE pricing reforms’ and two to three years later the central bank again prints money to keep rates down and the rupee falls again, leading to never ending ‘price reforms’ amid forex crises.

With no political will or knowledge to reform the central bank to restrain the arbitrary powers of the Monetary Board to keep rates down, the cycle keeps repeating with the currency peg usually collapsing each time US Federal Reserve tightens policy – which is usually every 4 to 5 years.

Pakistan and Sri Lanka, which have the worst central banks in the region are the top victims of circular debt.

Sri Lanka again facing forex shortages as money is printed to keep interest rates at 6.0 percent, which is half the 12.1 percent inflation seen in the 12 months ending December 2021.

Most of the money is now being printed to sterilize interventions in the forex market to clear fuel and other items (giving reserves for imports).

Sri Lanka central bank’s inflation is currently is just that of the State Bank of Pakistan.

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In Sri Lanka however the losses are now coming mostly from the power sector and not fuel, which has seen two price increases, despite the current administration coming to power based on a promise to fix fuel prices.

Sri Lanka’s power regulator has failed to raise tariffs of the Ceylon Electricity Board or have a mechanism to pass on higher fuel costs when liquid fuel plants are used or global prices go up.

Sri Lanka has also blocked a cheaper coal plant partly egged on by renewable energy activists undermining the long term generation plan of the utility and landing the country in a crisis, critics say.

Lack of price hikes in recent years to compensate for the loss of the coal plant has further worsened the finances of the CEB.

In an unusual cascading policy error, which has been repeated in Sri Lanka CPC has in the past funded its losses with dollar debt when the central bank prints money to create forex shortages, with the utility also barred from buying dollars.

As a result the CPC ran massive ‘Nick Leeson losses’ each time the currency collapses due to money printing. In the 2018 money printing cycle, it ran up dollar debt when the central bank printed money and a massive forex loss when the rupee collapsed.

Energy Prices

Unlike the regulated prices of the CEB, the CPC whose pricing is under the control of the Treasury has made multiple price hikes as money printing depreciated the rupee and global prices went up in the intervening period.

The CPC has in the past also kept furnace oil to CEB fixed, when global prices fell.

The CEB has overdue payments of 91 billion rupees to Ceylon Petroleum Corporation.

“By April – May 2020, CEB had to settle around 86 billion rupees for the fuel they purchased,” CPC Chairman Sumith Wijesinghe told reporters.

“With the Covid situation, the Finance Ministry provided 50 billion rupees to the CEB to settle their debts. CEB used some of that money to settle the debt to us and with that the debt decreased to around 41- 45 billion rupees in 2020.

“But in 2021, with the amount they purchased on credit, now have a debt of 91 billion rupees’ debt to the CEYPETCO. We were discussion on how they can settle this. But now we are discussing on how to get the diesel to the CEB.”

Wijesinghe said, despite the debt, CEYPETCO will provide the necessary amount of diesel to generate power for the next four days; however they have asked the CEB to provide money to purchase diesel they want in future weeks.

“Today to import one litre of diesel it cost 146 rupees. But we sell it to 121 rupees, even for the CEB. So we are having a loss of 25 rupees per litre when selling,” Wijesinghe said.

“CEB is also running on loss when they sell electricity. So they have to calculate how much money is needed to import diesel and the loss will make by both state owned companies.”

Wijesinghe said, CEYPETCO is supplying 1500 metric tons of diesel per day for electricity generation.

Not Original Plan

However the state-run Ceylon Petroleum Corporation said the CEB had not originally asked for furnace oil in January 2021. CPC had earlier shut down its refinery saying furnace oil was not required.

“The CEB plan for the January, 2022, was to generate power through hydro, solar wind and coal,” Ceylon Petroleum Corporation Chairman Sumith Wijesinghe told reporters.

“That was their expectation. However, with the sudden break down in Norochcholai coal power plant, 300 MegaWatts of power was lost to the main grid.

“To fulfill that they needed to start the Kelanitissa power plant. That is why a demand for fuel increased.”

Sri Lanka has been facing sporadic power cuts as fuel to the Kelanissa Combined Cycle Plant ran out. On Tuesday a gas turbine also tripped due suspected low fuel pressure.
(Colombo/ Jan 14/2021)

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