ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board has lost 16.59 billion rupees in the first four months of 2017 up 187 percent, despite the existence of a regulator to ensure cost-reflective prices as a drought reduced hydro generation, official data show.
For the full-year 2016 the CEB lost only 14.49 billion rupees, helped by fuel prices in the first half of the year.
The tax payer had given a subsidy of 6.0 billion rupees through a Treasury subsidy to cover the losses of the state owned enterprise, so far in 2017.
The first quarter of any year is dry and there is reduced hydro power generation but a drought that began in 2016 had badly hit hydro storage in 2017, with fuel prices also higher.
A Treasury report said losses in the first four months rose to 16.59 billion rupees from 5.78 billion last year as costs rose. The cost per a unit of electricity (kiloWatt hour) without tax rose to 20.28 rupees in the first quarter of 2017 from 17.54 rupees a year earlier.
Under Sri Lanka’s power regulation prices can be changed every six months. Power sector losses funded by bank loan – which are in turn accommodated by central bank money printing to keep rates down – have been a key feature of currency weakness and excess credit in Sri Lanka.
A power regulator was set up after the 2000/2001 balance of payments crisis in part to address the problem.
Power sector losses drive up credit in either through direct bank borrowings, arrears run with the Ceylon Petroleum Corporation and Independent Power Producers – which are in turn borrow from banks – or Treasury subsidies, which drive up the fiscal deficit.
However the regulator failed to bring cost reflective prices during a drought in 2011, partly due to political interference by the then power ministry.
Prices were adjusted only after the BOP crisis and the rupee had fallen as a part of a corrective measures required under an International Monetary Fund led bailout.
In 2017 interest rates are higher than in 2011 and the fiscal deficit is narrowing with higher taxes being collected reducing the impact of power sector losses on the currency.
The Central Bank has already warned that SOE losses are a threat to economic stability.
Analysts say the situation shows the need for reforms to the regulator and price mechanisms, to bring in early price changes when conditions deteriorate.
In Singapore, which rulers in Sri Lanka and policymakers are fond of dangling as a model of economic management, power prices are changed every month.
The regulator has also contributed to higher costs through high prices paid the renewable power producers, some critics say. But renewable tariffs have been set by a committee connected to the ministry and the CEB after 2013. The current administration had started open tendering small renewable plants, sharply bringing down feed in tariffs, moving away from high prices obtained by lobbying the price-setting process.
The regulator also backed a political decision to scrap a coal plant by the current administration, despite it being against the existing energy policy, according to critics. However some power sector analysts say the CEB also failed to get the Sampur project off the gound for many years, due to delays of its own making. (Colombo/July10/2017 – Updated to say after 2011 renewable tarriffs have not been set by the regulator)