Tripping over the power crisis – an explainer
As Sri Lanka’s power crisis enters its second week, leaving paying customers in the dark both literally and figuratively, the blame game is about to reach a fever pitch. The main players, namely the Ceylon Electricity Board (CEB), the Ministry of Power and Energy and the Public Utilities Commission of Sri Lanka (PUCSL), are battling it out in full view of the media, all claiming to fight for the rights of the hapless consumer. In this backdrop, what explains the ongoing crisis?
A darkness foretold
The PUCSL, as regulator, predicted almost three years ago the current (pardon the pun) spate of power outages. In a letter written to Secretary to the Ministry of Power and Renewable Energy Dr. B. M. S. Batagoda, dated 31 March 2016, PUCSL Director General Damitha Kumarasinghe warned of possible energy and capacity shortages in the years 2018 and 2019.
Noting that Sri Lanka’s power demands would grow by 5.5% per annum between the years 2015 and 2022, with peak demand expected to grow at 4.4% per annum, Kumarasinghe said in his letter that given what he called the “low reliability” of the Norochcholai coal power plant as well as the prevalent drought conditions, shortages could occur in two to three years’ time, even if new plants were added to the grid (spoiler alert: they weren’t). He communicated to Batagoda in writing the following recommendations to avoid said shortages:
- A national demand side management programme
- Development of planned conventional power plants on time
- Expediting the grid integration of planned renewable plants
Demand and supply
Demand Side Management (DSM) is essentially the management of consumer demand through education and other means affecting behavioural change — in this case, convincing consumers to use less energy during peak hours, or at least shift the bulk of their electricity use to off-peak hours.
According to the CEB, DSM is an umbrella term encompassing “systemic utility and government activities designed to change the amount and/or timing of the customer’s use of electricity for the collective benefit of society”. This is in contrast to supply side management, which is considered less cost-effective. While seemingly commendable, it does raise questions about burdening the individual consumer with the responsibility of energy conservation.
According to the PUCSL’s calculations, under an effective implementation of DSM, power generation demand would grow at a rate of 3.6% between 2015 and 2022 (as opposed to the 5.5% stated above, not counting for DSM). Peak demand will grow at 2.7%, as opposed to 4.4%.
In 2015, Sri Lanka’s installed capacity was 3,755MW. Given a 90% availability and not counting the non-conventional renewable energy (NCRE) plants, the available capacity at the time was 2,986MW.
As indicated by the graph above, even at 90% availability and given that no new plants were added to the grid, a capacity shortage in 2019 was inevitable.
Looking at the supply side, given low rainfall, no new additions to the grid and 60% availability of the Norochcholai plant, even under DSM, the PUCSL argued that there would still be a shortage in the years 2019 and 2020.
Long delays and laboured acronyms
The Least Cost Long Term Generation Expansion Plan (LCLTGEP) 2018-2037 approved by the PUCSL identified a number of brand new, relatively low-cost power plant projects that were to be added to the national grid in order to meet the growing demand. It’s certainly a mouthful, but the LCLTGEP sought to establish much needed renewable/hydro plants across the country, with several of them expected to be completed by 2020. Long delays in or non-implementation of these projects have arguably resulted in the present crisis.
For context, demand for electricity increases around 200MW per year, necessitating the addition of at least one 200MW plant to the grid annually. The CEB is not in the business of constructing its own power plants. That is usually outsourced to the private sector. Tenders are called, and power purchase agreements (PPA) are signed with successful bidders, with the stipulation that they will be acquired by the CEB at a later date. At present, the Lakvijaya Power Station at Norochcholai built with Chinese funds (completed in 2014) is the only coal power plant owned by the CEB. It contributes a total of 900MW to the national grid. Its second phase that reportedly experienced some technical difficulties earlier this month, leading up to the recent outages, generates some 300MW of power annually. In total, around 35% of the grid is fed by large and small scale hydro-power plants, while thermal (coal and fossil fuel) makes up about 50%. Since 2014, not a single power plant capable of generating 100MW, or even 50MW, has been constructed.
On 15 June 2017, Ministry Secretary Dr. Batagoda wrote to the CEB Chairman, urging the latter to implement the power plant projects scheduled in the LCLTGEP 2015-2034 without further delay.
Dr. Batagoda warned that the slow progress of the LCLTGEP could lead to a “serious power crisis in the future”.
According to the letter, a decision had been taken at a high-level meeting between the CEB and the Ministry to “tender all the power plants in the LTGEP scheduled to be completed before 2020”. Targets were set for, among other things, five solar power plants, three of them to be commissioned in 2019, five wind energy plants by 2020, the Kerawalapitiya liquified natural gas (LNG) plant by 2020 (now before courts). A majority of these were through independent power providers (IPPs), totalling nearly 1,000MW in capacity.
Needless to say, these plants have yet to see the light of day. While the drought is definitely part of the problem, the reluctance on the part of the authorities to expedite the LCLTGEP is a major cause for the darkness the country is now engulfed in.
Ace in the hole?
In the absence of new plants to meet the growing demand, and the prevailing drought conditions threatening to dry up the reservoirs, the CEB has resorted to buying power from the private sector through emergency or supplementary power purchase agreements — at a needlessly exorbitant cost, borne by the consumer.
According to industry sources, anywhere between Rs. 28 and Rs. 34 is now being paid per unit for diesel/thermal power purchases — to say nothing of the foreign exchange spent on diesel and coal. . Compare this to solar power, which currently costs only Rs. 22 per unit.
In March 2016, the Cabinet of Ministers approved the purchase of three retired power plants, on the condition that, in its negotiations with the companies, the CEB take into account capacity charges already paid to them (capacity charges covered the companies’ capital investments and, according to media reports, had to be paid to the plants’ owners even when idle).
One of these plants is owned by Ace Embilipitiya (PVT) Ltd, a subsidiary of Aitken Spence. At the end of March 2016, Cabinet authorised the CEB to purchase power from Ace Embilipitiya for a period of one year, pending its eventual acquisition. One of the stipulations was that the same terms and conditions entered into in the original, 10-year agreement signed with the company in 2003 apply. In the 2003 agreement, it had been decided that the tariff structure would facilitate the recovery of the company’s capital investment. This meant that the unit price would include all loans and interests paid by the CEB.
Having already paid some Rs. 10 billion per annum to the company, which included Rs. 1 billion as capital costs, by the time the 2016 PPA was approved, the unit price henceforth should not have included a loan component. However, according to a number of media reports, in the extension agreements signed in 2016, 2017 and last year (seeking approval for a three-year extension) it was, in fact, added to the unit price, resulting in a duplicate payment to Ace Embilipitiya.
In 2016 the CEB purchased on a supplementary basis from Ace Embilipitiya a total of 100MW of power. In 2017, according to industry sources, 100MW was again purchased from the company, 50MW from Asia Power (Pvt) Ltd, and 20MW from Ace Matara (also a subsidiary of Aitken Spence). In 2018, approval was sought to purchase these 170MW from the same companies for the next three years. Needless to say, these extension agreements are mired in controversy, and allegations are rife that standard tender procedure was bypassed when arriving at them.
Better the known devil?
The above narrative is not without its detractors. President of the Engineers Union of the CEB Saumya Kumarawadu staunchly defends Ace Embilipitiya, insisting that regulations were duly followed.
“So much mud was slung at Ace [Embilipitiya]. The truth is that, without Ace, the whole of the south would’ve been in the dark,” he told RepublicNext, blaming the Government and the PUCSL for not adding new plants to the grid.
It’s not practical to call for tenders to extend a 20-year-old plant, he said, arguing that the Electricity Act lacks the provisions to facilitate a proper agreement.
“All we can do is, get a quotation, appoint an independent committee and negotiate the price. There is no framework for this in the Act, which is a shortcoming in the Act,” he said.
Regardless, in terms of costs incurred in emergency power purchases, the country stands to lose a cool Rs. 50 billion, not due to a conveniently timed drought, but rather, the allegedly deliberate delay in or non-implementation of the long term generation expansion plan. This is something former Power and Energy Minister Champika Ranawaka himself has gone on record saying.
“The real cause to the energy shortage would be the deliberate delaying of implementing the long-term generation plan,” he said in a note presented to the Cabinet of Ministers in early 2017.
Let’s just consider the example of solar power. According to the LTGEP, the loss incurred per year of delay for the following three planned plants is as follows:
In addition to these, nearly 600 independent solar plant projects are currently languishing in government approval purgatory.
The Solar Industries Association (SIA), a collective of Sri Lankan solar entrepreneurs, last week charged that a delay in approving some 590 applications for solar power plants as a major contributing factor to the ongoing power crisis.
According to SIA Secretary Lakmal Fernando, the proposed plants, had they been greenlit, could’ve added over 1.48 gigawatts of power to the national grid at a relatively low cost.
“Solar averages about Rs. 18 per kilowatt hour. For the first seven years, it’s Rs. 22 per unit. Beyond that, from the 13th to the 20th year, you only have to pay Rs. 15.50,” Fernando told RepublicNext.
As pointed out by Fernando, all other [non-renewable] energy sources are tied to dollar inflation and other external factors that will invariably result in prices going up. This is not the case for solar, wind and other renewables, as the sources are mostly available in relative abundance in the island, depending on the area.
“For solar and other renewable energy sources, it’s a flat tariff in rupees. What costs Rs. 18 today, in 20 years won’t be worth even Rs. 5. This is the best way forward for the country,” said Fernando.
The impact of non-renewable sources, therefore, are felt not just by the environment but also the balance of payments.
CEB Engineer Kumarawadu, however, is skeptical.
“Can solar or wind solve the present crisis?” he asked dismissively, heaping blame on the Sustainable Energy Authority for the delay in approving the solar projects. The SEA, he charged, collected millions of rupees in application fees from solar entrepreneurs, allegedly to no avail.
The benefits of fast-tracking the LCLTGEP are fairly obvious, and yet, despite daily power cuts – (the CEB and Ministry now having dropped all pretence to the contrary) – especially in an election year, no action is apparently being taken in that regard.
According to one authoritative source, 320MW of thermal power for the CEB has been approved.
“It’s just a matter of getting these new plants constructed. When they go for competitive tenders, they will get the lowest prices,” the source said, adding that the CEB lost a golden opportunity to acquire Ace Embilipitiya at its initial valuation of Rs 2,365 million, opting instead to purchase power through a PPA for a period of five years from 2016 onwards at a staggering cost which allegedly gets added to the capacity charge and, more alarmingly, ends up totalling Rs. 3,700 million – over a billion rupees more than what it would’ve cost to buy the plant.
There is also the option of acquiring power from publicly owned state enterprises, which has already received Cabinet approval. The railways and ports, for example, house their own power generators with capacities of up to 200-300MW which can be utilised for emergencies without going for private purchases.
Engineers Union President Kumarawadu, however, said the CEB has in fact been trying to source power from public institutions for years, but to limited success, as these generators are mostly utilised for emergency power generation in the event of a power cut to their buildings.
“We’re facing a shortage of 400-500MW. These are only emergency generators, and these institutes don’t have an adequate fuel supply to run them 24 hours a day, or in some cases their tanks don’t have sufficient capacity for it,” he said, adding that the CEB pays Rs. 36 per unit when purchasing power from public institutes – more than what it pays the independent providers.
Meanwhile, President Maithripala Sirisena has lambasted the PUCSL for the delay in implementing the long term generation plan. Sirisena has reportedly said at Tuesday’s (26 March) Cabinet meeting that engineers attached to the Commission, with personal ties to independent power producers, had failed to approve the LCLTGEP — a sentiment shared, in part, by the CEB Engineers Union President.
The PUCSL, Kumarawadu complains, is uninterested in resolving the crisis in a manner that would be in the interest of the country, while also adding that the Government should take some of the blame for not constructing a single new plant.
“They halted the Sampur project, which was supposed to add about 500MW next year. Keravalapitiya was supposed to be operational this year. There are no new plants coming up for another four to five years. The Government needs to take a firm stand,” he said.
The PUCSL, for its part, has approved a series of generation plans since 2011 which included low cost plants. In any case, insiders say the onus is on the CEB and the Ministry to expedite the implementation of the LCLTGEP, without which the darkness will only grow.
Dr. Jehan Perera - Executive Director National Peace Council
Economic Intelligence Unit of the Ceylon Chamber of Commerce