The lessons of the electricity tariff increase

By the Economist

The increase in the electricity tariff was expected and inevitable. The cost of electricity consumption at the lower end for those consuming less than 90 units has not been increased. The increase is quite substantial for a significant number of other consumers. It will no doubt raise the costs of living further. The costs of production of industrial goods would also rise.

The increase in the general level of prices that the tariff increase entails would feed into the spiralling inflation that we have been experiencing for some time. Meanwhile, the Minister in charge of the CPC has assured us that petroleum prices would not be increased till the Sinhala New Year. This would hold down further inflation somewhat for a little time. No doubt his statement also implies, albeit in a subtle way, that it would be increased after the New Year.

The unpleasant truth is that these price increases are inevitable in the context of the rising oil prices that appear to have no end in sight. International oil prices had risen to about US$ 108 per barrel at the time of writing. It may be higher at the time of reading this column. Such is the state of the oil market. That is why it is inevitable. It is also inevitable owing to the inability of successive governments to implement the energy development of the CEB that was proposed several years ago.

The factual situation must be first stated to discuss this issue. First of all it must be recognised that we are mostly dependent on oil for our electricity generation though some still believe that the main source of electricity is hydro. Over 50 percent of electricity generation is based on oil. In a good year of rainfall hydropower generation provides about 49 percent of electricity. On the other hand, when rainfall is low the proportion of hydro generation of electricity falls to around 39 percent of total generation.

The demand for electricity is increasing at around 8 to 10 percent per year while hydropower generation is increasing by only about 1 percent per year. Therefore electricity demand is outpacing hydropower increases. Consequently, the reliance on oil imports for electricity generation is likely to rise significantly as the demand for electricity is rising much faster than the increase in hydro-electricity generation. Even when the new power plants both coal and hydro now under construction generate their maximum capacity, the dependence on thermal generation would be high, as by that time the demand for electricity may be even higher than the current increase of around 10 percent per year.

The dependence on oil could have been reduced and so would the cost of electricity generation, had the plans of the coal power plant in Nochiagama and the Upper Kotmale plant been implemented on schedule. It is contended by energy experts that we could have even had a reduction in the electricity tariff this year had these plants come into operation on time. The irony is that the environmentalists delayed the execution of these power projects that are now being implemented. It is however not likely that there would be a reduction in the electricity tariff when they generate power, as by then there would be a further increase in demand as in all likelihood, the thermal generation component of electricity generation would have risen further in costs.

There is a popular view that one of the reasons for the increase in costs of electricity is the inefficient and corrupt administration of the CEB. It is generally also agreed that this charge has some validity. Yet, the total costs of administration is of such a magnitude in relation to the costs of electricity generation, that, even the total elimination of the administrative costs can bring down the costs of electricity generation only by less than 5 per cent. Therefore, while a more efficient administration of the CEB must be attempted, this is not one that would reduce electricity costs much. The efficiency of the CEB administration could however have an effect on the future implementation of the most cost effective solutions.

What then of the future? There has to be a two pronged approach to the problem. First, there must be efforts at conservation. It appears that the increases in the costs of electricity are not having the desired effect of reduced consumption. It is ironical that companies that complain about the high costs of electricity have not taken steps to reduce their consumption by energy saving devices and by cutting wasteful use of electricity.

The expensive illumination of commercial buildings at night is an illustration of such waste. The public sector too is to be blamed. Those responsible for the use of electricity appear to be unconcerned about wastage as they do not pay the bills. Street lights during daylight are a glaring example, while wasteful use is quite widespread in public buildings There is a need to ration electricity use in public buildings. Policies to limit electricity consumption in public buildings must be implemented. Even households tend to waste electricity despite the higher costs. No doubt many households are unwilling to change their style of living however wasteful they may be of electricity use.

The second strategy is the development of alternate sources of electricity such as Denro, wind power and bio-fuels. These sources may cost high at present, but their relative costs may decline as oil prices rise. Besides, research on these alternate forms of energy should address the issue of reducing their costs of production. There are possibilities of obtaining international assistance to develop these sources. At present there is no clear idea of the extent to which these sources are substitutable for the conventional forms of energy generation.

The increase in the electricity tariff has sent out the signals for an effective energy policy both on the side of electricity generation as well as in conservation. The implementation of new electricity generation plants, the use of alternate methods of electricity generation and the conservation of energy use are vital components of an energy policy.