Electricity costs and prices: Facts and myths

Do our industrialists know that your electricity bill has been cross-subsidised since February 2007 by the commercial sector (including schools and hospitals, both government and private)? It is true that industries are called upon to pay a price that is regionally uncompetitive, but it is also a fact that our industries pay an average of Rs 9.50 for a unit of electricity (demand charge included) while the country average price is Rs 10.50 per unit.

The proposed price hike will take the industry to Rs 12 per unit, and the country average to 15.50 per unit.

Minister Sarath Amunugama made a discovery that Sri Lanka uses double the quantity of fuel to produce a unit of electricity. The Minister should know that there is no technology in the world to produce a unit of electricity from thermal power plants using less than 0.18 litres of fuel. That is with combined cycle technology.

The diesel-engine technology uses between 0.20 to 0.25 litres of fuel oil to produce a unit. Gas turbine technology uses about 0.32 litres of diesel to produce a unit. Each type of power plant performs a different duty in the grid. All the power plants with Ceylon Electricity Board (CEB) and with the private sector use fuel within the above norms, except the ageing gas turbines in Kelanitissa, which are not used much.

While there can be marginal improvements in all the power plants, the losses are definitely not as much as 50% as the Minister discovered.

Are there any technologies that can produce electricity at a lower cost ? That’s the question Minister Amunugama should be asking, and he does not have to go far to find the answer. Go into the archives of Cabinet decisions since 1992, under three former Presidents, and count the number of times coal power plants have been cancelled, deferred, postponed, and shifted to other sites ? Also count the number of times the Upper Kotmale hydropower project has been cancelled, modified, deferred and postponed ? Now you have the answer there, for Minister Amunugama.

Now to the argument that Sri Lanka is relying only on coal and hydropower, without looking at other options. Well the sickness in our electricity system is that of high production cost, and the proven medicine to treat this sickness is (a) build coal power (b) build nuclear power (c) build the remaining hydropower. Just like a patient who is critically ill, the specialists can administer only one or a combination of the above three medicines. The medicine is proven and keeps the electricity supply alive all over the world. Native physicians, with all the good intentions, may administer solar, wind and biomass, but that will not treat the chronic sickness of our electricity supply system, fast enough before our industry and the economy dies.

With everybody asking for subsidies, the electricity industry has only subsidy-asking customers, no one is willing to pay more to subsidise others. Let us get into the bottom of the issue.

Electricity Production and Delivery Costs
The estimated costs of CEB for year 2008, at the present prices of fuel is given in the Table. The dominant cost is the fuel +maintenance bill of Rs 97 billion to produce an estimated 6.5 billion units of electricity from thermal power plants. ie Rs 15 for a unit of electricity. The balance will come from hydropower plants. Given the fleet of oil burning power plants with CEB and the private sector, and remembering that between 0.18 to 0.32 litres would be required to produce a unit, and that fuel prices per litre are between Rs 59 (heavy oil) to Rs 80 (diesel), a little bit of arithmetic would tell you that Rs 15 is a reasonable average figure. However, efficiency improvements are possible, which must be vigorously pursued, but the gains would be less than 5%.
So what is the problem with our electricity supply costs ? The problem is that we produce electricity with the wrong type of power plants. Without building coal-fired power plants and the remaining hydropower plants, the politicians pressed CEB to build or to procure from the private sector, several oil-burning power plants. Eleven of them to be exact, built between 1995 and 2005, nine of them were never in the plan. Pressure was brought on politically-appointed Chairmen of CEB, to call for bids, accept proposals, appoint evaluation committees (to legitimise political aspirations) to build each one of these oil-burning power plants. Each and every oil-burning power plant outside the national plan, was introduced by their promoters, and their political masters, and some CEB insiders as well, as only a marginal drain on CEB, and thereby the electricity customer.

However, to the credit of CEB and the eight private operators, these power plants, though expensive, are performing very well and that is why Sri Lanka has no regular blackouts while the rest of the region (Nepal, India, Bangladesh and Pakistan) has blackouts and load shedding almost everyday.

When some former CEB Chairmen refused to toe the line, external committees were appointed to push power plants on CEB. Between 1992 and 1994, this external committee was known as the “Power Committee”, headed by the then Secretary to the Treasury, R. Paskaralingam.

From 1995 to 2001, the “Power Committee” continued, but headed by K. Balapatabendi, Secretary to the President, with Thilan Wijesinghe playing a leading role in the power plant procurement process. From 2002 to 2004, the committee was re-established as “Energy Supply Committee”, again headed by Mr Paskaralingam. From 2005 to now, this Committee’s role is performed by Strategic Enterprise Management Agency (SEMA), but to the credit of SEMA, it must be emphasised that no unwanted or wrong power plants have yet been pushed on CEB by SEMA, to date.

If you think these pressures are no more, you are mistaken. The latest pressure on CEB is to accept Liquefied Natural Gas (LNG) for power generation. In spite of three independent studies (by USAID, 2002, the World Bank, 2004, Japan International Cooperation Agency, 2006) clearly declaring that LNG is not an economical source for power generation for Sri Lanka, and CEB’s own studies confirming the same result, moves are in place over the past several months by external agencies to push an LNG terminal and power plants on CEB.

Without analysing what the price implications are, many politicians and bureaucrats, and even the present CEB Chairman declare frequently that we should “look” at LNG power plants, not coal. Look because it is cheaper ? Because it can reduce the burden on the consumer ? No, look because someone else is turning my head in that direction !!!

The Remedy
The remedy, as administered by specialists, was the proven medicine tried and tested in all countries in the region, with whom Sri Lanka’s manufacturing and service industry has to compete. That is (a) build coal power plants (b) build hydropower plants. Look at any country competing with your Industry: India, China, Vietnam, Malaysia, Thailand.

Why are their electricity prices lower than ours ? How much of oil-burning power plants do they have ? Virtually none, except in some states in India where governments similar to ours have existed in the past, and pushed oil-burning power plants into their electricity boards. The bulk of electricity in these countries come from coal.

What if we had the much awaited coal-fired power plant operational today? The calculation is simple. If the then President on 31st March 1999 signed the request to the government of Japan to finance the Norochcholai power plant, three generators of Norochcholai would have been operating today, wiping out much of the 97 billion rupee fuel bill. Similarly, if on 31st March 2002, the then Prime Minister did not summon the Japanese Ambassador to tell His Excellency to get off the Nororchcholai power plant project (Japan had agreed to finance the project through a long-term loan), and allowed his Energy Minister to proceed with the project, we would have Nororchcholai fully operational today. Again, if sometime in mid-2002, the then Prime Minister did not unilaterally cancel the commencement of work on the Upper Kotmale hydropower project, Sri Lanka would have been producing 530 million units this year at virtually no cost, no emissions. Today coal can be purchased at Rs 13 per kg, and the Nororchcholai power plant would have used 0.38 kg to produce a unit of electricity. So the fuel cost would be Rs 5 per unit of electricity. An additional rupee would be required for maintenance. Norochcholai would have produced 5 billion units of electricity this year. The fuel bill would then have been 30 billion for coal plus maintenance, and about a further 15 billion for supplementary power from existing oil-burning power plants, particularly for evening peaking needs, dry season backup and western grid voltage support. Thus the 97 billion rupee fuel + maintenance bill of CEB for 2008, would have been down to about Rs 45 billion, a clear saving of Rs 50 billion this year.

When oil prices rise, coal prices will also rise, and therefore, it is not possible to say electricity prices in Sri Lanka will never increase if we have many coal power plants. A base and strong supply from coal power plants will make our electricity prices to be competitive with other countries, and the manufacturing industry and other electricity customers should be happy with that.
The proposed price increase from Rs 10.50 to Rs 15.50, provides only Rs 43 billion of additional income to CEB, whereas if we had the three generators at Norochcholai today as it was planned in 1997 (cancelled by the then President, cancelled again by the Prime Minister in 2002), we would have saved Rs 50 billion. There would be no need to increase electricity prices. In fact, the prices would be lower by about 10%, if both Nororchcholai and Upper Kotmale were allowed to be built on time. Allowed by whom ? You know the answer. Oh we should not forget the Bishop of Chilaw, the CWC, Environmental Foundation Limited, etc., who all have lavishly contributed their time and sweat to raise your electricity costs by bringing immensely pressure on politicians not to build these power plants.

The Bishop of Chilaw wrote on 23rd December 2001. “The United National Party had recently come to power with the blessings of the voters in the Western and North Western Coastal Belt would surely not indulge in a breach of faith by reviving this project”. Such was the commitment of various individuals who went all out to ensure that Sri Lanka will remain a country of high electricity prices.

Improvements Possible but small
CEB can and should improve staff productivity, cut down on staff, and improve the business process. There is a lot of work to be done to reduce commercial losses and network losses, and the national energy policy has given a target of 13.5% of losses to be achieved by year 2009. This should be further tightened to a lower target, now that energy costs more and therefore savings are more worthwhile.

The Sri Lanka Sustainable Energy Authority has been given a policy target of reaching 10% of grid electricity production from non-conventional energy sources by 2015. Sri Lanka presently gets 4.2% from such sources.

Do not be mistaken. Even if we have saints in CEB with zero corruption, even if we sack all the staff of CEB and privatise it tomorrow, the electricity prices cannot be brought down. The required increase will be even more than 50%, to allow for profits for the privatised CEB.

Never again ?
The game is not over. While commendable progress has been made with the two crucial power plants in Norochcholai and Upper Kotmale, and some progress on Trincomalee, the same ball games are now being played about the next crucial power plant, the Hambantota coal plant. Bids have been called twice and no progress is seen in this project, and the impacts of this game (and the games on LNG explained earlier) will be seen in year 2015 when Hambantota is required to be fully operational.

On that day (approximately seven years from now in mid-March 2015), this same article can be re-published, to analyse how electricity prices could have been lower if Hambantota power plant was allowed to be built in 2008 by the present-day politicians. The editor needs to insert only the names of power plants and financial loss of not building Hambantota.