Demand in Sri Lanka’s power sector, which is driving economic activity and development, has been outstripping supply and increasing 7% to 8% annually. The domestic power sector has been struggling to meet the expanding demand for electricity through the late 1980’s, 1990’s and the first two years of the millennium.
According to a report on the power sector by rating agency, RAM Ratings Lanka, Sri Lanka is geared to narrow the power deficit that has been prevalent over the last few decades, in line with its brightening economic prospects. The report on the local power sector says the sector has been opened up to independent power products (IPP’s) which has in turn assisted the state utility in meeting the nation’s rising demand. However, RAM noted that the state is expected to retain its dominance in power generation over the long term as per the Sri Lanka Electricity Act of 2009 which requires that any plant with more than a 25-MW capacity be ultimately controlled by the government.
By 2008, the country had achieved 80% electrification and in line with the national energy policy, the government intends to raise this to 95% by 2015 with a mix of grid extensions and off-grid solutions. The report states that over the past 15 years, Sri Lanka has gradually been shifting its energy mix from hydro to thermal power. According to the Ceylon Electricity Board’s (CEB’s) long-term plan for the sector, the country will continue to depend on thermal sources, favoring coal-based rather than fossil fuels.
eanwhile, non-conventional renewable energy sources (NCRES) such as biomass, wind and solar energy are expected to supplement the country’s power requirements. Based on publicly available information, RAM Ratings noted that hydro-power players have improved their profitability of late. Their impressive profit performance is underpinned by lower debt levels, better tariff rates and heightened power generation. RAM Ratings observed that these profitability indicators may entice further investor interest in the local power sector. Profitability apart, these players have also sought to dilute their site risks via acquisitions. Thus far, such acquisitions have not overtly strained the companies’ balance sheets; their credit matrices have remained intact.
RAM finds that increased reliance on imported fossil fuels and the challenges faced by the state utility in implementing its long-term plans have pushed up tariff rates. A crucial consideration for any IPP is the rate of its electricity tariff. The report also noted that more IPP’s are likely to be attracted to the power sector given its salient features such as stable demand, moderate operating risks and long life of assets. From a credit-rating perspective however, RAM has identified several inherent risks that include construction, fuel-supply and customer-concentration risk. |
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