Financial Times - CEB has to be reformed urgently

People are appointed to high posts in Sri Lanka with no proper checks and balances. They hold critical positions and take critical decisions on behalf of the taxpayer at their will.

When decisions are made and they go bad they resign and go. But the public has to curse them and face the consequences of that bad decision for along time. This is what is happening and happened in the CEB over the years.

The long awaited CEB reforms bill is expected to be presented in parliament due to continuous pressure from the ADB and JBIC, however it is very unlikely to go through without the support of the JVP and the UNP. Whether the restructuring can make any difference, only time can tell. But if the same culture is retained and the same people continue to run the restructured units it will end becoming more expensive to manage and a greater burden on society, resulting in further hikes to electricity tariffs and rates.

Hydroelectric
By the mid 1990s, according to analysts, the hydroelectric potential of the country had been mostly exploited. The country had to move to thermal power generation to meet additional demand. Boiler-Steam-Turbines (BST) and Reciprocating Diesel Engines (RDE) that use residual fuel, the cheapest petroleum fuel, and also because of reliability, were used to power the engines.

The mix of hydropower and thermal power enabled the CEB to meet capacity in a somewhat efficient way.

In 1996 the Ceylon Electricity Board made a decision that thermal power generation should be generated via the most advanced technology irrespective of the cost to the economy - combined-cycle-gas-turbine CCGT power plants that used expensive diesel fuel. The CEB failed to asses the impact it would have on the national economy – that is the additional foreign currency needed to import diesel fuel and the amount of funds the government would have to inject by way of subsidies to make electricity and diesel fuel affordable to the people.

According to CEB sources the CCGTs are yet to prove their reliability. The first CCGT installed was plagued with many mechanical problems. Even today only one out of three CCGTs installed is generating power effectively. According to research in the rush to install CCGT power plants, the CEB left out the two cheapest technologies suitable for developing countries – the Boiler Steam Turbine generation (BST) and the Reciprocating Diesel Engine (RDE) that could use the cheapest petroleum fuel. The argument put forward by the CEB for using CCGTs was that the Ceylon Petroleum Corporation Refinery could produce only 275,000 tons of residual fuel oil and hence not more than 200MW of installed BSTs and RDEs should be in the CEB generation system. According to analysts neither the consultants nor the CEB consulted the CPC as to whether the residual fuel oil could be imported, instead of the more expensive diesel fuel. The net impact of this decision resulted in the addition of a further 450MW of combined-cycle-gas-turbine generation capacity to the CEB grid. The costs to the economy of this decision are illustrated below;

Additional cost to the public
The table prepared above by a power consultant shows the additional cost the CEB would have to incur on a 300MW CCGT Power Plant.

The crude oil price of $70 per barrel is the average May 2006 price. Industry consensus is that crude oil could reach $ 100 per barrel by year-end. The cumulative additional cost since 1996, even if oil had remained between $20 and $45 per barrel, the installation of CCGTS would have cost in excess of Rs 1 billion. According to analysts that is more than 3 times the cumulative loss the CEB incurred since 1996. If CCGTs were not used (without RDEs), according to analysts the CEB would have been in better financial health. Therefore analysts argue that the high price of electricity cannot be blamed on the escalating price of oil alone but also due to poor planning and use of inappropriate power generation technology and fuels. Research indicates Sri Lanka is one of the few countries in the world that has commissioned CCGTs using expensive imported auto diesel fuel for power generation.

CCGT justification
Analyst say the CEB's lack of understanding of the type of fuel to be used for power generation, is further illustrated by the fact that during droughts when emergency power was needed, the CEB used and continues to use even now auto diesel fuel without using the cheaper residual fuel oil.

Despite all the publicly available data, CEB is said to be considering the installation of another 300MW CCGT that would cost $120 million (Rs 13 billion) more per year when compared with RDEs or BTGs. The justification given to convince policy makers and administrators are as follows;

a) CEB says the CCGTs are the only acceptable option according to the CEB planning model. However insiders say CCGTs were in fact the only technology that was considered in the planning model. RDEs and BTGs were totally excluded.

b) The CCGTs are designed to use many fuel variations, implying that the second fuel variation proposed is Liquefied Natural Gas (LNG), LNG is 20 percent more expensive and not available in Sri Lanka.

c) LNG importation will require an initial capital investment of around $500 million. The CEB however argues that the capital cost has come down because of offshore storage facilities in LNG tankers.

The fact is offshore storage also requires on -board processing and the total cost of such a tanker is $ 100 million plus and at least 4 such tankers each fitted with a processor is required, which the government would have to purchase at a cost of over $400 million in addition to other onshore facilities.

d) Without CCGTs the CEB says the country will face a power shortage in 2008. Analysts say the RDEs are cheaper and can be constructed within 18 months compared to CCGTs that will take 24 months to construct in addition to the design period of 12 months.

According to analysts the CEB appears to have convinced the Cabinet that the country has no option but to commission CCGTs.

The additional cost of running CCGTs is at least $120 million a year compared to RDEs. In a country where COL is a huge political issue it may be politically suicidal to let the CEB engage in wasteful expenditure and on unproductive investment in this manner.

Perhaps the government could get the services of the World Bank or the ADB to obtain an opinion about our future power generation options before using this expensive technology.

Competitive offers
According to market sources the CEB called for competitive offers for the same CCGT project on a BOO basis against the advise of many engineers. A Korean company submitted the most competitive offer, which the Cabinet Appointed Negotiating Committee rejected since the price of power was unaffordable.

The CEB now is ready to award a contract to build a CCGT power plant out of government funds, with no price guarantees for power production to a "company" called Lakdharvani". According to analysts this company has very little experience as designer, builder or operator. The company is supposed to be owned by the CEB/government and that is one of the reasons attributed for this company getting the 300MW power project without any competition.

Way forward
The Minister of Power has to be guided by technocrats. However, if the Minister is not getting the facts that would enable him to make decisions that are in the best interest of the country he must seek independent advice perhaps from the ADB or the World Bank.

If a government were to overlook and aid in the perpetuation of incompetence in public institution they have to take responsibility for those blunders. We all know Sri Lanka is one of the most expensive producers of electricity and also that next to nothing has been done so far by successive governments to reverse this trend.

This country has enough competent professionals of high integrity in the CEB and also outside who could gladly assist the government to do the right thing in the best interest of the country.

The government and the opposition has an obligation to supervise, monitor and evaluate the CEB on a continuous basis to ensure that the goals for which it was set up are in fact being achieved.

CEB is costing the taxpayers over Rs 8.5 billion a year and it is too important for the management to be left only in the hands of the CEB leadership.