Power over the powerless
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File picture of the Norochcholai coal power plant.
Right at this moment, when I sit down to write this column, there is a coal shipment waiting in the Northwestern sea off Puttalam for unloading at the Norochcholai coal power plant. But the Ceylon Electricity Board (CEB) does not have money to pay for that – not dollars, but rupees to buy dollars from the banks.
This is not an unusual event which just happened randomly during this week. It has been a continuing story every week, if not a few times a week, since the days Sri Lanka plunged into an economic crisis. It may be a strange question to you, why does the CEB not have money even after raising electricity tariffs a few months ago and, why does it want to raise them again. However, I don’t have facts and figures to make any assessment or judgement about it.
If you think that is why we continue with daily power cuts, this is the story behind it. Before I turn to the government side or the customer side in order to talk about economic implications of the problem, let me elaborate on the source of the problem.
Hand-to-mouth policy
Before the comfortable days we enjoyed on either “borrowed money” or “printed money”, the Norochcholai coal power plant had a coal stock. As we fell into a debt crisis or a dollar crisis, the coal stock depleted, and even electricity generation was based on a “hand-to-mouth” strategy; if we get a coal shipment, we can have electricity for a week or so, but still with daily power cuts.
Generally, one ship can carry about 60,000 tons of coal, which costs about US$ 12 million. Because the CEB does not have any off-shore business operations, it does not earn foreign exchange; it has to use its local revenue in rupees to buy foreign exchange from banks and pay for its imports. Since it cannot find dollar payments for the shipment or even not enough rupees for the exchange of dollars, unloading often gets delayed.
Delays in unloading have a cost, the so-called demurrage, which is about $30,000 per day. It has an even bigger cost of losing the name and the fame of the nation which has fallen to the level that it cannot maintain even its current “hand-to-mouth” policy.
One coal shipment is enough for about eight days of electricity generation. This means that almost every week there should be coal shipments coming in and lining up at Puttalam for unloading. If the CEB intends to build its coal stock again, there should be more ships coming in.
Building coal stock is, anyway, necessary. As the monsoon wind patterns change by the end of April, ships cannot unload coal in the Northwestern coast during May – September. Unloading 60,000 tons every week at Trincomalee Port and transporting it across the country to Puttalam is not an option. I am not sure about any plans for generating electricity during this period, as the month April is just around the corner.
By the way, we have ignored the environmental cost of coal power generation in Norochcholai. According to a study by the Public Utilities Commission (PUCSL) in 2020, external cost of generating electricity unit of kWh is $ 0.0477; at today’s exchange rate this amounts to Rs. 17.17 per unit loss of environment.
Whose problem is that?
We have a reasonable question to ask: Why the issue is so critical now? In fact, it was equally critical earlier too, but it was not a problem for the CEB as a state-owned enterprise (SOE) – in fact, one of the biggest among them. The government used to allocate taxpayers’ money from its annual budget to cover up such expenses. When it’s not enough, the government provided bank guarantees for such SOEs to borrow from banks. In fact, the banks which lend to the SOEs are also the state-owned banks!
Now, faced with unsustainable fiscal operations and with no (proper) economic revival plan to get out of the crisis, the problem is more with the SOEs than with the government. Even with unpleasant tax hikes, the government is still faced with a budget deficit of Rs. 2,400 billion this year too. The most fundamental issue is that the SOEs as such have not yet taken the problem seriously.
Therefore, the main issue is whose problem is it that our electricity generation is in a risky and uncertain situation. It was in the last couple of weeks that the CEB was demanding to raise electricity tariffs for the second time by 60 per cent. An equally important question that needs to be asked is what steps have we taken to reduce the cost of electricity generation.
Annual financial reporting by the SOEs does not usually expose their economic efficiency and effectiveness issues. If the revenue is spent according to rules and regulations, either losses and profits or efficiency and effectiveness do not matter. And after all, the taxpayers could bear all that through the government’s budgetary operations.
Efficiency means simply the “minimum” resource usage as inputs, while effectiveness means “maximum” output that is generated; the combined effect is known as productivity. Financial reporting does not reveal these economic elements, which is not mandatory for the SOEs which had the problem of political interference in decision-making outside internal operations.
All evils come together
It was only a few months back that the government increased electricity tariffs significantly. In this case too, the CEB should have “international benchmarks” to compare and contrast Sri Lanka’s electricity tariffs with its peers in the region. While export industries have reaped the advantage of exchange rate depreciation, they are faced with increased electricity tariffs and regular power cuts together with negative consequences of skyrocketing inflation.
There is no evidence to suggest the status of the country’s business environment in the face of economic crisis and policy changes. However, if Sri Lanka loses its cost competitiveness against its neighbouring countries, it would be difficult for the country to win business confidence and to promote economic growth. International benchmarks for electricity generation, transmission and distribution is important, because electricity is a critical and vital input to maintain the country’s international competitiveness in its businesses.
The second category of electricity consumers is the household sector, which has also been affected by multiple issues of the economic crisis. More than half of their incomes as well as savings have already been wiped out by inflation. On top of that households have suffered from the repercussions of exchange rate depreciation, fuel price hikes, interest rate hikes, tax hikes as well as electricity tariff hikes.
Although I understand that the economic crisis and the corrective policies both bring about multiple impacts on both households and businesses, I strongly suggest that businesses should be saved as much as possible and that burdens of corrective policies should be fairly distributed in order to maintain equity, efficiency and political stability.
Electricity supply
For the electricity supply, it is not just the customers who should be targeted with tariff hikes, but also the cost reduction by improving internal operations. It should be a new business model with separate entities to handle the three main elements – generation, transmission, and distribution. It may also have to introduce measures for liberalisation and competition while improving efficiency and effectiveness in all three areas of electricity supply.
International benchmarks should be adopted, at least from India where there has been a rapid pace of reforms and transformation in electricity supply, and provide yardsticks to measure Sri Lanka’s progress and standards in electricity supply. And finally, all SOEs need to undertake annual reporting on internal economic progress too, in addition to financial reporting.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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