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Forming holding companies for unbundled CEB an additional financial burden, says Finance Ministry
The Finance Ministry has advised the Cabinet that if separate holding companies were to be formed for generation, transmission and distribution to succeed the existing Ceylon Electricity Board (CEB), it would be an additional financial burden to the electricity industry and could affect pricing for consumers.
The 2024 Sri Lanka Electricity Act envisages unbundling the CEB into 12 companies with four for generation, two for transmission, five for distribution and one for the provident fund.
However, the new Energy Ministry’s Power Sector Reforms Process (PSRP) Committee, which is drafting amendments to the law, proposes to additionally establish three government-owned companies “to hold shares of the completely unbundled generation, transmission and distribution companies”.
The Finance Ministry says this is “no longer necessary” as setting up such holding entities would be an additional financial burden and affect the determination of tariffs.
Meanwhile, the Cabinet has directed the Energy Ministry to consult with the Finance Ministry and other institutions to ensure that any amendments to the 2024 Act take into account areas such as pricing policy, electricity production cost and impact on the national economy, government capacity to invest in infrastructure development and attraction of private investments into the energy sector.
This was after the Finance Ministry made several other observations to Cabinet on the proposed amendments to the Act. For instance, it said the Committee must consult development financiers such as the Asian Development Bank (ADB) and World Bank (WB) when proposing amendments.
The Finance Ministry’s comments, seen by the Sunday Times, point out that the ADB and WB had backed Sri Lanka’s reform agenda through the Power Sector Reforms and Financial Sustainability Programme, with a focus on restructuring the CEB and the Lanka Electricity Company (LECO), electricity pricing reforms and renewable energy development.
“The World Bank and ADB will closely monitor progress, with adherence to agreed actions being critical for future budget support,” the Finance Ministry states. “Therefore, wider stakeholder consultation is recommended including the aforementioned parties.”
The Finance Ministry points out that the objective of the 2024 Electricity Act is to “support the electricity industry by segregation and separation of activities of the electricity industry, currently vested in a single government-owned entity by incorporation”. The core purpose of segregation is to foster a competitive electricity market.
However, the PSRP Committee has proposed retaining the “single buyer electricity market” – Sri Lanka’s current regulatory model where a single entity (CEB) buys electricity from independent power producers – as the initial phase before transitioning to a wholesale and retail electricity market.
The Finance Ministry calls for a clear timeline for the transition, which the revised amendment does not provide, “to ensure the timely implementation of a competitive wholesale and retail electricity market at its earliest”.
A “wholesale electricity market” refers to where power generators sell electricity in large quantities to electricity suppliers, while a “retail electricity market” is where those suppliers then sell smaller portions of that electricity directly to consumers like homes and businesses.
The Finance Ministry also recommends that the Energy Ministry revisit its intention for the proposed transmission company to be 100 percent government-owned – pointing out that strengthening the transmission network required extensive financial investment for maintenance, development and improvements. It was, therefore, crucial to attract private investment because of “the very restrictive fiscal space of the government”.
Under the prevailing Electricity Act, the government shall hold 50 percent of shares in the transmission company, as opposed to the proposed 100 percent.
The relevant Cabinet approval instructs the Energy Ministry to consider the inputs of the Finance Ministry and other institutions.
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