Features
Correct method of pricing electricity and need to reduce costs
Can electricity prices be reduced?
By Dr Tilak Siyambalapitiya
The answer to the question in the title of this article is in the affirmative. I explained in The Island of January 2023 [https://island.lk/the-correct-method-of-costing-electricity/] the correct method of costing electricity supply. In January, the Public Utilities Commission (PUC) announced the costs submitted by the two distributors Ceylon Electricity Board (CEB) and Lanka Electricity Company (LECO) for 2023, and the proposed prices. PUC’s proposed prices did not match the costs submitted. The government, which traditionally would not allow electricity prices to be increased, went to the extent of appointing new commissioners to PUC, and secured approval overnight to ensure prices were increased to a level that costs would be covered.
The government states that electricity prices will be revised (presumably both upward and downward) once in six months. Similar governments and a sympathetic PUC since 2010 prevented electricity prices being adjusted once in six months, while power plants designed to keep production costs lower, one after the other, were cancelled or delayed. The costing and pricing procedure was in place since 2010, ever since the Electricity Act was approved in 2009.
Previously, on 10th August 2022, Sri Lanka’s electricity prices were increased from Rs 17 to Rs 30 per unit. Different customers pay difference prices, but what we present here is the national average price, including both fixed and variable costs. Most recently on 15th February 2023, prices were further increased to Rs 48 per unit of electricity. On the day electricity prices were announced, Rs 48 worked out to 13.2 USCts per unit of electricity. Any national average price above 10 USCts per unit is seen internationally, as a country of “high electricity prices”. While Sri Lanka was demoted from upper-middle income country to a lower-middle income country, Sri Lanka graduated to the status of high electricity costs and prices. The key to reducing prices is in reducing costs. More on cost reductions later.
Principles of pricing
Electricity is like many commodities but also different to all those commodities. Similarities are that retail customers are more expensive to supply, while it is cheaper to supply bulk customers. Therefore, it is cheaper to supply electricity to the factory down the road, than to supply your house.
How is electricity different to any other commodity? It must be produced exactly at the same time the customer wants it. There cannot be even a one millisecond delay. Electricity cannot be stored in the form of electricity. If one power plant cannot produce electricity owing to lack of water, reduced wind flow or lack of sunshine, another power plant must be ready to operate and immediately takeover. That means there are fixed costs to keep power plants on standby, for which customers have to pay through their regular tariffs. If those power plants are too expensive to operate, such costs too will add to the operating costs.
Here (table 1: ‘Fixed and variable costs 2023’ and ‘Variable costs for Jan to Jun 2023 submitted to PUCSL’) are the calculated costs (not price) of electricity, on the basis of costs CEB submitted to PUC for the period January to June 2023. Fixed costs DO NOT include any profits. However, fuel (coal, naphtha and oil) prices used for electricity production surely include profits (no calculations are presented) to such suppliers, including Lanka Coal Company and Ceylon Petroleum Corporation, and taxes to the government. Prices paid for renewable energy (including minihydros, biomass, wind and solar power plants, all owned by the private sector) and rooftop solar prices include a profit to all such suppliers. Profits to renewable energy suppliers are pre-defined in the pricing formula; only a few of them were ever built under competitive bidding. All others, including that solar unit on your roof, have a pre-defined guaranteed profit.
The total cost was estimated to be Rs 85,683 million in fixed costs and Rs 301,412 million in variable costs, to make it a total of Rs 387,095 million for the first six months of 2023. Watch that 25% figure on the “oil” row. More on that later.
These costs have never been formally approved by PUC, but some other document shows the prices have been approved. PUC has violated its own procedures and has not approved the costs, but prices have been approved.
Be that as it may, how should the costs be translated to prices?
Fixed costs are allocated based on the burden imposed by each customer on the grid. A low-user imposes a lower burden. Hence a low user is required to pay a lower fixed cost, because the assets (generation, transmission, distribution) standing-by to supply him are proportionately smaller.
Then to variable costs. These include payments to renewable power suppliers (250 companies and 40,000 rooftop solar units), oil for both CEB and private power plants and for coal. Variable costs have features of seasonality and changes based on time-of-production. Seasonality is accounted for by revisions once in six months. A separate method is used to account for cost variations according to time of use.
Based on CEB submission of costs and PUC’s approval of prices, Table 2 shows the summary costs and prices for the first half of 2023.
These are the calculations, based on allocating the cost of supply to different customer categories. The fixed costs are lower to low-user customers, but the variable cost is higher to low user customers, because such a customer is a peak-time customer, when energy costs are the highest.
In general, the pricing (not the costing) announced imply high user customers receive a subsidy for fixed costs but they are surcharged on variable costs. If Sri Lanka wants to stop discrimination across customers based on consumption, all households can be charged Rs 1379 as monthly fixed costs, and Rs 43.24 per unit of electricity as variable costs.
Subsidies
Subsidies are fine to be provided to any type of customer, provided someone transparently pays them to the electricity suppliers. Electricity law provide for subsidies to be given to deserving customers or customer groups. The national energy policy 2019 states that subsidies by way of life-line electricity tariffs will be limited only to “low-user household customers using less than 30kWh per month.” This implies others must pay what it costs. The Electricity Act says subsidies can be provided but PUC must secure them from the government.
What next?
Costs, therefore, prices have gone up now because of mismanagement of three specific factors: One: cancellation or delaying of lower-cost power plants through government intervention, causing the “energy mix” to unwantedly tilt toward excessive use of oil. Two: uncontrolled addition of staff, making CEB over-staffed by as much as 50%. Three: Keeping electricity prices constant over 2014-2022 across various governments, while cheaper power plants were purposely delayed. If PUC firmly define action to build lower cost power plants with a monthly monitoring system and for reducing distribution costs, some customers, at least, may grudgingly agree to these high prices.
See Table 3. Variable costs can be reduced from Rs 41 to Rs 18 per unit, by eliminating the use of oil. Adding fixed costs of Rs 12, the price to customer will be Rs 30. That’s the price that prevailed before 15th February 2023. If focused action is taken now, to simply implement the long-term generation plan without resorting to shortcuts that take us nowhere, this target can be achieved by 2026. Certainly, it cannot be achieved overnight through political slogans or by going in processions, but through focused actions in building lower-cost power plants, honest procurement and a firm resolve not to use oil to produce electricity.
But what can be done overnight? Variable costs can be dropped from Rs 41 to Rs 30 (see table 3), by honest pricing of oil and coal given to electricity production. That means, at international prices plus 25% to cover all costs and taxes. Adding fixed costs of Rs 12 per unit, the total will be Rs 42 per unit, overnight. That is Rs 6 (15%) less than the prices now. If we add the benefit of the improved status of the Rupee, the variable costs will further decline from Rs 30 to Rs 27, and the price reduction has to be Rs 9 (19%).
So, in summary, what is required is to agitate for the reduction of costs by:
Step 1: correctly pricing coal and oil at international price levels: reduces electricity prices from Rs 48 to Rs 39 (19%) by 1st July.
Step 2: ensure the long-term plan is strictly adhered to, at least from now on, through honest procurements: further reduces electricity prices from Rs 39 to Rs 28 (28%)
Step 3: continue to streamline staff and other fixed costs; the estimated savings are Rs 2 per unit of electricity sold.
So, yes, the electricity prices can be reduced by 19% immediately (on 1st of July according to the procedure) and gradually by a further 28% by 2026. In effect, from the present Rs 48 to Rs 39 immediately, and over 4 years, to Rs 26, to achieve a total reduction of 46%.
That’s almost half the present price customers pay, isn’t it ?
It can be done, but it will never be done. All lower cost electricity production projects, be it gas, coal, wind, solar, hydropower will be meddled with (in the name of facilitating government-to-government deals, promoting FDIs, sustainability) finally ending up with more diesel, and you customers will be asked to pay, to make diesel power plants to be profitable.
That’s what you are paying for now. Your electricity bill should have been Rs 28 but you are now paying Rs 48 per unit.
Future?
The evening peak demand of 2022 that was forecast in 2020 to hit 3000 megawatt reached 2800 by February last year, and then dropped to 2300 megawatt as the crisis ruined the industry and commerce, and remains there until now. Once the economy recovers, the peak demand will surely accelerate toward 3500 megawatt at night, and Sri Lanka has nothing but more and more diesel power plants to meet such demand.
In other words, the economic recovery will not be a reality, when the money required for recovery, is drawn to buy diesel to produce electricity.
by Dr Gotabhya Ranasinghe
Senior Consultant Cardiologist
National Hospital Sri Lanka
When we sought a meeting with Hon Dr. Ramesh Pathirana, Minister of Health, he graciously cleared his busy schedule to accommodate us. Renowned for his attentive listening and deep understanding, Minister Pathirana is dedicated to advancing the health sector. His openness and transparency exemplify the qualities of an exemplary politician and minister.
Dr. Palitha Mahipala, the current Health Secretary, demonstrates both commendable enthusiasm and unwavering support. This combination of attributes makes him a highly compatible colleague for the esteemed Minister of Health.
Our discussion centered on a project that has been in the works for the past 30 years, one that no other minister had managed to advance.
Minister Pathirana, however, recognized the project’s significance and its potential to revolutionize care for heart patients.
The project involves the construction of a state-of-the-art facility at the premises of the National Hospital Colombo. The project’s location within the premises of the National Hospital underscores its importance and relevance to the healthcare infrastructure of the nation.
This facility will include a cardiology building and a tertiary care center, equipped with the latest technology to handle and treat all types of heart-related conditions and surgeries.
Securing funding was a major milestone for this initiative. Minister Pathirana successfully obtained approval for a $40 billion loan from the Asian Development Bank. With the funding in place, the foundation stone is scheduled to be laid in September this year, and construction will begin in January 2025.
This project guarantees a consistent and uninterrupted supply of stents and related medications for heart patients. As a result, patients will have timely access to essential medical supplies during their treatment and recovery. By securing these critical resources, the project aims to enhance patient outcomes, minimize treatment delays, and maintain the highest standards of cardiac care.
Upon its fruition, this monumental building will serve as a beacon of hope and healing, symbolizing the unwavering dedication to improving patient outcomes and fostering a healthier society.We anticipate a future marked by significant progress and positive outcomes in Sri Lanka’s cardiovascular treatment landscape within the foreseeable timeframe.
by Fr. Emmanuel Fernando, OMI
Jesuit Fr. Aloysius Pieris (affectionately called Fr. Aloy) celebrated his 90th birthday on April 9, 2024 and I, as the editor of our Oblate Journal, THE MISSIONARY OBLATE had gone to press by that time. Immediately I decided to publish an article, appreciating the untiring selfless services he continues to offer for inter-Faith dialogue, the renewal of the Catholic Church, his concern for the poor and the suffering Sri Lankan masses and to me, the present writer.
It was in 1988, when I was appointed Director of the Oblate Scholastics at Ampitiya by the then Oblate Provincial Fr. Anselm Silva, that I came to know Fr. Aloy more closely. Knowing well his expertise in matters spiritual, theological, Indological and pastoral, and with the collaborative spirit of my companion-formators, our Oblate Scholastics were sent to Tulana, the Research and Encounter Centre, Kelaniya, of which he is the Founder-Director, for ‘exposure-programmes’ on matters spiritual, biblical, theological and pastoral. Some of these dimensions according to my view and that of my companion-formators, were not available at the National Seminary, Ampitiya.
Ever since that time, our Oblate formators/ accompaniers at the Oblate Scholasticate, Ampitiya , have continued to send our Oblate Scholastics to Tulana Centre for deepening their insights and convictions regarding matters needed to serve the people in today’s context. Fr. Aloy also had tried very enthusiastically with the Oblate team headed by Frs. Oswald Firth and Clement Waidyasekara to begin a Theologate, directed by the Religious Congregations in Sri Lanka, for the contextual formation/ accompaniment of their members. It should very well be a desired goal of the Leaders / Provincials of the Religious Congregations.
Besides being a formator/accompanier at the Oblate Scholasticate, I was entrusted also with the task of editing and publishing our Oblate journal, ‘The Missionary Oblate’. To maintain the quality of the journal I continue to depend on Fr. Aloy for his thought-provoking and stimulating articles on Biblical Spirituality, Biblical Theology and Ecclesiology. I am very grateful to him for his generous assistance. Of late, his writings on renewal of the Church, initiated by Pope St. John XX111 and continued by Pope Francis through the Synodal path, published in our Oblate journal, enable our readers to focus their attention also on the needed renewal in the Catholic Church in Sri Lanka. Fr. Aloy appreciated very much the Synodal path adopted by the Jesuit Pope Francis for the renewal of the Church, rooted very much on prayerful discernment. In my Religious and presbyteral life, Fr.Aloy continues to be my spiritual animator / guide and ongoing formator / acccompanier.
Fr. Aloysius Pieris, BA Hons (Lond), LPh (SHC, India), STL (PFT, Naples), PhD (SLU/VC), ThD (Tilburg), D.Ltt (KU), has been one of the eminent Asian theologians well recognized internationally and one who has lectured and held visiting chairs in many universities both in the West and in the East. Many members of Religious Congregations from Asian countries have benefited from his lectures and guidance in the East Asian Pastoral Institute (EAPI) in Manila, Philippines. He had been a Theologian consulted by the Federation of Asian Bishops’ Conferences for many years. During his professorship at the Gregorian University in Rome, he was called to be a member of a special group of advisers on other religions consulted by Pope Paul VI.
Fr. Aloy is the author of more than 30 books and well over 500 Research Papers. Some of his books and articles have been translated and published in several countries. Among those books, one can find the following: 1) The Genesis of an Asian Theology of Liberation (An Autobiographical Excursus on the Art of Theologising in Asia, 2) An Asian Theology of Liberation, 3) Providential Timeliness of Vatican 11 (a long-overdue halt to a scandalous millennium, 4) Give Vatican 11 a chance, 5) Leadership in the Church, 6) Relishing our faith in working for justice (Themes for study and discussion), 7) A Message meant mainly, not exclusively for Jesuits (Background information necessary for helping Francis renew the Church), 8) Lent in Lanka (Reflections and Resolutions, 9) Love meets wisdom (A Christian Experience of Buddhism, 10) Fire and Water 11) God’s Reign for God’s poor, 12) Our Unhiddden Agenda (How we Jesuits work, pray and form our men). He is also the Editor of two journals, Vagdevi, Journal of Religious Reflection and Dialogue, New Series.
Fr. Aloy has a BA in Pali and Sanskrit from the University of London and a Ph.D in Buddhist Philosophy from the University of Sri Lankan, Vidyodaya Campus. On Nov. 23, 2019, he was awarded the prestigious honorary Doctorate of Literature (D.Litt) by the Chancellor of the University of Kelaniya, the Most Venerable Welamitiyawe Dharmakirthi Sri Kusala Dhamma Thera.
Fr. Aloy continues to be a promoter of Gospel values and virtues. Justice as a constitutive dimension of love and social concern for the downtrodden masses are very much noted in his life and work. He had very much appreciated the commitment of the late Fr. Joseph (Joe) Fernando, the National Director of the Social and Economic Centre (SEDEC) for the poor.
In Sri Lanka, a few religious Congregations – the Good Shepherd Sisters, the Christian Brothers, the Marist Brothers and the Oblates – have invited him to animate their members especially during their Provincial Congresses, Chapters and International Conferences. The mainline Christian Churches also have sought his advice and followed his seminars. I, for one, regret very much, that the Sri Lankan authorities of the Catholic Church –today’s Hierarchy—- have not sought Fr.
Aloy’s expertise for the renewal of the Catholic Church in Sri Lanka and thus have not benefited from the immense store of wisdom and insight that he can offer to our local Church while the Sri Lankan bishops who governed the Catholic church in the immediate aftermath of the Second Vatican Council (Edmund Fernando OMI, Anthony de Saram, Leo Nanayakkara OSB, Frank Marcus Fernando, Paul Perera,) visited him and consulted him on many matters. Among the Tamil Bishops, Bishop Rayappu Joseph was keeping close contact with him and Bishop J. Deogupillai hosted him and his team visiting him after the horrible Black July massacre of Tamils.
Sri Lanka-Singapore Free Trade Agreement
By Gomi Senadhira
senadhiragomi@gmail.com
“You might tell fairy tales, but the progress of a country cannot be achieved through such narratives. A country cannot be developed by making false promises. The country moved backward because of the electoral promises made by political parties throughout time. We have witnessed that the ultimate result of this is the country becoming bankrupt. Unfortunately, many segments of the population have not come to realize this yet.” – President Ranil Wickremesinghe, 2024 Budget speech
Any Sri Lankan would agree with the above words of President Wickremesinghe on the false promises our politicians and officials make and the fairy tales they narrate which bankrupted this country. So, to understand this, let’s look at one such fairy tale with lots of false promises; Ranil Wickremesinghe’s greatest achievement in the area of international trade and investment promotion during the Yahapalana period, Sri Lanka-Singapore Free Trade Agreement (SLSFTA).
It is appropriate and timely to do it now as Finance Minister Wickremesinghe has just presented to parliament a bill on the National Policy on Economic Transformation which includes the establishment of an Office for International Trade and the Sri Lanka Institute of Economics and International Trade.
Was SLSFTA a “Cleverly negotiated Free Trade Agreement” as stated by the (former) Minister of Development Strategies and International Trade Malik Samarawickrama during the Parliamentary Debate on the SLSFTA in July 2018, or a colossal blunder covered up with lies, false promises, and fairy tales? After SLSFTA was signed there were a number of fairy tales published on this agreement by the Ministry of Development Strategies and International, Institute of Policy Studies, and others.
However, for this article, I would like to limit my comments to the speech by Minister Samarawickrama during the Parliamentary Debate, and the two most important areas in the agreement which were covered up with lies, fairy tales, and false promises, namely: revenue loss for Sri Lanka and Investment from Singapore. On the other important area, “Waste products dumping” I do not want to comment here as I have written extensively on the issue.
1. The revenue loss
During the Parliamentary Debate in July 2018, Minister Samarawickrama stated “…. let me reiterate that this FTA with Singapore has been very cleverly negotiated by us…. The liberalisation programme under this FTA has been carefully designed to have the least impact on domestic industry and revenue collection. We have included all revenue sensitive items in the negative list of items which will not be subject to removal of tariff. Therefore, 97.8% revenue from Customs duty is protected. Our tariff liberalisation will take place over a period of 12-15 years! In fact, the revenue earned through tariffs on goods imported from Singapore last year was Rs. 35 billion.
The revenue loss for over the next 15 years due to the FTA is only Rs. 733 million– which when annualised, on average, is just Rs. 51 million. That is just 0.14% per year! So anyone who claims the Singapore FTA causes revenue loss to the Government cannot do basic arithmetic! Mr. Speaker, in conclusion, I call on my fellow members of this House – don’t mislead the public with baseless criticism that is not grounded in facts. Don’t look at petty politics and use these issues for your own political survival.”
I was surprised to read the minister’s speech because an article published in January 2018 in “The Straits Times“, based on information released by the Singaporean Negotiators stated, “…. With the FTA, tariff savings for Singapore exports are estimated to hit $10 million annually“.
As the annual tariff savings (that is the revenue loss for Sri Lanka) calculated by the Singaporean Negotiators, Singaporean $ 10 million (Sri Lankan rupees 1,200 million in 2018) was way above the rupees’ 733 million revenue loss for 15 years estimated by the Sri Lankan negotiators, it was clear to any observer that one of the parties to the agreement had not done the basic arithmetic!
Six years later, according to a report published by “The Morning” newspaper, speaking at the Committee on Public Finance (COPF) on 7th May 2024, Mr Samarawickrama’s chief trade negotiator K.J. Weerasinghehad had admitted “…. that forecasted revenue loss for the Government of Sri Lanka through the Singapore FTA is Rs. 450 million in 2023 and Rs. 1.3 billion in 2024.”
If these numbers are correct, as tariff liberalisation under the SLSFTA has just started, we will pass Rs 2 billion very soon. Then, the question is how Sri Lanka’s trade negotiators made such a colossal blunder. Didn’t they do their basic arithmetic? If they didn’t know how to do basic arithmetic they should have at least done their basic readings. For example, the headline of the article published in The Straits Times in January 2018 was “Singapore, Sri Lanka sign FTA, annual savings of $10m expected”.
Anyway, as Sri Lanka’s chief negotiator reiterated at the COPF meeting that “…. since 99% of the tariffs in Singapore have zero rates of duty, Sri Lanka has agreed on 80% tariff liberalisation over a period of 15 years while expecting Singapore investments to address the imbalance in trade,” let’s turn towards investment.
Investment from Singapore
In July 2018, speaking during the Parliamentary Debate on the FTA this is what Minister Malik Samarawickrama stated on investment from Singapore, “Already, thanks to this FTA, in just the past two-and-a-half months since the agreement came into effect we have received a proposal from Singapore for investment amounting to $ 14.8 billion in an oil refinery for export of petroleum products. In addition, we have proposals for a steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million), sugar refinery ($ 200 million). This adds up to more than $ 16.05 billion in the pipeline on these projects alone.
And all of these projects will create thousands of more jobs for our people. In principle approval has already been granted by the BOI and the investors are awaiting the release of land the environmental approvals to commence the project.
I request the Opposition and those with vested interests to change their narrow-minded thinking and join us to develop our country. We must always look at what is best for the whole community, not just the few who may oppose. We owe it to our people to courageously take decisions that will change their lives for the better.”
According to the media report I quoted earlier, speaking at the Committee on Public Finance (COPF) Chief Negotiator Weerasinghe has admitted that Sri Lanka was not happy with overall Singapore investments that have come in the past few years in return for the trade liberalisation under the Singapore-Sri Lanka Free Trade Agreement. He has added that between 2021 and 2023 the total investment from Singapore had been around $162 million!
What happened to those projects worth $16 billion negotiated, thanks to the SLSFTA, in just the two-and-a-half months after the agreement came into effect and approved by the BOI? I do not know about the steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million) and sugar refinery ($ 200 million).
However, story of the multibillion-dollar investment in the Petroleum Refinery unfolded in a manner that would qualify it as the best fairy tale with false promises presented by our politicians and the officials, prior to 2019 elections.
Though many Sri Lankans got to know, through the media which repeatedly highlighted a plethora of issues surrounding the project and the questionable credentials of the Singaporean investor, the construction work on the Mirrijiwela Oil Refinery along with the cement factory began on the24th of March 2019 with a bang and Minister Ranil Wickremesinghe and his ministers along with the foreign and local dignitaries laid the foundation stones.
That was few months before the 2019 Presidential elections. Inaugurating the construction work Prime Minister Ranil Wickremesinghe said the projects will create thousands of job opportunities in the area and surrounding districts.
The oil refinery, which was to be built over 200 acres of land, with the capacity to refine 200,000 barrels of crude oil per day, was to generate US$7 billion of exports and create 1,500 direct and 3,000 indirect jobs. The construction of the refinery was to be completed in 44 months. Four years later, in August 2023 the Cabinet of Ministers approved the proposal presented by President Ranil Wickremesinghe to cancel the agreement with the investors of the refinery as the project has not been implemented! Can they explain to the country how much money was wasted to produce that fairy tale?
It is obvious that the President, ministers, and officials had made huge blunders and had deliberately misled the public and the parliament on the revenue loss and potential investment from SLSFTA with fairy tales and false promises.
As the president himself said, a country cannot be developed by making false promises or with fairy tales and these false promises and fairy tales had bankrupted the country. “Unfortunately, many segments of the population have not come to realize this yet”.
(The writer, a specialist and an activist on trade and development issues . )
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