A viable FIT for Sri Lankan electricity industry

By Eng. Parakrama Jayasinghe
parajayasinghe@gmail.com

It is common wisdom to consider that the reliable supply of energy, particularly electricity, is an essential requirement for growth of the GDP by other sectors of the economy. But it must be realized that the energy services industry itself could be a major contributor to the GDP growth by itself, while serving the needs of all other sectors of the economy. This paradigm has been exploited to the maximum by the middle east countries, as well as coal exporting countries. Hitherto Sri Lanka has only concentrated on the need to provide continuous energy to other sectors of the economy both Electricity and other sources of energy to support their growth. In the electricity Sector until 1996, when 95% of the electricity was generated using indigenous renewable resources and thereby low electricity tariff levels, this appeared acceptable. However, with increase in the energy demand and over dependence on imported fossil fuels, this policy has created innumerable problems, with heavy drain on FOREX and higher cost of electricity and transport.

Ostrich attitude in continuing to depend on imported fossil fuels

There appears to be a sense of complacency, with the state pretending to be comfortable in providing uninterrupted power, ignoring the heavy burden on the balance of payments. Obviously, the fact that Sri Lanka had to face the ignominy of declaring bankruptcy and the need to repay the Billions borrowed in US Dollars loans, does not seem to be a consideration of those in charge of the energy sector. Such irresponsible behaviour is not what is expected from a government.

However, in recent times with the development of renewable energy technologies and their proven feasibility technically and financially and favourable impact on Sri Lanka’s electricity supply, it is indeed unfortunate that this realism and immense opportunity is ignored by our energy planners. The recent events have dispelled the myth that renewable energy is expensive and it is now well established that all commercially established renewable source-based power generation is definitely more economical than any form of fossil fuel-based electricity. Sri Lanka is also blessed with such renewable energy resources of capacity many times over our needs for several decades to come. This bonanza should and could serve as the vehicle through which Sri Lanka can overcome the present economic debacle. (See diagram)

The Feed in Tariff – Driver for RE Development

The private sector has demonstrated its commitment and capability to contribute towards this national service even under difficult circumstances and sometimes willful barriers created by vested interests wanting to perpetuate the continued dependence on imported fossil fuels.

The most visionary and progressive systems offered under the Surya Bala Sangramaya has already paid dividends with 825 MW of roof top solar providing 1200 GWh annually to the national energy mix. This may be a unique innovation in the whole world and Sri Lanka’s gratitude is due to everyone who created and developed this system. Also, its benefits and potential scope has expanded greatly with the progressive relaxation of the regulations on system capacities permitted by the CEB. It is hoped that they would continue to support this development by working towards the target of one million roof top systems as the first target, which is of great value to the cash strapped nation.

The recent upheavals in the economy and balance of payments, which have been addressed in the tariff revision in November 2022, offering a fixed tariff over the entire contract period, which contributed to the viability of the existing FITs resulted in the exponential growth of the sector as shown below. (See graph)

The somewhat controversial and ill-conceived system of variable tariff announced in June 2023 did not evoke any confidence in the investors, both due to its unnecessary complexity and the uncertainty making it totally nonbankable. A developer has no means of predicting the FIT he would get in the future, as the system is expected to be updated every three months. While the parameters used for the calculation have been declared, the actual values used for the original declaration nor the amendment done in October 2023, have not been published. Any developer would like to make his own predictions for the future before accepting any such scheme however attractive the original numbers were. The first amendment in October itself has shown the very likely downward trend scaring away any investors. Thankfully the CEB has provided the option of selecting the previous Fixed Tariff gazetted in November 2022. I believe that most if not all new projects have opted for the same.

This message must be heard loud and clear by the present committee reviewing the FIT system.

The attraction of Dendro Power

While the Roof Top Solar PV system supported by the regulations under the Surya Bala Sangraamaya, which by any standard is a most visionary approach, provided the means for the consumers even those in the domestic category to contribute participate in the nation’s power sector development by becoming “Prosumers” perhaps an even more far reaching and socially significant contribution by the people is possible by the development of the Dendro Energy, with Sri Lanka’s own proven concept of using sustainably grown short rotation coppicing species such as Gliricidia, where the rural farmers become the suppliers of the fuel for generation of firm energy on a year round 24/7 basis. It is important to recognize that Dendro Power is available all the time with a Plant Factor of 85% Vs 16% from Solar and may be 30% from Wind, with multiple spin off benefits to many sectors of the economy.

While we are thankful to the present minister for removing the artificially created obstruction of Dendro Development over the past six years, an attractive FIT is needed to win back the investors who abandoned the industry.

As a matter of interest, the flow of funds to the rural economy even from a 10 MW Dendro power plant is over Rs 1200 million annually, providing firm power which would otherwise be generated using imported fossil fuels. The savings in FOREX by the equivalent reduction of oil-based power is US $ 20 Million. This opportunity unfortunately does not attract any official attention. This is clearly the means of ensuring

“Power for the People by the People”

In this light the provisions in the proposed new Feed in Tariff structure needs urgent re-consideration as noted below

The Need for Level Playing Field

We give below a few specific examples of how this tariff mechanism discriminates against renewable energy (RE) producers particularly the local investors, and clearly disadvantages RE producers in ways that fossil fuel suppliers are not:

Price caps on RE producers; No price caps on fossil fuel power suppliers: CEB marginal cost of dispatchable plants is set as the maximum price cap for RE producers. For fossil fuel producers, there is no such price cap. At the very least, the CEB should treat all energy producers equally, and since fossil fuel producers do not have a price cap in their contracts, such a price cap should be removed from RE contracts as well. It is time that the CEB declared the true cost of generation using fossil fuel, both in CEBs owned plants and the IPPs, calculated on the same basis as the REs using the same formulae and the appropriate parameters including the cost of externalities. This will clearly highlight the value and urgency to provide the maximum support for RE development.

Tariff recalculation on a quarterly basis: This is totally impractical and poses a further disincentive, Project planning and financial closure invariably extend beyond three months, particularly for the larger commercial ventures, and such a quarterly tariff recalculation, which is not a feature present anywhere else in the world, makes financial planning for a large venture quite impossible. In order to capture any variations in the relevant parameter an annual re-calculation is more practical and should apply only for those projects approved in the respective year and not with retrospective effect.

It is apparent that this condition has been brought in consideration of the most disadvantageous financial parameters applicable in Sri Lanka at the time of development of this tariff system (June 2023) and in expectation of easing of these in the future. But the way it is applied, shows lack of appreciation of the ground situation, disincentivising the development of RE, while continually spending millions of dollars for use of oil for generation, which some of which could have been averted by providing favourable terms for the RE developers ready to enter in to the market now. There is a clear lack of holistic approach towards the long term national interest as described in the preamble.

Additional burden to RE investors through an Escrow account requirement: deposit of 2% of revenue in an Escrow Account is required of RE investors, another additional requirement imposed on RE investors alone.

This is further disincentive and a lopsided logic ignoring that the CEB has defaulted in payments for the RE developers for nearly a year or more. This has driven many such investors to near bankruptcy. Also such provisions are a further barrier for the local investors as against the large foreign investors for whom such requirements would not be a major burden.

A Clear Commitment from the CEB officials for RE Development

It is well known that, in spite of the protestations of support for the development of the renewable energy development by the Ministry, CEB and the SLSEA, the field level reality is quite different. All developers would testify to the hassle they face at every level and the inordinate delays by the respective officers, not limited to those in the Utility, but the plethora of other state agencies (other than for Roof Top Systems) , who appear to believe that hindrance or delaying the projects is their duty . (With apologies to the few officials who appreciate the national importance of RE and strive to ease the path of approval process).

Essential Features of a viable Feed in Tariff

We therefore request the following as minimum measures to keep all energy producers for the CEB on an equal footing:

*  Remove the price cap on RE producers

*  Remove the references to marginal cost and retain the cost+profit model

*  Tariff revision on an annual basis (not quarterly)

*  The capital cost component applicable at time of signing SPPA to be fixed for the period of loan recovery

*  Remove the requirement for Escrow accounts

*  Reset inflation to a more realistic level and adjust O&M charges accordingly

*  All tariff to be paid in Sri Lankan rupees. Any foreign investors must receive the tariff in rupees , but be permitted to repatriate the investment and fair profits under the systems prevailing under the BOI

Most importantly, the energy sector should be a Sri Lankan Industry to ensure future energy security and it is requested that a clear and simplified tariff calculation mechanism is provided so that investors and ‘prosumers’ themselves can use the mechanism to calculate and forecast financial feasibility of a project.