Features
The correct method of costing electricity
By Dr Tilak Siyambalapitiya
At a time the entire society is confused about who does what in determining electricity costs and prices, it would be useful for the learned and intelligent Sri Lankans to examine the correct procedure. What is written here is practiced across the civilized world, in countries where electricity generation is not a monopoly but electricity supply is still a monopoly. That includes India.
Five activities to get electricity to customer
Electricity industry comprises five businesses: electricity production, transmission, bulk supply, distribution, and retail supply. Transmission and distribution are natural monopolies, since there cannot be several companies building their own lines in the same geographic area to facilitate competition. However, electricity production, bulk supply and retail supply can be open for competition. Competition in generation can be at the initial procurement (as in Sri Lanka) or through short-term competitive contracts. They can be day-ahead competitive procurements (eg: India) or real-time competition. In Sri Lanka, electricity generation is open for private investments. If the investment is private, what is procured competitively is a “power purchase agreement. If the power plant is to be CEB’s own”, then what is procured is “a turnkey contract” to supply, install and commission a power plant. If the power plant is based on renewable energy up to 10 megawatt and private, electricity is purchased on feed-in-tariffs (some are competitively procured, too). For bigger renewable energy power plants, the law previously said it must be procured competitively, but a few months ago, the government changed the law to imply competition is not required.
Procurement is not the theme of this article. Once a power supply system is in place, how does one calculate the costs and then pass it down to customers in the form of tariffs?
Just like any other industry, electricity supply industry costs, too, can be divided into fixed costs and variable costs.
Fixed Costs
Fixed costs relate to the “capacity” of electricity production and delivery. A power plant built with a loan requires the loan principal and interest to be paid. The equity investment on the power plant should yield a return on investment. If the power plant is a private investment, its fixed cost are called “capacity charges” stated in the power purchase agreement in which the investors commitments to his banks and co-investors are included. Transmission and distribution lines, and various equipment at substations, too, require investments. There will be debt repayments and return on investments, too, required for such investments.
Fixed costs are independent of the amount of electricity produced. Supply of electricity requires a certain level of reliability of service to be assured. Investments on power plants, transmission lines and distribution lines should ensure the required capacity (amount of current), reliability (no power cuts, blackouts) or quality (no brownouts) are available to electricity customers.
Electricity regulators in most countries in the world review fixed costs submitted by electricity suppliers, compare with norms, examine opportunities to be progressively “cost efficient” and then approve the fixed costs. Fixed costs so approved include depreciation, interest costs, maintenance costs, spare parts, and staff salaries, and profits. Since electricity industry cost regulation includes a pre-defined profit, a return on investment is also included in the fixed costs. Since fixed costs do not vary rapidly, they are approved, upfront, for three years or five years. This time-interval, for which fixed costs are approved, is called the “tariff period”. Sri Lanka, from 2011 to 2020, followed a five-year tariff period, and since 2021, follows a three-year tariff period. Presently, the active tariff period is 2021-2023.
So, fixed costs are totally independent of how much of electricity is produced. Fixed costs are incurred anyway, literally, even if a single unit of electricity is not produced or purchased by customers.
Variable costs
Variable costs are proportional to the energy delivered. Energy is measured in kilowatthour (commonly called units of electricity). Fuel costs are incurred when a thermal power plant, or a biomass power plant, is operated. For renewable energy power plants, such as hydropower, wind and solar energy, there are no fuel costs. Their variable costs, that mean costs that depend on the quantity of energy delivered, if any, are very small.
When a thermal power plant operates, there will be costs on fuel, lubricating oil and other maintenance expenses. These costs are expressed, based on one unit of electricity (a kilowatt hour). If the power plant is private, the price paid per unit of electricity is based on the price of fuel, as stated in the respective agreement. Almost all agreements do not carry any mark-up on production costs. Investor’s profits are built into the fixed costs. For renewable energy power plants that sell electricity to the grid, without any storage, their costs, too, is based on electricity produced to the grid. Since generation costs depend heavily on hydrology and fuel prices, variable costs are required to be submitted for approval, once in 12-months, but represented in two six-monthly intervals, i.e. January-June and July-December.
Regulatory procedure and timetable to approve costs and prices
The Electricity Act 2009 specifies that a “tariff methodology” must be established by the regulator, PUCSL. This “tariff methodology” is available in the public domain for anyone to study. Electricity transmission and distribution license holders (currently CEB and LECO) must submit their costs, based on a specific format, which are then reviewed and approved by PUCSL. Submissions for transmission and distribution must be once in three years. These formats, too, are available on-line for public to view. This has been done for the window 2021-2023.
The timetable for cost and price review and who submits what, in which format, are all defined in the “Electricity (Procedure for Review and Adjustment of Tariffs) Rules No. 03 of 2016”, published in Gazette No. 1978/21, dated 2nd August, 2016. For example, the rules say “On or before the last working day of April, the Licensee shall submit to the Commission the following (using the templates approved by the Commission)” and provides a list of documents. It goes on to say “On or before the last working day of May of each year the Commission shall prepare the Draft Tariff Estimates using the Tariff Methodology and post the Draft Estimated Tariffs in its Website.” None of these happen on schedule.
The timetable has been largely ignored by CEB/LECO as well as by PUCSL itself who issued the timetable. However, delayed submissions and delayed decisions have been published from time to time, about costs and prices.
Most recent Published costs
Cost estimates for 2023 have not been submitted by CEB+LECO to PUCSL, as it has been widely stated in the media. Apparently, costs have been submitted to the Ministry. Thus, we have to go by the costs approved by PUCSL for the first half and second half of 2022. Sri Lanka’s national average price of electricity, right now, is Rs 30.13 per unit, which is closer to the costs approved by PUCSL and included in electricity prices announced in August 2022. However, it is clear that the costs of the second half of 2022 of Rs 48.45 per unit, published by PUCSL, would not be covered by charging the present price of Rs 30.13 per unit.
We do have to remember that “fixed costs” include depreciation, interest payments, staff, spare parts and a fixed return on investment (i.e. profit). If CEB and LECO agree to forego the profits, the “fixed costs” will be lower. Depreciation allowed is expected to finance debt repayments related to investments and for equity for ongoing or future investments. If debts are not being repaid, what happens to the cash set aside for depreciation is a question.
Even if depreciation, interest payments and return on equity are taken out of the calculation of pure cashflow requirements, still the following questions require answers:How much of electricity is planned to be produced, in 2023, from diesel and other petroleum fuels? Actual production from these expensive oils, in 2021, was 21%. Seven years ago, the long-term plan stated that only 13% of electricity will be produced from oil in 2021. So, what happened and where did it go wrong? For 2023, the plan of 2015 said only 9% will be produced from oil, but how much does CEB plan to produce from oil and who is responsible for the gap?
At what price is oil bought to produce electricity. A barrel of diesel is now about USD 100 delivered to Colombo, and a barrel has 160 litres. A small calculation yields that a litre of diesel should be Rs 231, since there are no delivery or retail costs to be added to the import costs. Electricity production does not get oil at these actual international prices. Fuel oil should be still cheaper.
However, it is clear that the delay in getting the full quantity of coal for the Norochcholai power plant (2022-23), the absence of Sampur (was due 2021-22) and Norochcholai No 4 generator (due 2024-25) all cancelled by politicians, and numerous renewable energy power plants delayed or cancelled by various people, and the absence of a gas terminal, may require at least 28% of next year’s electricity to be produced, using the killer fuel, oil.
Once the costs are reviewed and approved, they must be converted to a price schedule. The theory of pricing is taught to all electrical engineers, and it is not too complicated to be learned by anyone.PUCSL’s own approved costs for the second half of 2022 are Rs 48.45 per unit, or about 15 US cents per unit. Internationally, 15 US cents is considered a “high” cost of electricity. If CEB was “private”, the entire Rs 48.45 would have to be paid, even for the past six months. Thus what is important first, is to get the generation costs down, which for the past six months, was an exorbitant Rs 37 or 10 US cents per unit.
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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