What PUCSL and CEB did not disclose

Electricity subsidies, surcharges, and rooftop solar units:

by Dr Tilak Siyambalapitiya

The Public Utilities Commission of Sri Lanka (PUCSL) altered the CEB’s proposed prices and price structure, then amended its own proposal, and announced higher electricity prices, to be effective from 10 August 2022. Neither the CEB nor the PUCSL presented, to customers, the actual cost of supplying electricity to them; they simply pulled figures from their respective hats and called them ‘proposed tariffs’ and ‘alternative proposals’ and, finally, the ‘approved tariffs’. At the end, all the proposals, and approved prices of electricity, appear to have no basis.

For example, if the so-called ‘safety net’ is laid to subsidise low-user households, how much will the subsidy cost? Who will bear the cost of that subsidy? These questions need answers.

If there is a seemingly free market for any commodity or service, there is no need for customers to know the production costs, delivery costs, wastage, etc. Electricity is not so, yet; it is a regulated market, a badly regulated one at that, here in Sri Lanka, with no signs of improvement. Even in countries where there is an electricity ‘market’, the customer has a very limited choice. Low-user, low-income customers have no choice, at all.

Back to Sri Lanka, the only stated basis of pricing is to collect the forecast cost of Rs 510 billion by selling the forecast 15,772 million units of electricity in 2022. However, the cost of supplying electricity, to any customer, is not 510/15.8 = 32.28 Rs per unit of electricity. Customers are of three types: retail customers, low-voltage-bulk customers or medium-voltage-bulk customers. In simpler terms, if your electricity supply is from the roadside line, then you are a retail customer. If you have a transformer at your property; you have paid for it, but you are not required to maintain it, then you are a low-voltage bulk customer. If you have a transformer substation within your premises, you are a medium-voltage bulk customer. There are clearer, more serious definitions for these three types of customers.

All customers must pay a fixed cost in proportion to the burden they impose on the grid when they consume electricity. However, electricity producers are not required to pay any fixed costs for the use of the grid because (a) customers pay such costs, (b) producers are paid the cost of production. Producers who can guarantee on-demand supply to the grid are paid a fixed cost, based on the availability of their power plant. Additionally, all are paid a variable cost, based on energy output.

Getting back to the 10 August customer price increase, the PUCSL announced that there would be no government subsidies this year. Therefore, funds for subsidies for some customers, if any, have to be earned by overcharging other customers. The PUCSL also announced that low-user households will have a ‘safety net’; that means a ‘life-line tariff’ in the profession of energy economics, which the PUCSL is yet to learn. Be that as it may, a closer examination of the prices announced show the following (see the table):

A negative sign means the customer is charged above the cost of supplying electricity to that group of customers. It is cheaper to supply electricity to bulk customers, as in any business. When electricity is sold in bulk, there is no need for a distribution network and a distribution loss to allow for, just as when a trader sells potatoes, or onions, in bulk. Alas, the CEB and the PUCSL think (but do not calculate) that the cost of supplying electricity, to all customers, is the same; this is wrong. Our larger industries, large commercial and office buildings, as well as hotels, are being called upon to pay between 13% and 19% more than what it costs to supply them. The smaller bulk customers, numbering 12,000 are the hardest hit. They pay 19% more than the cost.

Where does this subsidy go to?

It goes to many retail customers, more specifically to smaller industries, religious customers, to households using up to 180 units per month, and to subsidize households numbering 40,000 who have rooftop solar units. Subsidy to rooftops? What? Yes, a subsidy goes to rooftop solar unit holders.

Subsidy to small user households is 67% of the costs. Small industries enjoy a subsidy up to 42%. Religious customers enjoy a 20% subsidy. No wonder why some temples and churches do not switch off their garden lights at all. So, when all put together, in essence, subsidy receivers are about 6.6 million customers.

Rooftop Solar Units

The households, with rooftop solar units, are latest addition to subsidy recipients. In the night they consume. In the day, they produce. So, the consumption at night should be paid for just like any other customer. Production during the day must be separately compensated by paying for that production. Buy, you pay: produce, you are paid.

Assuming a household, with a rooftop solar, unit draws 300 units from the grid per month, it should pay a calculated fixed cost of Rs 3,240 per month. Now, the PUCSL has said they, too, would pay the minimum fixed charge, which is Rs 120 per month, the same rate paid by a low-user household which finds it hard to make ends meet and uses only 30 units of electricity per month. The collective amount of subsidy given to rooftop solar unit users, by charging them a poor-man’s fixed charge alone, is Rs 1,500 million per year, which is adequate to subsidise one million households of lowest-user category, if the government so desires!

A free market for electricity?

What is required is a free market for electricity producers in which, once connected to the grid, any person can buy or sell electricity measured through two-way meters. In the same sense, customers can go off-grid, and request the CEB or the LECO to cut off your supply permanently. There are many who ‘think’ but not ‘calculate’, electricity can be produced cheaper at home or the factory. There is no legal barrier at all for such persons to ask for a voluntary, permanent disconnection from the grid.

Sri Lanka’s national average costs of electricity, this year, are Rs 1,400 per month per customer (fixed cost), plus Rs 22 per unit of energy costs. In an ideal market, after paying the fixed cost (because they are consumers), any person can join the ‘market’ and sell below Rs 22 if the customer has a cheaper source, and buy at Rs 22, if the customer has no cheaper source to produce electricity.

The emergence of a free market for electricity may take several years to come, or may never be a reality, if all customers eternally ask for subsidies, and producers eternally ask for preferential rates, and the CEB, the LECO and the PUCSL are not transparent as regards who subsidises whom.

Samurdhi and IRD, all in one

Customers, producers, governments (and the Opposition, too) and even some economists continue to consider, and act, as if electricity pricing calculations (by the CEB and the LECO) and approvals (by the PUCSL) had to be done to partially do the jobs of (a) the Samurdhi Authority (delivering social subsidies), (b) Inland Revenue Department (taxing the rich) and now (c) the Tourism Development Authority (subsidising hotels to tide over during the current crisis). Such unquantified ‘short-circuiting’ of funds will continue to aggravate the woes of the electricity industry, providing the electricity suppliers and ministers an eternal avenue for excuses for why the industry is making financial losses.

There is no harm in using the electricity bill to deliver subsidies, as allowed in the Electricity Act 2009 and the Energy Policy (2019), provided the CEB and the LECO promptly invoice the Treasury for the subsidy at the end of the month; the PUCSL facilitates the process, and the Treasury promptly pays the invoice, leaving no excuses for the CEB to report losses, at year end.

What is happening at present? The amount of subsidy, or surcharge, in the bill is not known, and the Treasury is not invoiced. Then, after years of reporting losses, the Treasury says: “We will pay a portion of your outstanding fuel bill of power plants, directly to the CPC!”

Fancy speeches, in Parliament, serve no purpose unless this 30-year-old problem is clearly identified, professionally quantified, treated and resolved, once and for all. Then demand performance from electricity suppliers!