The Public Utilities Commission (PUC) is currently considering a proposal for an electricity tariff increase. The Ceylon Electricity Board (CEB) has proposed an increase in tariffs to defray the loss of Rs. 59bn from the cost of producing electricity in 2013. The CEB proposal to increase electricity tariffs has brought to the forefront several economic issues with respect to the efficiency of power generation and the fiscal burden of CEB losses.
Is the increase in electricity tariffs necessitated by increasing costs of electricity generation or the fiscal problems due to losses in public enterprises? Are these losses due to increasing production costs or due to inefficiency of the CEB? Are electricity costs higher in Sri Lanka than neighboring Countries? Should electricity tariffs be based on a cost plus formula or one determined with a view to conserving electricity use so as to reduce the fuel import bill that constituted 26 percent of the import expenditure and absorbed over 50 percent of the country’s export earnings last year? Should electricity be subsidized for those who consume less electricity by reduced rates?
These are all valid questions that must be addressed in determining a pricing policy for electricity. A national electricity pricing policy that ensures efficiency in power generation, reduces the fiscal burden, conserves electricity usage and is equitable to consumers should be determined without undue haste.
Is the increase in electricity tariffs necessitated by increasing costs of electricity generation or the fiscal problems due to losses in public enterprises? Are these losses due to increasing production costs or due to inefficiency of the CEB? Are electricity costs higher in Sri Lanka than neighboring Countries? Should electricity tariffs be based on a cost plus formula or one determined with a view to conserving electricity use so as to reduce the fuel import bill that constituted 26 percent of the import expenditure and absorbed over 50 percent of the country’s export earnings last year? Should electricity be subsidized for those who consume less electricity by reduced rates?
These are all valid questions that must be addressed in determining a pricing policy for electricity. A national electricity pricing policy that ensures efficiency in power generation, reduces the fiscal burden, conserves electricity usage and is equitable to consumers should be determined without undue haste.
Hydro electricity
For about three decades after independence the country relied almost solely on hydroelectricity. The cost of electricity generation from water was low, especially as the capital costs are generally not considered in the estimate of such costs. This was so till the middle 1970s when there was an increase in electricity consumption in the post liberalisation era. In the 1980s, even though there was new hydro generation capacity after the Accelerated Mahaweli Development program, the rate of increase in electrify consumption increased more rapidly than the increase in power generation. In the 1990s power shortages resulted in power cuts that disrupted economic production, especially in the industrial and services sectors.
To the credit of the present government, it has decided to not introduce power cuts that disrupt economic activities and weaken social wellbeing. Several power plants have augmented the power supply and increased thermal generation that have enabled uninterrupted power even in a year of low rainfall, as last year.
In the last decade hydroelectricity has accounted for only about 40 to 50 percent of total electricity generation. With the decrease in the proportion of electricity generated by hydro power plants, and increased thermal generation of electricity the unit costs of power generation has risen sharply. This is particularly so in years of low rainfall, as last year when at the beginning of the year drought conditions reduced hydro generation sharply. The increase in costs of generating electricity has been further increased owing to the higher costs of petroleum imports owing to the ban on Iranian exports of oil.
For about three decades after independence the country relied almost solely on hydroelectricity. The cost of electricity generation from water was low, especially as the capital costs are generally not considered in the estimate of such costs. This was so till the middle 1970s when there was an increase in electricity consumption in the post liberalisation era. In the 1980s, even though there was new hydro generation capacity after the Accelerated Mahaweli Development program, the rate of increase in electrify consumption increased more rapidly than the increase in power generation. In the 1990s power shortages resulted in power cuts that disrupted economic production, especially in the industrial and services sectors.
To the credit of the present government, it has decided to not introduce power cuts that disrupt economic activities and weaken social wellbeing. Several power plants have augmented the power supply and increased thermal generation that have enabled uninterrupted power even in a year of low rainfall, as last year.
In the last decade hydroelectricity has accounted for only about 40 to 50 percent of total electricity generation. With the decrease in the proportion of electricity generated by hydro power plants, and increased thermal generation of electricity the unit costs of power generation has risen sharply. This is particularly so in years of low rainfall, as last year when at the beginning of the year drought conditions reduced hydro generation sharply. The increase in costs of generating electricity has been further increased owing to the higher costs of petroleum imports owing to the ban on Iranian exports of oil.
Increasing costs
In spite of this the government continued providing uninterrupted electricity despite the higher costs. This is in contrast to our neighboring countries that have introduced power cuts to reduce electricity consumption. While increased thermal generation of electricity is undoubtedly one reason for the proposal to increase electricity tariffs, there are questions of efficiency in the administration and policy options adopted by the CEB in the use of fuels.
Quite apart from the usual inefficiencies of public enterprises such as the higher number of employees than needed, inefficiency of workers and staff and issues of the work ethics of CEB employees, there are more technical issues that have been pointed out by energy specialists from time to time. In these circumstances the proposal to increase tariffs must be considered after a thorough study of the CEB’s costs of producing electricity.
It appears that CEB has not operated in the most cost-effective manner. For instance experts claim that the hydro electricity plants have not been operated in an optimum manner even in years of normal rainfall when there has been a lower than potential use of hydro power plants that have resulted in greater dependence of thermal power than needed. This would have increased the average costs of production of a unit of electricity. It has been pointed out that there is potential to save billions of rupees during years of normal rainfall if the hydro plants are operated in an optimum manner.
Furthermore, the operation of CEB’s key thermal plant at low efficiencies for long periods without taking prompt remedial measures has increased costs of electricity generation. Further, there is potential to save several billions of rupees annually by switching from auto-diesel to imported naphtha for the operation of CEB’s Combined Cycle Gas Turbine (CCGT) plant. Similarly, the Kerawalapitiya CCGT plant it is suggested could switch from furnace oil to naphtha for cheaper and cleaner operation while improving the plant factor and complying with environmental regulations.
In addition to these proposals, it is suggested that another way of improving the efficiency of the system is to break the present monopoly vested with the CPC for importing petroleum fuel for bulk users and the freedom given them to handle the import of fuel they need by themselves.
In spite of this the government continued providing uninterrupted electricity despite the higher costs. This is in contrast to our neighboring countries that have introduced power cuts to reduce electricity consumption. While increased thermal generation of electricity is undoubtedly one reason for the proposal to increase electricity tariffs, there are questions of efficiency in the administration and policy options adopted by the CEB in the use of fuels.
Quite apart from the usual inefficiencies of public enterprises such as the higher number of employees than needed, inefficiency of workers and staff and issues of the work ethics of CEB employees, there are more technical issues that have been pointed out by energy specialists from time to time. In these circumstances the proposal to increase tariffs must be considered after a thorough study of the CEB’s costs of producing electricity.
It appears that CEB has not operated in the most cost-effective manner. For instance experts claim that the hydro electricity plants have not been operated in an optimum manner even in years of normal rainfall when there has been a lower than potential use of hydro power plants that have resulted in greater dependence of thermal power than needed. This would have increased the average costs of production of a unit of electricity. It has been pointed out that there is potential to save billions of rupees during years of normal rainfall if the hydro plants are operated in an optimum manner.
Furthermore, the operation of CEB’s key thermal plant at low efficiencies for long periods without taking prompt remedial measures has increased costs of electricity generation. Further, there is potential to save several billions of rupees annually by switching from auto-diesel to imported naphtha for the operation of CEB’s Combined Cycle Gas Turbine (CCGT) plant. Similarly, the Kerawalapitiya CCGT plant it is suggested could switch from furnace oil to naphtha for cheaper and cleaner operation while improving the plant factor and complying with environmental regulations.
In addition to these proposals, it is suggested that another way of improving the efficiency of the system is to break the present monopoly vested with the CPC for importing petroleum fuel for bulk users and the freedom given them to handle the import of fuel they need by themselves.
Conclusion
A revision of electricity tariffs should be adopted only after all the issues regarding cutting down losses, improving plant efficiencies and switching to more economic fuels are considered. The foregoing discussion makes it clear that there is a need for a full fledged technical commission to determine the country’s energy pricing policies so achieve desired national objectives. As there is an immediate need to revise tariffs due to fiscal problems of the government, such a revision should be valid only for a short period of a few months till a comprehensive report is published by duly appointed energy commission.
Source : The Nation
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