Power and energy sector : When small interventions can have positive outcomes
Focusing attention on the prevailing financial crisis, I forecasted that the financial crisis will lead to an economic crisis and as a result an energy crisis by March 2022 in my budget speech on November 17, 2021. I further elaborated and predicted that a people’s uprising will occur which will defy even police barricades.
My predictions came true with the President being ousted by a “direct people’s action” which arose as a direct result of the energy crisis.
Power is of paramount importance in all economies. Destabilisation in the power and energy sector will lead to political destabilisation. This was the case in Lebanon, Greece, Pakistan, and other countries in the recent past. I wrote a book, “Power and power” (2014) to coin the theory on the co-relation between political power and physical power (energy), citing various experiences around the world and in particular Sri Lanka.
As a power and energy minister twice in Sri Lanka (2010 – 12, 2015) I realised that the political elite, criminal bureaucratic elements and power sector oligarchs work in unison and siphoned off big money from the Ceylon Petroleum Corporation (CPC), Ceylon Electricity Board (CEB) and finally from the consumers’ pockets.
In the meantime, the public perception is that the CPC and CEB are corrupt organisations and they burden the national economy. Hence, privatisation is the only solution. In 2015 I demonstrated once the manipulation of politicians is removed, these two organisations could be transformed into financially and economically viable organisations.
Sri Lankans enjoy some stability in the power sector now. The price hike, low consumption enforced through QR code and low forex availability created this uneasy, temporary equilibrium.
What next?
Once we start repaying the restructured debt and lift import restrictions this equilibrium will change. More importantly if the government decides to restructure domestic debt (defaulting domestic debt to our creditors) our financial systems may shake. Unless the CBSL and government take necessary steps to protect the stability of financial institutions, we will see a peoples’ uprising again.
President Wickremesinghe’s energy policy is an extension of what he implemented in 2002 -2004 period as a Prime Minister. At that time, his main focus was to unbundle the two key institutions; CEB and CPC and introduce an independent regulator, PUCSL. His plans were partially implemented and thereafter abandoned.
The Government is now under an IMF programme. One of the main areas the IMF emphasises is the power and energy sector. This means restructuring of CEB and CPC and related institutions. The IMF programme envisages the following (2022 -2023)
Cost recovery of fuel (monthly) and electricity (bi-annual) A pricing formulae should be implemented Comprehensive strategy to restructure balance sheet of CEB and CPC. Prompt publication of audited financial statements (CEB, CPC and SOEs in general) Prohibition of forex borrowing Reviewing the framework for selecting (Board members) managers (CEB, CPC and 52 A grade SOEs in general)
Fiscal transparency - Online transparent platforms to be established to enhance visibility of public debt, procurement contracts (Fuel and coal) and the exemptions (CEB CPC and other SOEs) Generation and transmission cost of CEB should be reduced.
There is no mention of privatisation. So it is now clear that the Government is selectively implementing some of the IMF programme proposals and ignoring some others and more importantly introducing a new set of proposals.
It is no doubt that the state sector organisations should be re-organised and restructured. So should its workforce (1.4 m). But it should be done in a scientific manner by way of conducting management audit and work audit. Then we could decide which SOEs should be closed down which are to be amalgamated, which SOEs should be scaled down and which SOEs to be privatised. Every organisation should have an ICPI system and appraisal system. On the other hand, work audit may give us essential and non-essential staff requirement. Then we can introduce a VRS system, early retirement system, new recruitment criteria etc. On top of that, appraisal systems to evaluate each government service are a must.
The Government has already decided to further liberalise the fuel import and dissemination system. Three new players have been already identified.
Although new players may lift the forex burden, in short term (180 days probably) forex repatriation is still a serious problem for a genuine investor (Geo political intervention is a diffident matter)
The fuel sector does not have a regulator. PUCSL should be empowered to regulate all 5 fuel suppliers. But on the other hand, the government is trying to weaken the PUCSL. There should be an open competition for fuel pricing.
State minister for finance recently declared the amounts of accumulated losses of SOEs including CEB and CPC. But the truth is that government took a large portion of money from the CPC (and to some extent from the CEB) as taxes.
The Government and the regulator should not allow energy cartels to be formed and black mail the government and country. This was evident during Mrs Bandaranaike’s tenure in 1961 which resulted in the nationalisation of fuel companies.
If we liberalise the fuel markets, competition should prevail, and a powerful regulator must exist. If not it will be a disastrous experience than the current CPC.
The Government has decided to unbundle CEB as well. Independent cost unit/ components may be formed according to the committee report -- six generation units, two transmission units, 4 distribution units and a few other units to run the CEB-owned assets and subsidiaries.
Most professionals may agree that CEB should have four distribution companies similar to LECO (CEB subsidiary).The problem is the consumer is restricted to one choice in his living area. Only one electricity supplier exists. In the meantime, the ministry may introduce the WHEEKING PRINCIPAL where a consumer can buy from a particular independent power producer by minimal understanding. So, it is a limited open market.
In order to have open modern electricity market, separate generation companies can use existing transmission / distribution network and sell their electricity via online market. That type of modern electricity market is still not proposed.
The Government planned to form separate three companies for Laxapana, Mahawelli and Samanalawewa complexes. It is inappropriate to run these entities by a private operator. Why? Sri Lankan citizens have already paid the capital expenditure for these entities and they are multipurpose entities. ( Drinking water, individual water, irrigational water supplies). Our power system’s frequency regulation is solely done by these entities. So it’s a vital part in system stability. Even Margret Thatcher refused to privatise nuclear plants citing National security and National need. Everyone agreed on no subsidy for fuel and electricity pricing. Now it is obvious that international prices (Coal, Fuel, Gas) are much less than a year ago. But the Government is still maintaining the artificial high prices for coal and fuel. At least the Government should publish their pricing formula with respect to international pricing and procurement criteria so that people may know the real situation.
Sri Lanka should diversify and curtail the energy sector over dependence on coal diesel and petrol. In 2015 as a subject minister, I unveiled a strategy to diversify the energy sector and how to achieve self sufficiency in the energy security. As a short-term measure the Government should introduce LNG, NG to the power sector and transport sector. Long term measure could be the upstream development of petroleum products in the Mannar basin.
Existing SUVs and motor cars should be exchanged for EVs (electric vehicles). An attractive time of use tariff should be declared during off peak time (9.30 pm – 4.30 am). Availability of rapid charging systems are also needed on roadsides. Extract 2500mw of renewable (wind solar) energy as per the plan prepared by the CEB immediately.
Furthermore wind energy to hydrogen energy and exportation of energy to India should be done in a competitive and transparent manner ( 2023 to 2032).
Refinery should be refurbished at a minimum cost ( as we prepared in 2015) so that its efficiency and availability are enhanced. (Bearing in mind that almost all the big car producers will stop making fossil fuel engines from 2030 to 2035 onwards ) – 2023 -2027
Public transport should be enhanced. New low floor bus fleet should be introduced in urban areas recommencing the bus priority lanes. Modernising the railway department,re-organising the public and private bus fleet as per our plan envisioned in “sahasra” programme 2023 -2025.
Launch a data platform integrating railways, buses, three wheelers, private cars motor bikes etc. and digital payment platform (mobility as a service) 2023).
If we genuinely attempt to implement the above short-term proposals there is no need to have mega or big scale investments,
Small interventions may result in beautiful outcomes.