- Electricity tariff impacted by energy purchase models
Sri Lanka’s electricity sector is once again under scrutiny, as the recurrent challenge of securing affordable and reliable fuel for thermal power plants comes back into focus.
Despite legal reforms aimed at breaking the Ceylon Petroleum Corporation’s (CPC) monopoly, the Ceylon Electricity Board (CEB) continues to face rising generation costs, unclear fuel agreements, and regulatory pressure to adopt transparent procurement practices, it is learnt.
Meanwhile, engineers at the CEB’s Thermal Complex power plants argue that opening fuel procurement to international competitive bidding could deliver immediate financial savings and improve transparency.
Competitive bidding as a necessity
On 18 August, engineers from the CEB’s Thermal Complex plants submitted a formal request to the Ministry of Energy, urging authorisation of international competitive bidding for fuel procurement. Their arguments emphasised three interlinked priorities: cost efficiency, energy security, and governance.
According to their request letter, fuel accounts for approximately 85% of the CEB’s generation costs. In 2023, the board spent Rs. 109 billion on fuel oil; in 2024, this fell to Rs. 81 billion. The engineers assert that even a modest 10% saving through competitive international procurement could translate into Rs. 8–10 billion annually, directly benefiting consumers and alleviating financial pressures on the board.
They argue that the CPC’s monopoly distorts pricing and erodes efficiency. Unlike petrol and diesel, naphtha and Heavy Fuel Oil (HFO) prices are not publicly published. The CPC also imposes pipeline measurement protocols that make the CEB liable for losses or leakages, transferring operational risk unfairly. The engineers cite instances where the CEB was outbid in CPC tenders despite offering higher prices, pointing to opaque contract award practices.
From a governance standpoint, the engineers note in their letter that international and regional suppliers — particularly India — could provide fuels at lower cost and higher quality, including low-sulphur HFO and high-grade diesel.
Opening procurement to competition would, in their assessment, align with legal mandates under the Petroleum Products (Special Provisions) (Amendment) Act No.27 of 2022 and international best practices, while fulfilling International Monetary Fund (IMF)-recommended governance reforms.
Infrastructure and technical constraints
The CPC has rejected allegations of obstruction. According to the corporation, the issue is logistical rather than political.
Existing pipelines do not support naphtha transport from the Colombo Port to the Kelanitissa Power Station; the crude oil pipeline from Colombo to Sapugaskanda is designed for heavy crude and cannot accommodate lighter fuels. To enable international imports, substantial investments in new pipelines, storage tanks, and handling infrastructure will be required.
Commenting on the matter, CPC Managing Director Dr. Mayura Neththikumarage told The Sunday Morning that there appeared to be a misunderstanding, noting that the CPC was not blocking international competitive bidding or any related process.
According to him, neither he, the Chairman, the Vice Chairman, nor any other executive has raised such an objection. Instead, the point the CPC has highlighted is simply that electricity generation using thermal fuel is inherently expensive, regardless of the fuel supplier or procurement method. He stressed that this was not a CPC-specific issue.
“At a recent discussion, I raised only a technical question regarding logistics – specifically, from where and how the fuel would be unloaded and transported. For instance, there is no dedicated pipeline to carry naphtha from the Colombo Port to Kelanitissa. The existing pipeline network runs from Sapugaskanda to Kelanitissa, but that is meant for other products.
“The crude oil line from Colombo to Sapugaskanda cannot be used for naphtha, as it is designed for heavy crude, with a very large capacity and incompatible infrastructure. No country in the world uses crude pipelines to pump naphtha,” he explained.
He added: “If Kelanitissa is to continue using naphtha, the CEB would need to invest heavily in new infrastructure, including pipelines and storage tanks, which is not practical. Moreover, many of these thermal plants only use diesel for start-up, not for continuous generation.
“The broader solution is not to invest in more thermal fuel infrastructure, but to transition towards cheaper and renewable energy sources. In fact, Kelanitissa itself is planned to be converted to Liquefied Natural Gas (LNG) in the future, with the pipeline owned by the CPC and managed jointly with the CEB.”
Dr. Neththikumarage emphasised that the CPC’s position was clear, noting that this was a matter of national interest and that the focus should be on sustainable energy solutions rather than expanding expensive and outdated fuel-based generation.
Financial pressures
The lack of finalised fuel supply agreements directly affects the CEB’s financial position. According to the Public Utilities Commission of Sri Lanka’s (PUCSL) consultation document on the third electricity tariff revision for 2025, the CEB’s finance costs between October and December are projected at Rs. 7,830 million, an increase of Rs. 2,484 million from earlier forecasts.
The primary driver is higher capital repayments on term loans. The CEB was able to obtain only Rs. 53.5 billion of the planned Rs. 70 billion for repaying legacy debts, leaving unrestructured portions to accrue interest and increase finance costs.
According to the consultation document, breakdowns show Rs. 1,714 million for term loan interest, Rs. 638 million for overdraft interest, Rs. 471 million for debenture interest, and Rs. 4,305 million for capital repayment. Notably, delay interest on Non-Conventional Renewable Energy (NCRE) payments rose sharply from Rs. 75 million to Rs. 683 million, underscoring the growing cost burden of delayed financial restructuring.
Fuel cost assumptions for October–December are also critical. The CEB projects coal prices between Rs. 42.15 and 42.36 per kilogramme, while fuel oil, naphtha, and diesel are assumed constant at Rs. 177, Rs. 141, and Rs. 289 per litre, respectively.
Coal prices reflect actual and forecast market values, while liquid fuel prices remain dictated by the CPC. Delays in formal procurement agreements increase exposure to price fluctuations and regulatory scrutiny, creating a direct link between procurement strategy and consumer tariffs.
Regulatory oversight
The PUCSL has consistently emphasised the necessity of transparent procurement processes.
When contacted, PUCSL Director General Damitha Kumarasinghe said that as the regulator, the commission had consistently emphasised to the CEB the importance of establishing a transparent fuel purchasing agreement — whether with the CPC or any other supplier — and of adopting competitive procurement processes to ensure transparency.
Legally, the CEB’s position is strengthened by the Petroleum Products (Special Provisions) (Amendment) Act No.27 of 2022, which removed the CPC’s monopoly and allowed third-party access to pipelines and storage. The law authorises the Minister of Energy to license qualified suppliers, explicitly enabling competitive procurement.
The IMF’s Governance Diagnostic Report (September 2023) identified non-competitive procurement as a structural weakness in public enterprises and recommended adoption of a national procurement law.
Domestic guidance reinforces this: the Secretary of the Ministry of Energy instructed the CEB to initiate competitive bidding through letter PE/01/46 of 7 October 2024, while Supreme Court rulings confirm that monopolistic procurement fosters corruption and violates constitutional principles.
Despite the legal framework, the CEB remains constrained by infrastructure limitations and reliance on CPC-controlled pipelines, creating tension between statutory entitlement and practical feasibility.
Fuel quality is another point of contention. CPC-supplied HFO frequently fails to meet Original Equipment Manufacturer (OEM) specifications and calorific values are not certified. Engineers argue that this results in higher specific fuel consumption, increased operations and maintenance costs, and reduced plant efficiency.
Past tenders illustrate the risks of relying solely on the CPC; even when the CEB bid higher prices for naphtha, contracts were awarded elsewhere, raising questions about transparency. Regional and international suppliers, in contrast, can provide higher-quality fuels that improve operational efficiency, reduce emissions, and enhance energy security.