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Power and energy: Questions over changing price formulas

Power and energy: Questions over changing price formulas

29 Oct 2023 | By Maheesha Mudugamuwa

  Sri Lanka finds itself at a crossroads as proposed changes to fuel and electricity pricing formulas ignite controversy.

Power and Energy Minister Kanchana Wijesekera’s plan to shake up the status quo by instituting quarterly adjustments to electricity tariffs, as opposed to the prevailing biannual revisions, has set off a wave of debate. In a parallel move, a new daily fuel price formula is on the horizon, designed to provide clarity and international alignment. 

However, these reforms have ignited concerns within the Finance Ministry, where a senior official, speaking on condition of anonymity, has raised doubts about their practicality. The concern is that changing the existing formulas could lead to public confusion, further muddying the economic waters. 

Significantly, these changes are envisioned to ensure the autonomy of Government entities – the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) – which are expected to be self-sustaining. While the Government pushes for transparency, the devil is in the details and making factors contributing to pricing public could add complexity. 

On the contrary, the Minister argues that this shift aims to address common misconceptions regarding the CEB’s authority to revise tariffs.

However, the Finance Ministry has yet to receive official communication about these changes.

The Finance Ministry’s primary concern is to maintain the financial independence of two critical Government entities: the CPC and the CEB. These entities are expected to cover their own expenses and any proposed changes need to be practical.

To address these concerns, the senior official suggested that should a daily pricing formula be introduced, the factors contributing to the price formula should be made publicly available daily. This would empower the public with the information necessary to understand fuel price and electricity tariff fluctuations. 

The current electricity tariff, effective from 20 October 2023 to 30 June 2024, has been approved with an 18% increase by the Public Utilities Commission of Sri Lanka (PUCSL). This follows two previous tariff revisions in August 2022 (75% increase) and February 2023 (66% increase), aimed at easing the CEB’s financial challenges.

Minister Wijesekera plans to create a cost-effective electricity tariff formula in collaboration with energy experts. This complex formula will consider various factors such as fuel prices, power generation costs, energy mix, taxes, exchange rate fluctuations, and overhead expenses. The Minister intends to make all these factors and the fuel formula mechanism public after finalising them. 

The recently-approved 18% rate adjustment in electricity tariffs, effective from 21 October, aligns with the Government’s policy framework in conjunction with the International Monetary Fund (IMF). However, concerns loom over hydroelectricity production targets for 2023, as reservoir capacity utilisation has decreased by 20% compared to the previous year. 

Financial challenges 

Before the recent tariff hike, the CEB was grappling with significant financial challenges, struggling to secure funds for its diverse energy sources, including coal, petroleum, and renewable energy. The CEB is projecting a staggering loss of nearly Rs. 33 billion by the end of this year, necessitating urgent measures to alleviate its financial burdens. 

Highlighting the magnitude of accumulated losses over the years, the CEB Chairman emphasised that from 2013 to September of the previous year, the CEB had incurred a cumulative loss of Rs. 447.5 billion. In 2022 alone, losses amounted to a daunting Rs. 167 billion, underscoring the severity of the situation. The recorded loss for 2022 alone is Rs. 167 billion, with an additional Rs. 30.7 billion loss in the initial months of 2023, specifically January and February. 

TUs against daily price revisions

Trade Unions (TUs) associated with the petroleum sector have voiced their concerns against the Minister’s proposal for daily price revisions. They argue that daily adjustments do not suit Sri Lanka, given its low per capita income and the ongoing economic crisis. 

Energy Trade Union (ETU) Convener Ananda Palitha suggests that rather than daily revisions, removing the current Rs. 50 tax from fuel prices could make them more competitive and beneficial for consumers. 

The CPC had increased prices in its latest adjustments, including a Rs. 13 increase for octane 92 petrol, a substantial Rs. 42 increase for octane 95 petrol, a Rs. 35 rise for auto diesel, and a Rs. 1 increase for super diesel. Kerosene oil also saw a Rs. 5 hike under CPC pricing. However, Sinopec Lanka provided some relief to consumers by offering slightly lower prices, making them more competitive for most fuel types.

Opening SL’s petroleum market 

Sri Lanka’s decision to open its petroleum market to international players is driven by the urgent need to secure approximately $ 500 million monthly for fuel imports amid severe foreign reserve and currency crises.

This strategic move has led to significant agreements with prominent international petroleum companies, with Sinopec being the first to sign in May. RM Parks Inc., in collaboration with Shell, followed suit on 8 June.

The selection process, which began in October of the previous year, shortlisted 13 foreign companies from 26 proposals received in response to Expressions of Interest (EOIs). These EOIs were sought from reputable petroleum companies operating in oil-producing countries to establish long-term agreements for petroleum product trade in Sri Lanka.

Sinopec has already initiated its operations in Sri Lanka, but there is uncertainty surrounding United Petroleum, the Australian-based company, regarding whether it intends to proceed with the agreements. RM Parks, the US-based company, has not set a specific commencement date for operations in Sri Lanka.

No proposal submitted yet 

Contacted for their input, Deputy Treasury Secretary R.M.P. Rathnayake stated that no proposal had been submitted to the ministry yet, and that decisions must be made by individual institutions considering practicality and implementation aspects.

CEB Chairman Nalinda Ilangakoon confirmed that the ministry had not informed of any such changes to the current formula.

Meanwhile, when contacted, a senior CPC official who wished to remain anonymous told The Sunday Morning that the CPC planned to introduce daily price revisions for fuel from the second quarter of next year.

The CPC official said that certain equipment and processes needed to be put in place before the implementation of the new daily price revisions. 

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