Renewable energy projects: Questions over special tariff rates

• Local industry concerned new investors will be discouraged
• Data used by Govt. to calculate rates misleading: SIA Secretary 
• Says Treasury bills more attractive than investments
• SLSEA grants preliminary approval for 234 MW Adani renewable projects

By Maheesha Mudugamuwa

The national power sector has alleged that the Government was attempting to pave the way for Indian investor Adani to set tariffs for its solar and wind projects in Mannar and Pooneryn at a higher rate by introducing a fixed purchase tariff on a 20-year agreement, The Sunday Morning learns.

It is learnt that Cabinet approval had already been received for the Renewable Energy (RE) purchase tariff for the year 2022 submitted by Power and Energy Minister Kanchana Wijesekera, which has subsequently been forwarded to the Finance Ministry for opinions.

The tariffs have been reviewed by an eight-member committee appointed by the Power and Energy Ministry. 

The committee comprises Ministry of Power and Energy Additional Secretary A.K.N. Wickramasinghe as the Chairman, along with Ministry of Power and Energy Additional Secretary (Generation, Transmission and Distribution) L.K. Sugath Dharmakeerthi, Ceylon Electricity Board (CEB) Deputy General Manager (Renewable Energy Procurement and PM), K.K.P. Perera, Ministry of Finance Department of Public Enterprises Additional Director General H.M.S. Dharmawardane, CEB Deputy General Manager (Energy Purchase) G.W. Vajira Priyantha, Public Utilities Commission of Sri Lanka Director General Damitha Kumarasinghe, SLSEA Deputy Director General (SSM) H.A. Vimal Nadeera, and Central Bank of Sri Lanka Senior Economist M.M.L.K. Wijerathne.

Developers dissatisfied

Even though there is a visible increase in rates compared to the present rates, local renewable energy developers have expressed their dissatisfaction with the suggestions made by the committee, alleging that the present tariffs suggested by the Government would prevent any new developer coming forward to invest in the renewable energy sector.

Speaking to The Sunday Morning, Solar Industries Association (SIA) Secretary Lakmal Fernando stressed that there wouldn’t be many developers willing to invest in the solar industry at the given tariff rates.

“In the current context, the parameters that they have taken considering these tariffs are incorrect. When the Treasury bills are running at 32%, who would want to invest in a solar project that is going to give them a possible return of about 18%? What they have calculated on Return on Equity (ROE) is 18.14% and the average they have taken is 17.13%. Further, they have taken the interest rate at 16.46%. But at present, rates at banks are over 30%. 

“When you take bogus numbers like these and put them into a formula, you achieve a completely false number – that is the problem. None of these numbers that they have taken are going to be attractive to any banker or investor,” Fernando stressed.  

Two key issues

When asked about the parameters that solar developers had disagreed with, Fernando explained that there were two main parameters – grid outage and interest rate.

“Before the power shedding, the average grid outage was at 3%. This 0.5% will have to be changed to 3%. Then the interest rate – they have taken it as 16.46%, although you will have to pay at least 90% more for this as the interest rate,” he stressed.

Fernando continued: “The committee has taken the Return on Equity at an average of 18.14%. When you can invest in Treasury bills for a return of 30%, why would people invest in such an industry in expectation of lower returns? These are basic things that we need to discuss and solve. The construction cost is not appropriate at all. When the correct numbers go into the equation, a new number comes out. That cannot be a diminishing tariff, but should be a levelised tariff.”

Mini-hydro developers up in arms

It is not only the solar developers who are unhappy with the recent tariff suggestions, but the mini-hydro developers as well.  

Speaking to The Sunday Morning, Small Hydro Power Developers Association (SHPDA) Chairman Prabath Wickramasinghe said that in a context where the country required more renewable energy projects, since such projects appeared to be the only means of bringing the country out of the energy crisis, they were disappointed with the Government’s tariff suggestions.

“We have been asking for a 30-35% higher tariff than what was declared to develop the sector. We were not even given a hearing to present our case to the tariff committee. What we have been asking for is a flat tariff of around Rs. 40 for mini-hydros. What they have given is a three-tier tariff, which has a higher tariff in the first eight years. After that it drops down to around Rs. 15-20, which would ensure minimal returns to the developer. As a result, there won’t be many projects coming in.”

Committee stands its ground

Nevertheless, the committee in its letter to the Ministry of Power and Energy Secretary on the committee review has stated that the annual interest rate had been calculated on the basis of the Average Weighted Prime Lending Rate (AWPLR) plus 3% margin and that the committee had explored the present trend and variations of the lending market and obtained the present rate on the basis of providing loans for RE projects from banks.

The committee had noted that it had compared the previous method of calculation of interest rate with the present market rates. Further, the committee said it had noted the market variations and present interest rates applicable for RE projects. Accordingly, it had recommended utilising the present calculated interest rate of 16.46% (AWPLR of the last six months) for the calculation of tariffs for the year 2022.

The committee had noted the development of the RE industry in the past and the private sector investments to achieve the RE targets set by the Government. Further, local value additions and technology transfers to uplift local engineering and technical skills have also been considered. In view of the above and to achieve the RE targets set by the Government while keeping the required momentum of the local industry, a fixed Return on Equity of 18.14% for 15 years and 17% ROE after 15 years have been provided. 

However, the committee had noted that the industry had developed, unlike its situation in the period of 2007-2014. Hence, the committee had decided to provide an ROE rate based on the 12-year Treasury bond yield rate with a reasonable margin. The latest 12-year Treasury bond yield as published by the CBSL is 13.14% (as of 2 March 2022) and the margin is 5%. Accordingly, ROE considered over the 15-year period is 18.14%.

Further, in its review, the committee had noted that it was not the best time to formulate the Standardised Power Purchase Agreement (SPPA) tariff, which is to be applied for a 20-year horizon due to the very volatile economic situation in the country, causing the exchange rates, interest rates, and inflation rates to show sudden sharp increases.

Therefore, the committee had recommended adjusting the tariff (after signing the SPPA) after each operational year to reflect the latest available cost of debt. This will provide some redress to both the purchaser as well as the seller as the most recent cost of debt will be applied. It was further noted that the prevailing average selling price of electricity by the CEB per kilowatt hour is Rs. 16.23, whereas the energy purchase tariff of all above declared technologies are very much above the average selling price of the utility.

The committee had stressed that therefore, it was very clear that the utility could not apply these tariff values for electricity purchase from RE power plants if the utility (CEB) were to operate as a commercially viable entity. 

While the committee recommended applying the above calculated tariff rates for the purchase of electricity from RE sources to encourage more RE power plants to be built, appropriate measures need to be made to either increase the electricity sales tariff appropriately or cess/taxes for fossil fuel products need to be applied to compensate the CEB appropriately to cover excess expenditure.

Ministry stands firm

When contacted by The Sunday Morning, Power and Energy Ministry Secretary M.P.D.U.K. Mapa Pathirana said he was unable to comment on the tariff proposals until an opinion was given by the Finance Ministry. 

However, responding to the allegations levelled by renewable energy developers, the Secretary stressed that the committee had been appointed to look into the issues faced by the developers and therefore there was no necessity to consult it again. 

“The decision to revise the current tariffs was taken following the concerns raised by the developers,” he said. 

Elaborating further, Pathirana said: “This is what happened in the past and things got dragged out because somebody would always come out and say that they didn’t agree with something. We can’t work like this. We have listened to their grievances and that’s why the committee was appointed. Therefore, there is no need to go and meet them again.”

Enter Adani Green Energy 

In the meantime, the Sri Lanka Sustainable Energy Authority (SLSEA) has granted preliminary approval to Adani Green Energy SL Ltd. for the declaration of the development area as a renewable energy development area under Section 12 of the Sri Lanka Sustainable Energy Authority Act No. 35 of 2007.

In a letter dated 7 July 2022 with ref no: SEA/RFP/A-41640, the SLSEA Chairman has informed the Director of Adani Green Energy SL that upon the receipt of the technical feasibility on 24 May 2022 from Adani and as per clause 3(2) of the MoU dated 11 March 2022 to set up 500 MW renewable energy power plants (wind and solar) in Mannar and Pooneryn of an investment approximating $ 442 million, the authority granted the preliminary approval and declared the development area as a renewable energy development area.

According to the SLSEA, the approved capacity for Adani is 234 MW. 

Furthermore, it is stated that the SLSEA is in the process of carrying out the necessary steps to complete the resource allocation for the proposed project adhering to all legal and other relevant formalities.

Further, the authority has informed Adani that it had already informed the transmission licensee and energy regulator and other stakeholders to fulfil their legal obligations.  

Proposed tariffs opposed

Prior to the tariffs being reviewed, the Sri Lanka Electricity Act was amended in June to eliminate competitive bidding for energy projects. The move drew sharp criticism from the Opposition as well as the engineers attached to the CEB.

The CEB engineers who spoke to The Sunday Morning claimed that the only foreign investor willing to invest in the country’s renewable energy sector would benefit from the recent tariffs introduced by the Ministry.

They also claimed that the tariffs for 20 years had been determined during a very turbulent period in the economy, where the dollar rate was at around Rs. 360, which may fall within a few years, although these high rates would be paid for the next 20 years.

A senior engineer attached to the CEB, who wished to remain anonymous, stressed that the tariffs that would be decided regarding mega-scale projects such as Adani investments would be based on the tariffs that were going to be introduced by the Government soon. “When it comes to a mega-scale project, the present tariffs are too high,” he stressed.

Meanwhile, the CEB Engineers’ Union (CEBEU) is also against the proposed tariffs for RE, claiming that there was a risk that even mega projects such as Adani would be paid at higher rates and the plant factor in Mannar and Pooneryn would be well above the considered figure of 35% in the recent committee report.  

Further, the union alleged that the past data had been taken from tendered projects and that the Act had been amended to bypass tender requirements. Attempts to reach the Ministry of Power and Energy regarding these allegations failed.

The CEBEU noted that for mini-hydro plants to be developed in Seethawaka and Samanalawewa, the actual plant factor would be close to 100%. However, as per these recommended tariffs, it would be considered as 40% and would result in paying unnecessarily high prices for those projects.

Suggested tariffs

As per the three-tier tariff options suggested by the committee, the tariffs suggested for mini-hydro, wind, solar, biomass, agricultural and industrial waste, municipal solid waste, excess power from agri/industrial waste of same industry for tier 1 (years 1-8), tier 2 (years 9-15) and tier 3 (years 16-20) are as follows: 

• Rs. 32.28, Rs. 17.52, and Rs. 11.95 for mini-hydro
• Rs. 29.79, Rs. 14.99, and Rs. 9.89 for wind
• Rs. 33.74, Rs. 16.98, and Rs. 11.21 for solar
• Rs. 17.92, Rs. 9.02, and Rs. 5.95 for biomass
• Rs. 17.92, Rs. 9.02, and Rs. 5.95 for agricultural and industrial waste
• Rs. 57.02, Rs. 28.69, and Rs. 18.94 for municipal solid waste 
• Rs. 13.44,Rs. 6.76, and Rs. 4.46 for excess power from agri/industrial waste of the same industry