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Cablegate: Sri Lanka: Power Sector Badly Needs Reform,

VZCZCXRO8067
RR RUEHBI RUEHLMC
DE RUEHLM #0638/01 1841136
ZNR UUUUU ZZH
R 021136Z JUL 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8356
INFO RUEHKA/AMEMBASSY DHAKA 0979
RUEHIL/AMEMBASSY ISLAMABAD 7968
RUEHKT/AMEMBASSY KATHMANDU 6140
RUEHNE/AMEMBASSY NEW DELHI 2138
RUEHKP/AMCONSUL KARACHI 2363
RUEHCG/AMCONSUL CHENNAI 8574
RUEHBI/AMCONSUL MUMBAI 6019
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 03 COLOMBO 000638


SIPDIS

STATE FOR SCA/INS, SCA/RA, AND EEB/ESC

E.O 12958: N/A
TAGS: ECON ENRG EINV KCOR KMCA PGOV CE
SUBJECT: SRI LANKA: POWER SECTOR BADLY NEEDS REFORM,
BUT GOVERNMENT LACKS THE WILL

1. Summary: The state owned Ceylon Electricity Board (CEB) is the
primary provider of electricity to Sri Lanka. The company is
plagued with inefficiencies and a spiraling debt. Sri Lanka is
dependent on petroleum products to produce 60 percent of its
electricity. The price of production is sky rocketing as the price
of crude oil has surpassed US $140 per barrel. Despite having some
of the highest prices of energy in the region, CEB continues to sell
electricity below cost. CEB needs to diversify into less expensive
sources of electricity to meet rising demand and bring down costs.
The most promising options are coal and wind power along with an
underwater transmission line that would allow India and Sri Lanka to
share electricity. Although there is a general acceptance of need
for change, powerful trade unions have prevented reform legislation
from passing parliament. End summary.

ELECTRICITY GENERATION
-----------------------

2. Sri Lanka has only two utilities in the power sector, the state
owned Ceylon Electricity Board (CEB) and the primarily state owned
Lanka Electric Company (LECO). CEB serves approximately 90 percent
of all consumer accounts and LECO the remaining 10 percent. All of
LECO's consumers are located in the western coastal townships
between Negombo and Galle.

3. In 2007, total installed power generation capacity was 2,443 MW.
The two primary sources of electricity generation are thermal and
hydro. Thermal made up 60 percent and hydro 40 percent of
electricity generated. Most thermal electricity is produced by
Independent Power Producers (IPPs) and sold to CEB, at unfavorable
rates for the state owned enterprise, before being distributed to
consumers. Thermal power is dependent on diesel and is one of the
most expensive and inefficient ways to produce electricity. Costs
are increasing rapidly as the price of fuel continues to rise.
Thirty percent of all imported fuel is used to generate electricity.
While hydro power is generally more efficient than thermal power,
it is limited by severe droughts. Sri Lanka has already developed
almost all of its economically feasible hydropower potential. There
are other sources of electricity, such as wind and solar power;
however, currently their contributions are only marginal to the
nation's power supply.

GROWING DEMAND
---------------
4. National electrification has improved drastically within the last
two decades. In 1986 merely 10.9 percent of the population had
access to electric grid; by 2005, 76.7 percent had access. The
current level is significantly higher than other South Asian
countries. The government has found it difficult to provide
electricity to many of the more remote and poorer villages. In
2002, the Eastern province Monaragala had one of the highest poverty
rates at 32.4 percent and only 32.2 percent of households had
electricity. The government also struggles to provide electricity
to the northern region, which is largely controlled by the ethnic
separatist Liberation Tigers of Tamil Eelam (LTTE). CEB continues
to provide electricity to government-controlled Jaffna and the
surrounding area using electricity not connected to the national
grid, despite costs far outweighing revenue. While the current
government has a stated goal to provide electricity to all who want
it, CEB has set a target to provide electricity for 95 percent of
all households by 2016.

5. Demand for electricity grew by an average of 6.7 percent from
1991-2000, slightly above the rate of GDP growth during the same
period. Recently, demand for electricity decelerated because of
increasing cost for tariffs. However, as the market adjusts to the
new costs for energy demand is likely to return to a 7-8 percent
growth rate. It is questionable whether CEB will be able to meet
this demand. CEB has warned the public to cut unnecessary use of
electricity and that the failure to reduce power consumption by at
least 10 percent by July 2008 could cause disruptions of service.

NEW SOURCES OF PRODUCTION
--------------------------

6. Sri Lanka must look to new sources of energy to meet growing
demand. Sri Lanka is counting on coal both to increase electricity
production and to reduce costs. The first coal power plant is
currently under constructio in Norochcholai, funded by a Chinese
government oan and built by a Chinese firm. The initial $450

COLOMBO 00000638 002 OF 003


million project is scheduled to add 300 MW to the national grid in
2011; the plan is to later expand this plant so it eventually
generates 900 MW of power. Another coal power plant of 500 MW in
Trincomalee that will be jointly owned by Indian and Sri Lankan
firms is planned for 2013.

7. The Government of Sri Lanka (GSL) is relying on the private
sector and development agencies to develop alternative sources of
energy. Currently wind power is the only significant source of
alternative energy, besides hydro, but only produces 3 MW of
electricity annually. The government has issued 40 more permits for
wind power projects that could potentially add 34 MW to the national
grid; however, almost all of these projects have been delayed for
lack of funding. The World Bank and other international
organizations have funded projects that use wind, solar and hydro
power off the national grid to provide electricity to areas where it
was previously unavailable. Micro hydro plants are particularly
well suited for Sri Lanka and are able to provide electricity to
rural communities at affordable costs. In 2007 there were 5,869
households that received energy off the grid from a cumulative
capacity 1,432 kW.

SRI LANKA-INDIA TRANSMISSION LINE
----------------------------------

8. India and Sri Lanka are exploring the possibility of an undersea
power transmission line between the two countries, as an alternative
way for Sri Lanka to meet its energy demand. Such a link would
enable Indian producers to sell their excess power to Sri Lanka at
higher rates than in India. The link would also potentially enable
Sri Lanka to sell power to India to meet the latter's peak demand
periods. India has sent a draft proposal to the GSL for the two
sides to split the cost of a $3 million feasibility study on an
underwater transmission line. The GSL hopes to sign the proposal by
August. If the feasibility study goes well, the World Bank's
International Development Agency has shown interest in funding the
project.

EXPENSIVE TARIFFS
------------------

9. The GSL restricts how much CEB is allowed to charge and how often
prices can be adjusted. In the past, CEB had been unable to
increase tariffs to offset rising capital and operational costs. In
2007, the average tariff was RS 10.56 per kWh (approximately $0.10
per kWh), while the average cost to CEB was RS 14.79 per kWh. In
order to curb further losses and to better reflect costs, in March
of 2008 CEB increased prices by 40 percent. Despite the significant
price hike, CEB is still losing an approximate average of RS 1.5 per
kWh produced.

10. There is a complex system for determining tariffs. Prices for
consumers are determined by the amount of energy used and are
assessed both by fixed and per unit charges. There are separate
price categories for different types of consumers. Generally prices
are cheaper for domestic consumers and religious purposes and more
expensive for businesses.

11. Despite tariffs in Sri Lanka not keeping up with costs,
commercial and industrial tariffs were among the highest in South
Asia in 2007. The price hike of March 2008 made tariffs even less
competitive in comparison to other countries in the region.
Observers worry high prices for electricity will deter investors,
causing firms to look to other locations with more attractive
rates.

DETERIORATING FINANCIAL SITUATION
----------------------------------
12. CEB is in a financial crisis. In 2007 its operating losses
equaled RS 21 billion ($195 million). It had a total short term
debt of RS 55 billion ($510 million) and a long term debt of RS 89
billion ($825 million) by end of 2007. CEB does not have a plan to
reduce its debt in the foreseeable future and, as it is still losing
money, its debt will only increase. Since CEB is a state owned
enterprise, taxpayers will absorb the burden of this debt. The
incentive for administrators to increase efficiency and ensure that
CEB is solvent is diminished by the belief that the state and in
turn the public will answer for their liabilities.

POWERFUL TRADE UNIONS PREVENT REFORM

COLOMBO 00000638 003 OF 003


-------------------------------------

13. Powerful trade unions have blocked reforms that would improve
the efficiency of CEB. Recently, the government attempted on two
occasions to bring a bill to parliament that would break CEB into
different sectors. Each time Marxist party-led unions, consisting
of minor CEB staff, threatened to strike, forcing the bill to be
tabled. The Asian Development Bank has offered a loan for power
sector reform, but it is contingent on passage of this bill.

14. Ceylon Electricity Board Engineer's Union (CEBEU) is the most
powerful union in CEB; it is the only union that could unilaterally
create mass blackouts. The CEBEU has suggested some modifications
to the proposed electricity bill, but does not have serious issues
with it.

15. Despite the opposition's concern, it is unlikely that CEB will
be privatized under the current administration. President Mahinda
Rajapaksa promised on numerous occasions not to privatize CEB and
that any reforms will need to be approved by all stake holders,
including the unions.

COMMENT
--------

16. The government needs to take bold action to ensure that
production levels meet demand that is projected to grow by 7-8
percent in the coming years. The coal plant currently being built
in Norochcholai and talks of a joint power transmission line are
positive steps. Dependence on thermal power that uses fossil fuels
must be reduced, in order to stem rising costs. In March 2008 the
government increased electricity tariffs by 40 percent to better
reflect the cost of production. While that was a positive sign that
CEB is trying to stem its losses, the increased tariffs have added
to what already were some of the highest prices for electricity in
the region. This is likely to have a detrimental impact on
investment and further inflation pressure. CEB needs to be
restructured in order to increase efficiency and the reform bill
currently being debated in parliament would be a good start. The
GSL has always had difficulty imposing reform against the wishes of
intransigent unions, but now the primary obstacle to reform is the
government itself, with its preference for large state run
enterprises, however inefficient and unprofitable.

© Scoop Media

 
 
 
 
 
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