Proposed CEB tariff increase: Is it sensible?

The cost to the economy of power cuts is much higher than the adverse effects on businesses and consumers of a further raising of the tariff

We are stuck today with an inefficient CEB with monopoly power. Even if it were possible, it will take years to reduce these inefficiencies. As a result, power costs are higher than they could be with a more efficient operation. The question is, who should bear the cost of the inefficiency today? From an economic policy perspective, there is only one answer. If should be electricity consumers. The alternative is for the tariff not to be raised and the CEB’s losses to be met by the Ministry of Finance

A few months ago, the CEB tariff was increased for all consumers. The average increase was approximately 75%. The Minister of Power and Energy has recently stated that there needs to be a further large increase in tariff in January, around 65%, if the CEB is to provide continuous power to the public. Without the increase, he says, there is likely to be eight-hour power cuts.

There were numerous protests relating to the original tariff increase. These protests have come from many different types of consumers including hoteliers, industrialists, temples and residential consumers. Hoteliers and industrialists have gone so far as to say that the increase will have serious negative impacts on the viability of their businesses. They now claim that a further increase as mentioned by the Minister would push them to insolvency.

Is the tariff increase mentioned by the Minister sensible? Is there any other alternative? Based on my wide experience, there are two reasons why a further CEB tariff increase is necessary. First, not increasing tariffs will adversely impact renewable energy generation growth in the country. Second, it is the fairest and most efficient way to fund power generation cost in the current economic context. 

Let me start with my credentials. My dealings with the CEB go back over 20 years, as CEO of the then largest private company building small hydro power plants (40 MW connected to the grid) and later as the Executive Chairman of a company which built and operated a 4 MW biomass plant, all selling power to the CEB grid. I have also worked for many years in the policy sphere, primarily in the Ministry of Finance, originally as the CEO of the Plantation Restructuring Unit and later as the Director General, Economic Affairs. 

What are the adverse impacts on future renewable energy?

One of the key policy proposals of the Government relating to the power sector is to substantially increase the share of power generated through renewable energy (RE), mainly, small-hydro, wind and solar. The capital cost of RE plants is high, running into hundreds of millions of rupees per MW. In spite of this, they are financially viable to build and operate because their fuel – wind, sun and water flow in rivers – is free. The policy is to have the private sector undertake the large capital investments in these power generation technologies and sell their generated power to the CEB grid. 

The levelised average cost of power generated by RE power plants, even after including their large capital costs, is lower than that of power plants based on fossil fuel, such as coal and oil. RE plants are also much better for the environment compared with fossil fuel-based plants and, increasing their share of power generation will also substantially reduce foreign exchange requirements to import coal and oil. 

In spite of the last large increase in tariffs, the CEB is still experiencing major financial difficulties. Faced with these difficulties, the CEB has saved cash for purchasing coal and other fossil fuels and for other expenses such as salaries, by not paying the amounts due to private RE producers who have entered into contracts with the CEB to supply power. The CEB owes a staggering Rs. 22 billion to these producers. In many of the cases, invoices going back for over a year have yet to be paid. 

These producers have continued to supply power to the CEB in spite of the payment delays, primarily because in the case of wind, hydro and solar, there is no fuel cost and these producers have only to pay their operating costs and their bank loans. To handle their cash flows and to keep going, these producers have begged their bankers for support. How long they can keep it up is anybody’s guess. 

Biomass and private thermal power producers who have not been paid by the CEB have mostly shut down because they simply cannot afford to pay for fuel. Small-hydro and wind power producers may also close down if the CEB payment delays continue and the developers do not have the financial resources to pay their operating costs and bank loans. 

The present grid connected RE plants were almost all built at a time when the CEB was paying the invoices submitted by these plants on a regular basis, with maximum delays of 1-2 months. In its present financial situation, the CEB is not paying the large arrears owed to these power producers. Clearly, no sensible private sector investor will want to undertake future large investments in RE plants under such circumstances. The only way for the CEB to return to timely payments for power supplied by private RE plants is with a further tariff increase as proposed by the Minister. Without such payments, it will be the end of the Government’s plans for substantial private sector led increases in RE’s share of the grid, along with their attendant benefits enumerated earlier.

Government has to bite the bullet and take the hard decision to increase CEB’s tariffs now. Becoming current and staying current with payments due to RE producers should also be a condition of the tariff increase. If possible, it should leverage the decision with a mutually acceptable agreement with the CEB’s engineers to support the unbundling of the CEB towards improved efficiency

How should the cost of CEB’s generation be funded? 

We are stuck today with an inefficient CEB with monopoly power. Even if it were possible, it will take years to reduce these inefficiencies. As a result, power costs are higher than they could be with a more efficient operation. The question is, who should bear the cost of the inefficiency today? From an economic policy perspective, there is only one answer. If should be electricity consumers. The alternative is for the tariff not to be raised and the CEB’s losses to be met by the Ministry of Finance (MoF). 

MoF, in turn, can raise the funds by either printing money or taxing people. Even printed money is not free, as we have found out recently. It results in everyone having to pay large price increases in the future. In practice, the Government subsidies of the CEB come in small bits and pieces which the CEB has to beg for. In the interim, faced with severe cash flow issues, the CEB reacts by cutting power and not paying RE power suppliers. The cost to the economy of power cuts is also much higher than the adverse effects on businesses and consumers of a further raising of the tariff. 

As I indicated at the start of this article, numerous commercial parties, including hoteliers and industrialists have claimed that a further increase in tariff will push them to insolvency. 

However, this statement cannot be sustained. In 2022 the Sri Lanka Rupee exchange rate vis-a-vis the US Dollar depreciated by around 80% and inflation as per the NCPI was around 70%. As a result, the Rupee prices of every item in the country increased by at least this amount. This includes the price of items sold by hotels (room rates) and items locally produced by industry and farmers, whether it be cement, rice, eggs, fish, vegetables, chocolates, cleaning supplies, toiletries, and so on.

Imported and domestically sourced inputs into industry, hotels, farming, and so on also increased. Power supplied by the CEB is one such input, and the cost to the CEB of producing this power has also increased. It is only rational that the price charged for electricity should also be increased. In the case of industry and commerce, the recent performance figures published by quoted companies show very large increases in Rupee profits. Of course, these are devalued Rupees. 

A further increase in electricity price, will reduce these Rupee profits somewhat, but, by how much depends on what the electricity cost share is of total input costs. (None of the industries and commercial establishments that are objecting to the past or proposed future tariff increases, has provided any hard financial analyses on the impact on their bottom line of such increases.) It may well be that hotels will go under because there are no tourists. If the Government wants to provide relief to such hotels, this should be done directly, not by subsidising the price of electricity. 

An added benefit of charging electricity consumers the CEB’s inefficiency cost is that a further increase in electricity price will result in a reduction in demand, which will, in turn, reduce the requirement for more costly imported fossil fuels to run the CEB’s power plants. A clear example of such an impact is the recent large increases in transportation fuel costs, which, as reported in the press, has resulted in a 50% reduction in the demand for fuel.

One last point on the social impact of tariff increases. Electricity is fundamental to modern life. Everyone should be able to afford some minimum level of electricity consumption. A further increase in tariffs may put electricity out of reach of the poorest consumers who are struggling to survive today. To protect such consumers, it would be best that those who consume only a small amount of electricity each month be given a special lower tariff. The CEB already has such a tariff for residences consuming less that 60 units (kWh) a month. A household consuming 30 units in a month only pays Rs. 360 under the present tariff, and those consuming 60 units pay a monthly bill of Rs. 900. 

With the latest proposed increases, their respective bills would increase to Rs. 1,300 and to Rs. 2,960. These increases look large if expressed as a percentage. In absolute Rupee terms they are not, compared to the present official poverty line income threshold of Rs. 55,000-60,000 per month for a family of four. The additional Rs. 940 for those consuming 30 units in a month, would be about the same as one meal for a family of four. If the Government wishes to reduce the special tariff for consumption from 30-60 units, the impact on CEB revenue of any such adjustment could be covered by slight increases in the tariff revision to other consumer categories. 

In spite of the last large increase in tariffs, the CEB is still experiencing major financial difficulties. Faced with these difficulties, the CEB has saved cash for purchasing coal and other fossil fuels and for other expenses such as salaries, by not paying the amounts due to private RE producers who have entered into contracts with the CEB to supply power. The CEB owes a staggering Rs. 22 billion to these producers. In many of the cases, invoices going back for over a year have yet to be paid

What of the longer-term prospects? 

The CEB is a mammoth organisation, an order of magnitude larger than the largest private sector companies in Sri Lanka. It is abundantly clear that the CEB, like most Government ventures, is not the most efficient of organisations. There is much that can be done to improve its efficiency, but this can only be achieved in the long-term. The Minister has proposed the first step, the “unbundling” of the CEB, where the generation, transmission, and distribution parts of the CEB are divided into separate entities. In the case of generation and distribution, these could be divided even further. 

The idea is that these smaller entities could be better managed, and more importantly, that it should be possible to bring in private sector management into some portions, or even privatise them completely. The Minister’s proposal is not new. Several past attempts were made to do just such an unbundling; one during the time I worked in the Ministry of Finance, around 20 years ago. The engineers who run the CEB, fully aware of the loss of their monopoly control of the entire power supply of the country with such unbundling, blocked these attempts. The present Minister thinks he can easily get it through this time. The CEB engineers, who are very smart about looking after their own interests, are biding their time and, I predict, they will put up a fight, and may well succeed in blocking the break up, as they have done in the past.

Politicians across the board, even those who are part of the Government, have been reported in the press as objecting to a further tariff increase by the CEB. None of them have any alternate proposals for how the revenue shortfall of the CEB can be met, other than to make glib comments like “reduce the inefficiency of the CEB,” “recover the money stolen in the sugar scam,” “cut Government waste,” and so on. These things are not going to happen in the coming year or two. The problem is here now. No politician has highlighted the serious adverse impact of no tariff increase on the Government policy to substantially increases RE’s share of the grid which I have highlighted here. 

Government has to bite the bullet and take the hard decision to increase CEB’s tariffs now. Becoming current and staying current with payments due to RE producers should also be a condition of the tariff increase. If possible, it should leverage the decision with a mutually acceptable agreement with the CEB’s engineers to support the unbundling of the CEB towards improved efficiency. 

(The writer holds a Ph.D., has extensive work experience in renewable energy in the private industry, and in policy formulation and implementation in the Ministry of Finance of the GOSL.)