‘Powering’ inclusive growth

Numerous studies suggest the existence of a strong correlation between electricity consumption and economic growth.

Estimates suggest that in Sri Lanka, current as well as past changes in electricity supply has a significant impact on economic growth: increase in the supply of electricity by one megawatt hour (MWh) in the current year leads to an income increase of Rs. 38,200 in the same year, Rs. 30,000 in the second year and Rs. 44,100 in the third year1.

Therefore, access to a sufficient, affordable and reliable supply of electricity across all sectors of the economy has strong distributional implications. This article looks into the issues in electricity supply in the household sector as well as commercial (hotel) and industrial sectors.

Household sector

When considering the accessibility of electricity, the overall level of electrification in Sri Lanka rose to 90% by the end of 2010 compared to 86% in 2009. It is targeted to reach 100% by 2012. However, as the figure below indicates, substantial disparities in electrification at the district level can be seen.

Affordability also remains an issue. According to a recent survey 15% of households find it difficult to pay the electricity bills ion a monthly basis, while 14% do not make payments on a monthly basis. Around 43% of households have found it necessary to adopt ways to reduce their electricity bills.

Further, a high level of disparity exists between consumer groups: the lowest 10% of households consume only 2%, while the highest 10% of households consume 27% of the total electricity consumption.

Commercial (hotel) and industrial sectors

Over 40% of urban manufacturing firms and 25% of rural enterprises in Sri Lanka are estimated to find electricity to be a major bottleneck for industrial growth. In 2004, less than 70% of rural enterprises received electricity from the national grid.

Although this may have improved due to various electrification schemes, reliability of electricity supply continues to hamper the industrial sector. Nearly 75% of urban manufacturing firms own generators to cope with power outages, which accounts to 12% of their fixed assets on average.

Implementation of tile of use (TOU) tariffs from January 2011 has further driven up costs. It is estimated that top city hotels will incur an additional cost of Rs. 120 million due to the implementation of TOU tariffs. Similarly, electricity intensive industries such as textile, cement, ceramic, metal and aluminium, ship building and food and beverages are also affected by high electricity costs.

Industry sources expect a cost increase of 4 to 8 per cent on average, which adversely affect competitiveness, especially of export-oriented manufacturers.

Way forward

The obvious remedy for affordability issues in the household sector is employing demand management strategies.

However, applying targeted subsidies to poor households such as Samurdhi beneficiaries might be a better measure given that issues of poor targeting Samurdhi are addressed first.

Ensuring affordability of electricity for commercial and industrial categories is equally important as they are major contributors to national output. A possible measure is shifting production to off-peak hours. However, this cannot be universally adopted given the practical constraints such as working several shifts a day or where significant numbers of female employees are present.

Transforming the production process to energy saving plant and machinery is another option, albeit a costly one.

Removal of import duties and taxes on energy saving equipment can help mitigate the high cost of such equipment.

However, it should be borne in mind that the electricity industry is currently undergoing a tariff rebalancing exercise targeted to bring the sector back to profitability by 2015. Therefore, the challenge remains for the Government to strike a balance between affordability of electricity and the financial success of the power sector.

Footnotes

 1Morimoto, R., C. Hope, 2001, “The Impact of Electricity Supply on Economic Growth in Sri Lanka”, Research Papers in Management Studies, University of Cambridge.