Making CEB and CPC profitable at the same time

Friday, 13 December 2013 00:00 -     - {{hitsCtrl.values.hits}}

By K.C. Somaratna When we, Sri Lanka, nationalised the petroleum industry in the late 1960s, we would have never imagined that this particular corporation to be established in place of the Shell, Mobil and Esso operations would ever become such a colossal drain on State coffers. We think it – the Ceylon Petroleum Corporation – is a drain on the State coffers because COPE reports of year after year come out with some unimaginable values as the losses of the corporation. Whether the State coffers make any money out of petroleum sales as taxes, levies or whatever and whether these funds do offset the much publicised losses is unknown. But the irony is that the three multinational oil companies it replaced in Sri Lanka are right at the top in the Fortune 500 listing with Shell recording a profit of US$ 48 billion (nearly the GDP of Sri Lanka in that year) in 2012 and Exxon Mobil, the merger of Exxon & Mobil, being just behind Shell. Apparently the top 25 companies in the Fortune 500 listing has 15 oil companies with Chevron, Conoco – Philips of USA, Sinopec of China, Total of France, etc. recording very high turnovers and profits. If someone were to ask Petroleum Corporation officials why this is so, they probably would say that their energy partner in the State sector does not pay them their dues and this is all because of that. Or we hear that CPC threatening to cut oil supplies to CEB due to this non-payment of bills. As such these partners in the energy sector of the public service somehow or other appear right at the top of the loss-making public sector entities in Sri Lanka every year and if any trend is to be seen it is the increasing trend in the losses. So the question arises whether these losses will ever stop increasing or start decreasing as we Sri Lankans expect. Reviving the ailing entities Sometime back a new entity called Strategic Enterprises Management Agency (SEMA) was formed to revive these two ailing entities. Of course one would say that SEMA nor any other individual nor entity in Sri Lanka has control over the global factors which contribute, as we generally claim, to these losses, the most often quoted factors being the inclement weather and global price hikes. In fact one former Finance Minister said that if these two factors are not there, preparing the Sri Lankan Budget would be like a walk in a garden of roses. The real challenge in situations such as this is not quoting a few excuses which are outside one’s control and saying that nothing can be done as long as these conditions prevail. When we do consultancy for different entities, most often such uncontrollable factors are cited and we do have a ready response to that. What we say to them goes as follows: “Whether in private life or official life, we do and will have a few factors which are beyond one’s control. That is always the case. What we need to do in such situations is control what we can control and collect information about what we cannot control and use this collected information to get control over them.” So we need to identify the uncontrollable factors at these two entities. Uncontrollables First at the Ceylon Electricity Board we would hear the following uncontrollables: i) Erratic rainfall or inclement weather (ii) Mahaweli projects need to fulfil farmer needs as well. (iii) There is a peak demand in the night and you need thermal power to fulfil same. (iv) When thermal plants are switched on and off too often, efficiency suffers. (v) CEB is unable to sell electricity at a profit. (vi) CEB can’t reduce its costs. And there may be few others like this. Then at the Ceylon Petroleum Corporation, the list will go like this. (i) Oil prices always go up in the global market. (ii) Oil consumption always goes up due to more motor vehicles being imported. (iii) Price of oil cannot be increased to meet the costs. Solution for CEB It is true that CEB is unable to calculate their costs, add a profit margin and decide on the selling price the way a private sector entity would do and the same is true of CPC as well. If we look at the uncontrollable factor (v) of CEB and uncontrollable factor (iii) of CPC and collect information on these two, we could probably arrive at a solution to make both these profitable. If we are to collect information on selling energy at a profit, we could identify an application where energy is sold at the highest unit cost and this will be the application where energy is wasted the most. If you collect information about wastage of energy in different applications one would see that this application is the use of energy in the motor vehicles. According to the Massachusetts Institute of Technology document ‘On the road in 2035,’ an Internal Combustion Engine (ICE) powered automobile loses about 80% of the energy in the fuel. According to the same document a Battery Electric Toyota Camry needs only 0.58 MJ//km while the ICE in a Toyota Camry really uses about 2.84 MJ/km. What happens to the balance of 2.26 MJ/km? It is wasted partly as energy transferred to the cooling water to prevent engine heating up due to this wasted energy, which is then transferred to the air at the front via the radiator. The balance is wasted as heat energy in the exhaust gases which contains the latent heat of water vapour as well. A litre of gasolene contains about 33 MJ of energy or nine kWhrs. So if the Toyota Camry does 10 kms/litre, the total amount of energy it would have actually used is only 5.9 MJ or 1.6 kWhrs. So in paying Rs. 170 per litre of gasolene and wasting 80% of the energy in the litre of gasolene the motorist has paid Rs. 117 per kWhr of energy actually used. So if and only if CEB really wants to make profits it should sell electricity at close to Rs. 117 per kWhr – say at Rs. 80 per kWhr to motorists who are equipped to run vehicles using electrical energy. If CEB loves to make more losses it could definitely sell electricity to these motorists at the current rates and add to their losses. This is what blue ocean strategy or engaging in value innovation is all about, when product innovation will throw you into a blood red ocean. And if you lose this opportunity it is lost forever. Solution for CPC Now that we have found an application where CEB can increase its price, let us look at the CPC side of the problem. How can the CPC, with its mission of ‘powering mobility in Sri Lanka’ engage in this initiative? It needs a form of energy which could power mobility, but not dependent on oil with its dwindling resources and ever-increasing prices and could be easily transmitted to thousands of locations where this energy is required. This is where highway solarisation comes into the picture and CPC could work hand in hand with CEB. CPC could establish this infrastructure of highway solarisation, i.e. photovoltaic solar panels erected above and along the highways and generate electricity. It could use a part of the energy generated to charge batteries of battery electric vehicles (the first few of these – Nissan Leaf, BYD E 6 – have already arrived and more would come) and supply the balance to the CEB. The CEB could transmit this to where electricity is needed either for battery electric vehicles or otherwise. When this infrastructure is established on all the highways, the minute to minute variability of PV solar could also be addressed. When there is no solar radiation in one place, it would be available elsewhere. When there is no electricity generated due to rain, we could use main grid electricity and hydropower could cope. When there is no rain and drought sets in, there will be PV solar to compensate. So CPC could establish this infrastructure and sell it to the motorists at Rs. 80 per kWhr and at Rs. 40 to the CEB. The CEB could purchase this at one location and sell it to a motorist elsewhere at Rs. 80 per kWhr. In case State coffers do get some income from imported oil, then wouldn’t the State suffer due to this? This could be easily solved as follows. Let us assume that the State earns an income of Rs. 50 per litre of petrol sold to a customer and he does 10 km per that litre. Then he is charging Rs. 5 per km travel and if one kWhr would enable the motorist to travel about seven km, the CEB/CPC should be able to pay Rs. 35 per every kWhr sold to a motorist. So the picture would be like this. Ceylon Petroleum Corporation erects the photovoltaic solar infrastructure above the highways and generate electricity and sells this energy to motorists using battery electric vehicles at Rs. 80 per kWhr. The motorist would still save about Rs. 30 per petrol equivalent of one kWhr of energy actually used and as such he gets a 30% benefit over usage of petrol. CPC sells the balance energy to CEB at Rs. 40 per kWhr which in turn would transmit to places where more energy is needed and sell to motorists using BEVs at Rs. 80 per k/Whr and pays Rs. 30 to the Government. Then CPC makes profits and CEB makes profits and the Government does not lose. BEV motorists benefit by about 30% of the cost on petrol. When the fossil fuel prices go up, both CEB and CPC can make bigger profits and savings of BEV motorists could also be made bigger. What we need to do this is only the will. If we spend the US$ 2 billion we were planning to spend on that Sapugaskanda Oil Refinery Expansion and Modernisation Project (SOREMPRO), CPC could provide power to more than 200,000 battery electric vehicles and everything else will automatically fall into their respective places. It will not take four years as for the SOREMPRO and no more crude need to be imported at ever escalating prices. People will get used to driving BEVs and Sri Lanka could be the first country in the world to develop the green economy as envisaged in the United Nations Environment Program document by the same name released in July 2011. This document titled ‘Green Economy’ says that if a country keeps on spending about 0.34% of its Gross Domestic Product on transportation using alternative fuels for 40 years, it could achieve 80% penetration while generating 10% more employment. Highway solarisation is the surest alternative to ensure the achievement of this challenging target. (The writer is Managing Director of Somaratna Consultants Ltd. and can be reached via kcs@somaratnaconsultants.com.)

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