Who’s trying to derail power sector reforms?

Sri Lanka, too, must consider transitioning to a more market-driven approach to reduce costs and lower electricity tariffs for consumers

 Looking ahead, the most logical and prudent path forward is to allow private investment in distribution and existing generation assets only after a two-year period of stabilisation and institutional strengthening. This phased approach ensures transparency, builds investor confidence, and protects public interest, especially in a sector as vital as electricity

The reform of the power sector and the restructuring of the Ceylon Electricity Board (CEB) were key election promises made by the current NPP Government. This initiative stands as one of their flagship projects and is progressing well, staying on track as planned.

Despite this, there have been murmurs of dissatisfaction from groups claiming to represent the business community, trade unions, and the solar energy lobby. The writer believes it’s time to clarify the situation by distinguishing between fact and speculation.

An earlier article by the same author, published on 1 July 2025 in this newspaper (https://www.ft.lk/opinion/Electricity-reforms-and-CEB-restructure-Confusion-conjecture-or-calmness/14-778393), outlined some key aspects of the proposed CEB restructuring.

Some critics have questioned the unbundling of the CEB, suggesting it is an unprecedented move. However, it’s worth examining how countries such as the UK, Australia, and Vietnam have carried out their own electricity sector reforms, ranging from full privatisation to models with minimal or no competition.

How did other countries reform their electricity industries?

In Australia, the privatisation of electricity assets has been a gradual process. Reforms began in the early 1990s, but the National Electricity Market Management Company (NEMMCO) which operated the national grid remained fully government-owned until 2009. It was then replaced by the Australian Energy Market Operator (AEMO), a not-for-profit public company with 60% government ownership. Sri Lanka’s proposed National System Operator (NSO) will perform a similar role.

Prior to reforms, Australia’s state-owned electricity utilities were vertically integrated, much like the CEB. Following restructuring, electricity generation became a competitive market, while transmission and distribution, considered natural monopolies, were regulated and separated into independent entities.

Today, transmission assets remain state-owned in Queensland, Tasmania, Western Australia, and the Northern Territory. In New South Wales, they were leased to the private sector for 99 years in 2015. South Australia and Victoria had privatised their transmission systems earlier. Distribution networks, meanwhile, are fully privatised only in Victoria, New South Wales, and South Australia, while other states have retained state ownership. As a result, Australia has adopted a hybrid model: Western Australia, Tasmania, and the Northern Territory maintain unbundled state owned transmission and distribution networks.

The United Kingdom, by contrast, undertook its electricity reforms more rapidly, beginning in 1989. The privatisation of the distribution sector into 12 Regional Electricity Companies was completed in just three years, alongside a swift liberalisation of the generation market. Transmission took longer, around 11 years, to be converted into a privately listed entity. The UK’s model is highly competitive, with extensive privatisation under strong regulatory oversight.

Vietnam, often cited in Sri Lanka for its rapid industrialisation and low electricity tariffs, presents a very different case. Its power sector remains largely under the control of a vertically integrated state-owned enterprise (SOE), though private participation is allowed in generation through Independent Power Producers (IPPs). A competitive wholesale electricity market is being piloted, but significant reforms have yet to take place. Tariffs remain low, largely due to direct state intervention and subsidies.

Are we on the right track on the reforms?

The previous analysis focused on a limited set of countries, but it suggests that Sri Lanka is taking a balanced and pragmatic approach, drawing from international experience while tailoring reforms to suit the current Government’s risk appetite and electoral commitments.

Transmission and distribution are widely recognised as natural monopolies. This is why, in many countries, they remain under state ownership and are subject to regulatory oversight. Their revenues and allowable expenditures are typically regulated. One might argue that the CEB is already regulated by the Public Utilities Commission of Sri Lanka (PUCSL), and that is true. However, because the CEB remains a vertically integrated entity, its internal cost structures are bundled together, leading to concerns that the reported costs are distorted and unreliable.

Electricity tariffs are determined by considering three components: the “regulated costs” approved by the Regulator, the actual costs reported by the CEB, and an economic return as allowed under regulatory guidelines. If the CEB incurs expenses beyond the approved regulated costs, those excess costs must be absorbed by the CEB itself and cannot be recovered through tariffs. A dispute resolution mechanism is in place to handle disagreements between the utility and the Regulator. This model is standard practice globally.

That said, doubts persist over the credibility of CEB’s reported costs, which has led to an ongoing and often contentious relationship between the CEB and PUCSL over tariff-setting. It is hoped that these disputes will subside after the restructuring process is complete, when PUCSL begins to regulate separate entities rather than one monolithic organisation. These new companies will ideally be led by professionals committed to due diligence, transparency, and sound governance.

As a result, within the first two years following the restructure, a much clearer picture is expected to emerge, both in terms of actual cost structures and the true financial health and value of each entity in the electricity sector.

Should the restructured companies be considered for immediate sale?

It doesn’t take a rocket scientist to see that any prudent investor conducting due diligence would quickly uncover the uncertainties surrounding the true financial health of these businesses. Given Sri Lanka’s current economic challenges, it is unrealistic to expect a wave of foreign investment in entities that lack transparent, reliable data necessary for informed decision-making. Most would likely fail even the most basic due diligence tests.

Supporters of the current 2024 Electricity Act should also consider a key concern raised by the writer and many others: under the previous administration, there was a very real risk that restructured entities could be sold off in “fire sales” to politically connected domestic interests, crony capitalism, in other words. Thankfully, public resistance and civic engagement have helped prevent this outcome.

Looking ahead, the most logical and prudent path forward is to allow private investment in distribution and existing generation assets only after a two-year period of stabilisation and institutional strengthening. This phased approach ensures transparency, builds investor confidence, and protects public interest, especially in a sector as vital as electricity.

Addressing concerns about share transfers and reform transparency

Some concerns have been raised regarding the transfer of CEB-held shares in Lanka Electricity Company (LECO), LTL Holdings, and SL Energies, all of which are private companies. It is important to note that the CEB, being a fully government-owned entity, will transfer these shareholdings to other fully state-owned companies as part of the restructuring process. Since these three companies will continue to operate independently, conducting business as usual, the writer sees no risk of conflict of interest or undue interference arising from their new ownership structure.

While there has been some valid criticism regarding the formation of the committee appointed by the Minister of Energy to review the Amended Electricity Act, the final outcome appears to be both reasonable and pragmatic. Much of the credit for this positive outcome should go to the Director General of the Electricity Reform Unit. His clear, articulate, and consistent communication—often breaking down complex provisions into simple, understandable language—has helped build public understanding and trust in the reform process. The writer cannot recall a similar level of engagement or transparency during the development of the 2024 Act.

Will the CEB restructure lead to lower electricity prices?

That is indeed the intended goal, and international experience suggests that restructuring can contribute to lowering tariffs. A closer look at Sri Lanka’s current cost structure reveals that approximately 70% of the unit cost of electricity comes from generation. Therefore, reducing generation costs is the most crucial factor. This is already being addressed through the Government’s policy of using competitive tendering for new power procurements.

The restructuring of the CEB is expected to drive cost efficiencies in other areas, primarily through the formation of leaner organisations with more focused management and performance-driven operations (using KPIs). However, it’s important to note that privatisation alone is unlikely to reduce tariffs. Much depends on the return on investment expected by private investors, as well as the extent to which they are willing to invest in upgrading the existing infrastructure.

Globally, transmission assets are typically better maintained than distribution networks, and Sri Lanka is no exception. Many areas of the country face capacity constraints, supply quality issues, and reliability concerns within the distribution system. The Asian Development Bank (ADB) has been supporting the maintenance of service levels through debt funding and technical assistance, which is expected to continue and remains both viable and beneficial.

Another key factor affecting generation costs, and therefore consumer tariffs, is the price paid for rooftop solar and other renewable energy sources fed into the grid. To understand the impact, it’s useful to look at global trends in Feed-in Tariffs (FITs).

Reassessing solar incentives: The case for market-based reforms

Feed-in Tariffs (FITs) have driven rapid solar growth in many countries. However, in most cases, Governments underestimated the pace of adoption. This led to unintended consequences such as grid congestion, oversupply in certain regions, and mounting subsidy burdens. Long-term fixed payment contracts, sometimes spanning 20 years, locked Governments into paying high tariffs even as the cost of solar technology sharply declined. In some instances, FITs were set well above market rates, distorting the energy market and placing a heavy financial burden on the public.

Sri Lanka experienced similar challenges. FIT rates increased even as global and local solar costs fell. This was due to the same global trends, compounded by domestic issues such as crony capitalism and political interference.

Today, solar power is cost-competitive in many parts of the world, and most countries have shifted away from FITs toward competitive, market-based procurement mechanisms. While small-scale rooftop solar still receives support, mainly through net billing or self-consumption incentives, larger scale solar projects are rarely offered traditional FITs anymore.

Sri Lanka, too, must consider transitioning to a more market-driven approach to reduce costs and lower electricity tariffs for consumers. Naturally, the solar lobby, having benefited from earlier FIT structures, resists this shift and continues to push its narrative to maintain its position.

Ultimately, the Government faces a clear choice: pursue reforms that reduce costs and benefit the broader public, or cater to narrow interest groups prioritising their own gains over national interest.

Conclusion

In the short to medium term, the only sustainable path to lower electricity prices lies in two key actions:

1. Introducing real competition through transparent and competitive procurement of new generation capacity.

2. Improving efficiency through strong, performance-driven management of the restructured electricity sector.

This stabilisation and maturation period, over the next two years, will be critical to ensuring long-term affordability and reliability in Sri Lanka’s power sector.

(The writer is an electrical engineer with over 25 years’ experience in Australian Electricity Networks as a Manager and a Principal Engineer. He also worked as a Safety Regulator in establishing and enforcing Safety Regulations and investigating electricity network incidents. He worked as an electrical engineer at CEB, in the first 10 years of his career. He could be reached via email at [email protected].)