Govt. unveils National Electricity Policy in push for cost-reflective tariffs, reforms

• Energy Ministry invites public consultations on or before 9 January
• Energy pricing, reforms crucial components of IMF EFF program

The Government has released the National Electricity Policy of Sri Lanka for public comment on or before 9 January 2026, setting out a binding framework to reform pricing, strengthen regulation and accelerate renewable energy, while reaffirming cost-reflective tariffs and the financial sustainability of the power sector.

Issued by the Ministry of Energy under the amended Sri Lanka Electricity Act, the policy marks a decisive shift away from administratively controlled electricity pricing, placing long-term system cost, security of supply and regulatory discipline at the centre of electricity sector governance.

The policy states that electricity must be supplied at the lowest long-term system cost, subject to security and reliability constraints, while ensuring utilities remain financially viable. It affirms that future tariffs must reflect generation, transmission and distribution costs, with subsidies permitted only if transparent and targeted, rather than embedded through cross-subsidisation.

While aggregate tariffs will be cost-reflective, the policy allows limited lifeline support for vulnerable consumers, to be implemented through explicit mechanisms approved by the regulator.

The framework also formalises the post-unbundling structure of the electricity sector, with separate entities for generation, transmission, distribution and system operations. The National System Operator is assigned a strengthened role in security-constrained economic dispatch and long-term planning, aimed at minimising generation costs while safeguarding grid stability.

Renewable energy expansion is positioned as a central pillar of the policy, with priority given to solar, wind, hydro, and biomass and waste-to-energy projects. However, the document makes clear that renewable integration will be governed by system limits, grid stability considerations and competitive procurement, signalling a move away from ad hoc project approvals.

The policy also mandates accelerated digitalisation of the electricity system, including smart metering, automated meter reading, grid monitoring and centralised data platforms, identifying loss reduction and demand-side management as critical to containing future tariff pressures.

Appendix A of the policy introduces a National Tariff Policy that tightens regulatory oversight of costs, explicitly listing allowable expenses such as depreciation, financing costs and operations and maintenance, while requiring efficiency benchmarks to be enforced. Inefficiencies, the policy notes, are to be addressed through regulatory scrutiny rather than tariff adjustments.

The document sets out phased implementation timelines from 2026 onwards, covering competitive procurement of new generation, review of feed-in tariffs, application of new multi-year tariff methodologies and full operationalisation of the system operator’s planning and dispatch functions.

Energy reforms is a key component of the ongoing International Monetary Fund Extended Fund Facility program with Sri Lanka.

Last October when the IMF review team last visited the country for the fifth review under the EFF program (the conclusion of which has been postponed to early 2026 on account of Ditwah), it reiterated the importance of sustaining momentum on energy sector reforms, particularly the unbundling of the Ceylon Electricity Board and the preservation of cost-reflective electricity pricing, as part of Sri Lanka’s Extended Fund Facility program.

IMF Mission Chief Evan Papageorgiou told reporters in Colombo that the Fund is closely monitoring developments around the unbundling of the CEB and the broader transformation the energy sector is expected to undergo from 2026 onwards. He described the reform as a critical step toward improving transparency and operational efficiency, while noting that several technical and implementation details remain to be clarified.

Papageorgiou stressed that maintaining cost-recovery pricing remains a continuous structural benchmark under the IMF-supported program, forming a core pillar of the Extended Fund Facility. He said this is essential to ensure that the CEB or its successor entities do not incur financial losses that could ultimately become liabilities for the State and taxpayers.

He added that cost-reflective pricing helps contain fiscal risks and supports long-term economic stability by ensuring that electricity utilities operate on commercial principles and make financially sound decisions. Stable and predictable tariff-setting processes, he said, are also important in paving the way for lower electricity prices over time and broader economic benefits.

As part of the fifth review of the IMF program, the Fund was also evaluating the CEB’s latest tariff submission to the Public Utilities Commission of Sri Lanka, and assess compliance with the end-November structural benchmark relating to the review of the electricity tariff methodology.