Major investment required as Sri Lanka's energy sector focuses on renewables and liquefied natural gas


With strong economic growth and an expanding population, Sri Lanka faces increasing demand for cost-efficient and clean energy. Similarly, the expansion and modernisation of the country’s cities, towns and villages is also placing higher demands on water and sewerage services, with investment in these vital utilities needed for successful future development.

In a bid to meet these challenges, the current government has adopted a business-friendly approach to energy and utilities, with public-private partnerships (PPPs) and foreign investment seen as having a key part to play in upgrading these services. Therefore, the sector is one of the most promising for overseas interests, offering plenty of opportunities and a strong demand for action.

Sector Bodies

The Ministry of Power and Renewable Energy (MPRE) is the main government body responsible for the power sector, with several organisations coming under its auspices. These are the Ceylon Electricity Board (CEB), the Lanka Electricity Company (LECO), the Lanka Coal Company, the Sri Lanka Sustainable Energy Authority, the Sri Lanka Atomic Energy Board and the Sri Lanka Atomic Energy Regulatory Council. The Ministry of Irrigation and Water Resource Management (MIWRM) is the main governmental body for water and irrigation on the agricultural side, while the National Water Supply and Drainage Board (NWSDB) looks after drinking water and sewerage systems.

The Public Utilities Commission Sri Lanka (PUCSL) is the sector regulator. Established in 2009, PUCSL will also eventually become the regulator for water and petroleum. However, at present, legislation that will bring these additional areas under the its remit has yet to be finalised. In late 2016 an act to move the petroleum industry into the commission’s authority was progressing through constitutional compliance procedures in parliament, while another to bring water under its remit was still at the consultancy stage. In the meantime, water supply continues to be managed and regulated by the MIWRM and NWSDB, while the petroleum sector remains under the Ceylon Petroleum Corporation (CPC) and the Lanka Indian Oil Company.


The legal framework for the power sector is the Sri Lankan Electricity Act of 2009, which partly unbundled the CEB, which was until then the sector’s state monopoly. The generation, transmission and distribution units of the CEB were divided up and placed under separate management, but were not spun off into independent entities. Other companies are also allowed to operate in the market at the generation and distribution stages. A range of independent power producers (IPPs) and small power producers (SPPs) are active at the former level, while one company, LECO, works in distribution alongside the CEB. In transmission, the CEB remains the sole purchaser for the IPPs and SPPs as well as for the CEB’s own generators.

As the sector’s approving authority, the PUCSL sets end-user tariffs and the generation and transmission licence fees, along with a revenue cap, which is set every five years. Once the maximum has been set, generators can forward an annual revenue requirement to the PUCSL for its approval. There is also a facility for adjusting the end-user tariffs every six months to respond to any new market developments and/or power forecast errors.

One of the commission’s key roles, therefore, involves balancing costs, requirements and real-time demand, spreading the impact of any price-change shocks, while taking into account of the varying costs accrued by sector players. This can sometimes be a difficult task, with the government often keen to keep end-user tariffs as low as possible, while generators and distributors generally look to protect themselves against volatility in energy prices and secure a healthy return on their investments.

These conflicting pressures were evident in October 2016, when the MPRE said no hikes in end-user tariffs were expected, and yet the CEB requested a 5% increase in electricity bills to cover revenue shortfalls. Debate thus began on other ways to help the CEB, while also keeping tariffs down. A direct government subsidy on electricity bills could be the result, although the state continues to face budgetary constraints (see Economy chapter).

Lighting Up

In the meantime, however, demand for power in Sri Lanka has been rising steadily in recent years. According to figures from the CEB, in 2015 annual demand stood at around 10,500 GWh, with approximately 38% of this coming from household and domestic use, 39% industrial, 20% commercial and 3% from other sources.

The CEB’s long-term Generation Expansion Plan (GEP), which lays out a blueprint for power generation in the country for the period from 2015 to 2034, expects base load demand to be 12,015 GWh in 2016, rising by 6.9% to reach 12,842 GWh in 2017 and then 22,125 GWh by 2027.

Demand peaked at 2133.74 MW in 2015. On March 9, 2016, a new high of 2293.5 MW was recorded, a level which was widely blamed for causing a number of power outages. The year 2017 is expected to bring new peaks of up to 2415 MW.

Sri Lanka’s strong economic growth is fuelling increasing demand. Real GDP rose 8% in 2010, 8.4% in 2011 and 9.1% in 2012. While a weakened external environment and domestic macroeconomic imbalances brought a slowdown, growth for 2015 stood at around 4.8%, with the World Bank forecasting a similar level for the following year, rising to approximately 5% in 2017. Meanwhile, GNI per capita (at current US dollar rates) grew from $2020 in 2009 to $3800 in 2015. An increase in the number of electrical goods and gadgets purchased by Sri Lankan households is therefore further spurring demand.


The CEB and MPRE have been extremely successful in spreading power connectivity in recent years. The national electrification level stood at 98.4% in September 2015, up from just 29% in 1990. A $115m loan from the Asian Development Bank (ADB) in August 2016 is now helping to bring that up to 100% nationwide over the next five years.

However, achieving full connectivity is proving difficult, since some rural areas and small, offshore islands remain difficult to access. Additionally, connectivity rates have also been low in those areas that have been affected by recent conflict, particularly in the north. That being said, by September 2015, even the town of Kilinochchi located in the Northern Province had a connectivity rate of 84%.

While this all adds up to a strong, nationwide level of demand, there are major regional differences. The Western Province, which has 100% electricity coverage, contributes the most to GDP – some 41.2% in 2015 – and is the most heavily populated. It also holds the most generation capacity, with 3715 MW of installed capacity in 2015 and a maximum demand of 2100 MW. The excess is distributed to the Northern, Eastern and Southern provinces, which, although contributing less to GDP, have shown stronger annual GDP growth rates than the Western Province in recent years.

Energy Mix

The CEB and the IPPs are meeting the country’s demand through a range of facilities. The generation system had a total installed capacity of 4050 MW at the start of 2016. This was divided between 900 MW of thermal, coal-fired plants, 1335 MW of thermal, oil-fired plants, 1375 MW of hydroelectric power and 440 MW from other renewable energy sources (see analysis).

This combination gives Sri Lanka a remarkable energy mix. Hydropower makes up some 37% of installed capacity, a major share, although less than it has been historically. At the same time, coal and fuel oil, which account for 26% and 35%, respectively, are also major sources. There are no natural gas-fired stations currently in operation.

The CEB has the lion’s share of generating capacity. According to the most recent figures from the MPRE, which are for August 2015, the CEB operated 17 large hydropower plants, which accounted for nearly all the installed capacity for hydropower. The CEB also runs six large, oil-fired plants, totalling 544 MW of capacity. In addition, it operates a 900-MW coal-fired power plant and a 3-MW wind power plant. With the addition of several small plants installed on the islands around the Jaffna Peninsula, the CEB had a total installed capacity of 2824 MW.

The CEB’s generation total was split into 2921 GWh of hydropower, 3336 GWh of thermal coal power, 1462 GWh of thermal oil power and 1 GWh of other renewable energy power. The IPPs, meanwhile, generated some 604 GWh of hydropower, 862 GWh of thermal power and 294 GWh of other renewables.


The main IPPs include Asia Power, with a 51-MW, diesel-fired plant at Sapugaskanda; AES Kelanitissa, with a 168-MW combined-cycle diesel plant in the Kelanitissa power station complex; Northern Power, with a 36-MW diesel plant at Chunnakam, in Jaffna province; Westcoast, with the largest IPP project in the country, the 300-MW oil-fired station at Kerawalapitiya in the Western Province; Sojitz, which bought AES Kelanitissa in February 2016 and has a stake in Asia Power; and ACE, which has a 100-MW thermal plant at Embilipitiya in southern Sri Lanka.

Current generation is adequate to meet existing demand, with outages largely the result of technical failures rather than lack of capacity. However, the MPRE is well aware that expected rising demand creates a pressing need for expansion in generating capacity, given the sometimes lengthy time lags between planning and completion of major power projects. Thus, a series of current expansion plans is under way, along with a key debate on the future energy mix. This may well see an increased role for non-hydro renewables, along with the introduction of liquefied natural gas (LNG).


For many years, hydro was the staple of Sri Lanka’s electricity production, playing a dominant role up until the introduction of thermal plants in the 1990s. Since then, the share taken by hydropower has diminished, in part because the country is reaching its current capacity for feasible large-scale projects. At the same time, hydropower can be affected by climate change, with water levels in feeder reservoirs becoming an issue in times of severe drought. Nonetheless, hydropower continues to play a vital part in the energy mix, and is set to retain its place under energy development plans.

The largest of the plants currently in operation is the Victoria Dam on the Mahaweli River, which was completed in 1985 and supports a 210-MW power station. Other major hydropower stations include the 201-MW Kotmale and the 2012-launched 150-MW Upper Kotmale dams, also in the Mahaweli region, along with the 126-MW Randenigala Dam.

A number of new hydro projects are also taking shape under the MPRE’s current plans, while others are receiving upgrades. New initiatives include the Uma Oya Power Project, which is being developed jointly by the MPRE and the MIWRM. Once completed, the project will have an estimated capacity of 120 MW, producing some 290 GWh for the grid, while also providing enhanced irrigation services for the south-eastern Central Highlands. The project has not been without controversy, however, partly because of its Iranian contractor, and also due to its environmental impact. Work was suspended due to these concerns, but restarted in 2015.

Broadlands, situated on the Kelani River, is another project in the pipeline. Scheduled for completion in 2017, the initiative includes two dams and a power station with an installed capacity of 35 MW, generating 126 GWh annually. The complex is located around 90 km north of Colombo and is being financed largely by the Industrial and Commercial Bank of China and Sri Lanka’s Hatton National Bank.

Elsewhere, the Moragolla Hydropower Project is benefitting from a $125m loan from the ADB. This should see a 30.5-MW plant constructed, with an expected completion date of 2019.

Rural Power

The hydro sector includes a number of SPPs, most of which entered the market through the Renewable Energy for Rural Economic Development (RERED) project, supported by the government and the World Bank. The scheme provided a sound financing basis for mini-hydro projects, as well as other renewables schemes (see analysis), with installed capacity in mini-hydro rising from 1 MW in 1997 to 70 MW in 2004 and around 300 MW today.

The schemes have standard power purchase agreements in place with the CEB, and while the RERED scheme has now finished, the mini-hydro segment continues to provide a significant amount of generation capacity and assist with rural electrification and empowerment initiatives.

One key IPP in the hydro sector is Resus Energy, which exited the oil-fired market in 2014 and now focuses entirely on renewables. The company has four small hydropower plants in operation, while another four are under construction.

Vallibel Power Erathna, another key player in this segment, is the largest publicly quoted mini-hydro power company in the country, with some 21.85 MW of installed capacity from three main projects, Erathna, Denawaka Ganga and Kiriwaneliya.

King Coal

The MPRE is also supporting an expansion of the country’s thermal power facilities. However, this has prompted controversy, particularly when it comes to coal. Although Sri Lanka has little in the way of coal reserves, the GEP foresaw a major role for this fossil fuel in the future energy mix. These plans drew opposition from environmental groups, leading to the suspension of some projects. Finding suitable sites for coal plants has proved particularly problematic due to Sri Lanka’s relatively small size, with the proximity of proposed locations to population centres sparking several protests.

The proposed 500-MW Sampur plant in Trincomalee, a joint project for the CEB and the National Thermal Power Corporation of India, is a case in point. In September 2016 the MPRE cancelled plans for its construction ahead of a Supreme Court ruling upholding a petition against it by non-governmental organisations. As a consequence, the CEB stated that it is likely to have to make up the resulting shortfall in future capacity with fuel-oil thermal plants. In November 2016 the board announced plans for the construction of two such plants, of 100 MW and 70 MW, respectively. The projects are scheduled to be commissioned in December 2018.

Other key oil-fired plants already in operation include the Uthuru Janani Thermal Power Plant outside Jaffna. This 24-MW plant, commissioned in 2013, was completed in record time and replaced a series of high-cost emergency power stations previously operating in the northern district.

Meanwhile, the country’s existing major coal-fired plant, the 900-MW facility at Norochcholai, also met with controversy in 2016. Also known as the Lakvijaya Power Station, the plant experienced a major outage in October, causing blackouts in Colombo and other areas for several days. Investigations revealed this to be the result of a fault in the transmission lines to the facility, rather than any fault in the Chinese-built plant itself, a discovery that supported the MPRE’s calls for further upgrading of the nation’s electricity transmission system.

Connectivity Focus

Such upgrades will form a major part of the MPRE and CEB’s plans for the years ahead. The system currently relies on a main, backbone 220-KV transmission line, running from hydropower stations in the central highlands to Colombo and the main centres of the Western Province, while also extending north to Anuradhapura. In addition, a number of 132-KV lines extend from this backbone and cover most of the rest of the country, although key gaps exist in the north.

The MPRE has been working on upgrading the system for some time and has scored notable successes by reducing transmission losses, surpassing its 2016 goal of 12% loss three years early. The latest data from the World Bank, for 2014, shows a loss rate of just 11%. In addition to curbing losses, the sector must also invest into storage facilities. “There currently exists excess capacity, specifically for wind and solar power. It is important to optimise usage during peak and off-peak hours,” Damitha Kumarasinghe, director-general of the Public Utilities Commission of Sri Lanka, told OBG.

One key initiative that will further develop the network is the 220-KV Veyangoda-Habarana transmission line project, which is receiving support from the Japanese International Cooperation Agency. The initiative includes both substations and transmission lines, with a consortium of Mitsubishi Corporation, J-Power Systems Corporation and Ceylex Engineering awarded the contract in November 2016. At present the projects is expected to be completed around October 2019.

A further, 400-KV transmission line project from Habarana to Sampur has also been studied and costed, again with Japanese assistance. Given the cancellation of the Sampur coal-fired power station project, however, its future remains uncertain. Another much-discussed project is a grid interconnection between Sri Lanka and India, via a 400-KV cable, 50 km of which would be undersea, linking Madurai in India with Anuradhapura in Sri Lanka. This would give the country access to the South Asian Grid, which currently links India to Nepal and Bhutan. The project would likely bring a number of benefits, including load spreading. However, preparation is still required on the regulatory and legal side for Sri Lanka to begin importing and exporting power, and the rolling out of hard infrastructure. The debate on this looks set to continue, although the MPRE and CEB expect upgrades and extensions to the transmission network to advance.

The transmission system feeds into four distribution regions, spreading south from region 1 in the north. Each of these is then divided into a series of sub-regions, in addition to the areas covered by LECO, which includes coastal areas around Colombo and further south, around Galle, in region 4.

Incorporated as a private firm in 1983, LECO supplies some 537,604 customers as of 2015. It has been recently focused on reducing distribution losses, which fell from 4.02% in 2014 to 3.76% in 2015.

Future Power

The controversy over coal, coupled with the long-term expense of fuel oil, has reignited a debate on Sri Lanka’s future power mix and shone a spotlight on LNG as a potential new feedstock. Aside from having a much cleaner environmental footprint than coal, LNG has also become cheaper due to a global supply glut and falling oil and gas prices, with costs reaching new lows in recent years.

Significantly, in late 2016 the MPRE announced that a new diesel plant would be put out for tender, as a result of the Sampur cancellation, which could be converted to LNG at a future date. The plant is likely to be either an IPP or a PPP.

Testing The Waters

At present, however, the country has no production facilities, nor infrastructure for landing, storing and distributing imported LNG, raising the prospect of a major new investment, if the authorities decide to progress down this route.

Sri Lankan officials began testing the waters in the international LNG industry in 2016. In November, while in Doha, Rauff Hakeem, the minister of city planning and water supply, suggested two 300-MW LNG power plants were under consideration, with Qatar a potential supplier. Press reports suggested that one of these could be sited at Kerawalapitiya. Meanwhile, Japan may well prove to be a major source of investment and expertise for the infrastructure, with several consultancies suggesting the world’s number-one LNG importer had the experience and financing to help construct onshore LNG terminals, or implement a short-term solution of a floating storage and regasification unit.

UK, Indian and US companies are also reportedly interested in developing the LNG sector, with the Board of Investment suggesting in November 2016 that four proposed LNG power station projects, worth some $3bn and involving around 2050 MW of installed capacity, had so far been submitted by companies from these countries.

Offshore Prospects

Sri Lanka first began looking at the option of LNG in 2011, when Cairn India discovered deposits of natural gas offshore in the Mannar Basin. This marked a major step forward for Sri Lanka’s oil and gas exploration sector, which despite possessing a history that dates to the late 1960s, has so far failed to deliver major finds. The Mannar Basin, which runs from the north-western coast of Sri Lanka under the channel separating the island from India, and the Cauvery Basin, situated adjacent and to the north, have both been the areas of main exploration activity.

Energy Oversight

The main government body overseeing this sector is the Ministry of Petroleum Resources Development (MPRD) set up in 2005. In 2010 the downstream part of activities was placed under a new Ministry of Petroleum Industries (MPI), with the upstream component falling directly under the president’s office. However, in 2015 the up- and downstream segments were reunited under the MPRD. The CPC, Ceylon Petroleum Storage Terminals and the Petroleum Resources Development Secretariat (PRDS) come under the ministry’s jurisdiction. The latter body is the main oversight and management body for the sector.

In 2007 the government parcelled out the Mannar Basin into nine exploration blocks, with exploration licences for three of these put out for international tendering. Only one, Block 1, received sufficient bids, with Cairn India the eventual winner.


The firm discovered natural gas in two wells out of the four it drilled in 2011 and 2013. Recoverable volume was estimated at around 60bn cu metres. However, the discoveries came at an unfortunate time. Global prices fell sharply, while the cost of recovery in the deep Mannar Basin made the project uneconomical, according to Cairn, which withdrew from exploration in 2015.

Since then, the government has decided to revive an earlier exploration for the Cauvery Basin, located offshore of Jaffna, and two blocks were put forward in mid-2016. In the meantime, the PRDS has signed an agreement with Total to explore marginal areas on the country’s east coast, with seismic work being undertaken by the French oil giant. Interest in the petroleum sector has also refocused on downstream activity, with refining and storage currently the subject of much new debate (see analysis).


Sri Lanka’s power sector is on the brink of change, as it shifts the focus from coal to renewables and LNG. Such moves signal numerous benefits for both the environment and investors, but will also present several considerable challenges. Major investment is required – and rapidly – if future power shortages, predicted for 2018 onwards, following the cancellation of Sampur, are to be avoided. The current situation highlights, too, the importance of energy conservation. Improvements to the transmission and distribution services will also need to be supplemented by public awareness campaigns, which are required to help improve safety in both households and workplaces.

In addition, boosting capacity is also necessary, given the range of large-scale projects that are currently under way or in the pipeline. Port City in Colombo and the proposed Megapolis in Western Province will both make significant additional demands on the power supply.

Meeting these needs will require a coordinated effort between agencies and well-worked private sector participation. The current government has expressed a desire to be more open to international investors, with much goodwill evident on all sides. In such circumstances, the power sector could well be a major investment destination in the coming years, with companies from Europe, China, Japan and the US competing for a wide range of contracts. Powering up the country for the next level of its development holds significant opportunities for industry players operating in a broad range of segments.


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The Report: Sri Lanka 2017

Energy & Utilities chapter from The Report: Sri Lanka 2017

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