Sri Lanka’s energy sector has undergone a significant transformation in recent decades, as growth in the economy and population have eroded the country’s capacity to meet its energy needs via hydropower, strained the national grid and pushed thermal generation to dominate the industry.
Although it benefits from an abundant supply of renewable energy (RE), electricity shortages and rising fuel imports have become serious concerns, with the problem expected to intensify as the government advances its sizeable infrastructure development agenda. At the same time, financing shortfalls and rising electricity demand have presented new opportunities for private sector investors, with the government’s Vision 2025 – an economic development plan released in October 2017 – emphasising public-private partnerships (PPPs) as a preferred finance mechanism for new projects, including power plants. PPPs have been deployed successfully in the power sector for decades, although chronically delayed contract awards and heavy financing requirements continue to weigh on project development in 2018.
Recent policy developments have been promising, however, with the government increasingly shifting its focus away from oil- and coal-fired power plants towards environmentally friendlier fuel sources, including liquefied natural gas (LNG) and RE. Years of severe drought and growing concern over climate change have led the government to set its sights on bold RE targets, with hydro, solar and wind power set to play a critical role in meeting long-term demand, while medium-term strategies will focus on establishing LNG import infrastructure and new gas-fired plants.
Unexplored offshore blocks could offer the potential to boost self-sufficiency over the medium term, with the government moving to award new exploration licences, creating opportunities for private upstream investment, even as its most recent budget, which introduced specific plans to phase out combustion engines, has dampened the conventional downstream segment’s long-term outlook.
A significant framework for the industry was put in place in 2009 with the passing of the Sri Lanka Electricity Act, which stipulates provision of 24-hour electricity services, a transparent electricity tariff policy, and cost-efficient infrastructure development with open, competitive and transparent bidding processes. The act also established the Ministry of Power and Renewable Energy (MPRE), which supervises all non-oil-and-gas activities in the energy sector, as well as non-conventional RE (NCRE) such as solar, wind, mini-hydro, biomass, coal and hydropower projects.
Moreover, the MPRE supervises seven subsidiary agencies, including the Ceylon Electricity Board (CEB), the Lanka Electricity Company, the Lanka Coal Company, LTL Holdings and the Sri Lanka Sustainable Energy Authority (SLSEA). The MPRE also created the Atomic Energy Board in 2010 to examine the potential for nuclear power generation beginning in 2025, and the Atomic Energy Regulatory Council in 2011 to facilitate nuclear technology deployment.
The CEB, established in 1969, is Sri Lanka’s largest electricity company, and its responsibilities include generation, transmission and distribution of electricity to all consumer categories, as well as revenue collection. In 2016, the last year for which data is available, the CEB accounted for 72% of total generation capacity, including 1377 MW from hydropower, 564 MW from oil and 855 MW from coal.
The Public Utilities Commission of Sri Lanka (PUCSL), established in 2002, is another important player in the power sector. The commission is the industry watchdog, responsible for monitoring and evaluating generation, issuing licences, transmission, distribution, supply, consumption and service quality. The PUCSL also sets tariffs under a multi-year system, with the most recent plan covering the period from 2016 to 2020. The commission also claims to act as a shadow regulator for the lubricant sub sector, and plans to assume responsibility for the water and petroleum industries in the future.
Meanwhile, the Ministry of Irrigation and Water Resources is responsible for overseeing projects and resources, as well as four subsidiary organisations: the Irrigation Department, the Water Resources Board, the Irrigation Management Division and the Kothmale International Training Institute.
In March 2015 the government published the Sri Lanka Energy Sector Development Plan for a Knowledge-based Economy (ESDP), running from 2015 to 2025. As a vital strategic industry documents, it attempts to address the challenges created by rising power consumption through a series of ambitious infrastructure and policy development targets, although many of these, including a goal to meet 100% of domestic energy demand via renewable resources by 2030, have since changed.
The 10-year strategy aims to reach at least 1000 MW of capacity from indigenous gas resources and add 2000 MW of thermal capacity, including natural gas and biomass, to the supply mix by 2020. It also targets reducing technical and commercial losses from transmission and distribution networks from 11% in 2014 to 8% in 2020. The aims are all part of an overall goal of boosting electricity generation capacity to 6400 MW by 2025 and to make the country energy self-sufficient by 2030. In 2016 an early target was achieved by expanding electricity coverage to 100% of the population.
Alongside the ESDP, the Vision 2025 economic development strategy is under way. Released in September 2017, Vision 2025 aims to address constraints to economic growth and lift the standard of living. It includes specific targets to improve the energy sector and address the financing shortfalls facing new power projects. The plan focuses on PPPs as a means to reduce reliance on loans in the provision of public assets and services, with the Ministry of National Policies and Economic Affairs (MNPEA) currently working to formulate a “clear PPP policy with a well-defined legal, regulatory and institutional framework to attract private players with the requisite capacities”.
Energy-specific projects to be developed in partnership with the private sector were included in Vision 2025’s related Public Investment Programme (PIP), a medium-term plan with a focus on priority projects for development between 2017 and 2020.
Delivering these projects on time will be a critical priority for the government given rising energy needs; the SLSEA reported that electricity demand jumped by 51.6% between 2005 and 2014, rising from 623.7 thousands of tonnes of oil equivalent (toe) to 945.7 thousands of toe, while the CEB reported that total electricity consumption rose by 74.4% between 2005 and 2016, from 7200 GWh to 12,560 GWh. Moreover, both demand and consumption are expected to triple over the next two decades as transformative real estate projects, such as Port City Colombo, gather pace (see analysis).
Investment & Demand
Noting that Sri Lanka’s electricity requirements were growing at an average annual rate of between 5% and 7%, requiring an additional 150-200 MW of installed capacity each year, the PIP’s investment priority areas for the 2017 to 2020 period include approximately LKR594m ($3.9m) of national budget investment in electricity generation, as well as LKR147.3bn ($961.7m) for the CEB for generation projects and LKR134.9bn ($880.1m) for transmission projects.
The power sector has long accounted for the majority of large PPP developments in the country, with data from the World Bank’s PPP Knowledge Lab showing that seven electricity projects worth a combined $1.13bn reached financial close between 1999 and 2012. The total value of large PPPs developed over the same period was $2.06bn.
Despite this strong track record, the authorities have struggled to move forward on a number of major projects in recent years, as shifting long-term strategies, delayed contract awards and government-subsidised electricity tariffs weighed on investor appetite. The PUCSL reported that Sri Lanka failed to develop 1720 MW of planned new capacity between 2006 and 2016, instead relying on years of short-term solutions, including small-scale, oil-fired power plants that cost significantly more than the authorities had anticipated (see analysis).
In an August 2017 report examining Sri Lanka’s investment climate, the US International Trade Administration (ITA) highlighted problems for the energy industry. “From an investor viewpoint, the power and petroleum sectors are particularly challenging, as decision-making authority is highly fragmented, and the capital investments required are substantial,” the report said, noting that trade union opposition in state-owned energy companies has dampened the reform outlook.
According to the PUCSL, at the end of 2016 there were 239 grid-connected power facilities operating in the country, with a combined capacity of 3887 MW. Of these, 27 were owned and operated by the CEB. Five additional thermal plants were owned and operated by independent power producers, and 207 small-scale renewable projects by small power producers.
Hydropower historically has played a significant role in the country’s power supply. It is largely derived from the Kelani and Mahaweli river basins, including a plant at the Laxapana waterfalls, where the country’s first-ever hydropower project was commissioned in 1950. Current facilities at the falls comprise five hydropower stations built along Kelani River tributaries, Kehelgamu Oya and Maskeli Oya. Two major storage reservoirs, Castlereigh and Moussakelle, are also located at the complex. Meanwhile, the Mahaweli hydro complex includes seven hydropower stations and three major reservoirs – Kothmale, Victoria and Randenigala as well as the Samanalawewa reservoir on the Walawe River.
Though hydropower accounted for the majority of electricity generation in Sri Lanka for much of the 20th century, its share of generation has dropped off significantly in recent years, with output declining following periods of severe drought, and rising domestic energy demand, which pushed the government to seek alternative power sources. World Bank data shows that hydro generation accounted for a high of 99.8% of electricity generation in the country in 1990, with its share of production seldom dropping below 70% between 1971 and 1996. However, in 1999 this figure fell to 67.43 and dipped further to 45.7% in 2000.
While variable output saw hydro account for a peak of 57.5% of production in 2013, it has seldom risen above 50% since 2000. According to PUCSL figures, hydropower accounted for 35% of total capacity and 25% of generation at the end of 2016.
This shift prompted the government to invest in a series of thermal plants in recent decades, most notably the 900-MW Lakvijaya coal station in Norochcholai, a $1.4bn project financed by the Chinese government and commissioned in 2011.
However, reliability is still an issue, as output from the plant has been inconsistent. Its total generation capacity is 855 MW; however, one of its three units operated at a plant factor of 29.8% in 2016, meaning actual energy output was less than a third of the unit’s full installed potential, according to data from PUCSL. Moreover, the highest plant factor recorded at any of the CEB’s hydropower plants in 2016 was 50.4%, while the lowest was 12%. By comparison, inefficient oil-fired plants recorded plant factors of between 7.8% and 77.6% during the same year.
The high cost of imported energy sources is particularly concerning given that imports accounted for 32% of the 2016 energy mix, in contrast to the 2006 goal of 4%. According to the PIP, the total cost of crude oil imports rose from LKR114.3bn ($747.5m) in 2007 to peak at LKR187.8bn in 2014, before moderating to LKR100.6bn ($657.9m) in 2015. Prior to the mid-2014 global oil price crash the government reported that the country’s crude oil, coal and refined petroleum product import bill stood at $5bn annually, representing 25% of total import expenditure, and nearly 50% of export income.
Electricity shortages could impact Vision 2025’s plans to establish new economic and industrial development zones to attract foreign direct investment, with the MNPEA writing that industrialisation targets cannot be met without increasing capacity. As a result, the PUCSL and MPRE have increasingly shifted their focus towards gas-fired and RE projects, altering some of the ESDP’s long-term priorities, as well as the CEB project development plans.
Import Bill & Subsidies
Frequent breakdowns at the Norochcholai plant have forced the government to purchase costly fuel imports to cover the shortfall, which has weighed heavily on budget deficits as well as foreign exchange reserves.
In August 2017 the PUCSL addressed the country’s near-, mid- and long-term energy needs in a report that highlighted the substantially lower efficiency of oil-fired electricity generation. The PUCSL estimated oil generation costs of LKR27.87 ($0.18) per KWh in 2016. Comparatively, costs per KWh for NCRE, coal and hydropower were LKR16.71 ($0.11) , LKR9.90 ($0.06) and LKR5.03 ($0.03), respectively.
Although the MPRE and the CEB reported that the average sales price of electricity was higher than the cost of generation between 2011 and 2014, electricity and fuel are heavily subsidised by the government. In a June 2016 Article IV Consultation, the IMF warned that both the Ceylon Petroleum Corporation (CPC), which holds a monopoly in fuel refining and distribution, and the CEB had been incurring significant losses caused by implicit energy subsidies; prices for fuel and electricity had been set below cost-recovery levels.
In December 2017 the CEB reported it would incur approximately LKR29bn ($189.6m) in losses for 2017; this came on the back of local media reports in October 2017 that the CPC owed over LKR300bn ($2bn) to banks as a result of fuel subsidies.
Renewables will play a critical role in boosting long-term generation capacity in the country, although recent policy announcements have set several conflicting mid- and long-term targets. In February 2016 the MNPEA emphasised its ambitions to meet all of its electricity demand using RE by 2030, as part of the ESDP. However, at the 22nd UN FCCC Conference of Parties, hosted in Morocco in November 2016, the government pledged to generate 100% of its electricity using RE by 2050.
Meanwhile, in April 2017 the CEB released its Long-Term Generation Expansion Plan (LTGEP), which sets various targets over the 2018 to 2037 period. The plan calls for generation capacity additions, including 842 MW of large-scale hydropower, 215 MW of mini-hydro, 425 MW of oil-fired power, 1500 MW of gas-fired power, and 2700 MW of coal-fired power, with 8361 MW of new capacity expected to come on-line over the next 20 years.
This would see RE’s share of total generation capacity fall from a projected 36% in 2018 to 35% in 2030 and 31% in 2037, while coal’s share of total generation would rise from a projected 28% in 2018 to 48% in 2030 and 54% in 2037.
However, coal-fired plants have become increasingly unpopular, and recent announcements regarding new power projects indicate that the government is likely to replace several large-scale, planned coal projects with new gas-fired plants. Additionally, a landmark report on the country’s power sector and long-term goals published in August 2017 by the UN Development Programme and the Asian Development Bank (ADB) suggests how the country could achieve its ambitious RE aims by gradually phasing out all fossil fuels (see analysis).
In August 2017 the government announced it would adjust its medium-term energy policy to increase its gas-fired power generation beyond the LTGEP’s recommendations. New plans call for 1000 MW of new gas-fired power plants to be developed before 2022, against the LTGEP’s 705 MW by 2025. A special committee also recommended converting 623 MW of existing oil-fired capacity to gas-fired facilities, as well as expedited construction of new LNG import facilities (see analysis).
Though still in its very nascent stages, nuclear power could offer another avenue to attain energy self-sufficiency. Though it is not included in any planning policies, the government has recently made moves to advance nuclear power development. In February 2015 a civil nuclear energy agreement was signed with the government of India, aimed at improving knowledge transfer, resource sharing, capacity building and personnel training in areas such as nuclear medicine, waste management, safety and security. In January 2018 the country moved to forge new ties with other global nuclear powers, and Ranjith Siyambalapitiya, minister of power and renewable energy, met with Nikolay Spassky, deputy director of Russia’s state-owned nuclear corporation Rosatom, to discuss opportunities for cooperation in nuclear energy development. Members of the Atomic Energy Board and the Atomic Regulatory Council were also in attendance.
Oil & Gas Oversight
Though from 2010 to 2015 legal amendments shifted responsibility for downstream activities under the presidency, the Ministry of Petroleum Resources Development (MPRD), created in 2005, currently regulates the upstream and downstream activities of the industry.
The ministry is mandated to support the country’s push for energy self-sufficiency through domestic oil and gas production, ensuring adequate supply, developing new storage projects, promoting fuel conservation, and managing the distribution and quality of refined fuels, such as diesel and petrol.
Three important institutions operate under the ministry: the CPC, responsible for downstream activities including imports, refining, blending, storing, fuel distribution and petroleum product retailing; Ceylon Petroleum Storage Terminals Limited (CPSTL), in charge of handling, storage and distribution; and the Petroleum Resources Development Secretariat (PRDS), which acts on behalf of the state to negotiate petroleum resource agreements.
In 2005 seismic and airborne gravity surveys completed by Norwegian geophysical data firm TGS revealed that areas in the nation’s territorial waters are likely to contain large oil reserves. According to the ITA, this puts estimates at more than 1m barrels of oil resources over a 30,000-sq-km area in Sri Lanka’s northern waters, including the Cauvery Basin in the Palk Straits, located in between the country and India, and the Mannar Basin, along the western coast. In October 2017 the PRDS reported much more optimistic figures, telling local media that the Mannar Basin alone could contain 5bn barrels of oil and 9trn cu feet of natural gas, with its M2 block holding especially high potential for future exploration.
In conjunction with this announcement, the PRDS said it hoped to see offshore natural gas production commence by 2021. This is in line with the overall strategy of shifting towards gas-fired electricity generation, which includes efforts to attract new interest in offshore gas exploration and production.
In December 2016 the MPRD signed an agreement with US firm IHS Energy, which will help develop a marketing plan, bid documents and partner selection criteria, focusing on the high-potential block M2 in the Mannar Basin. The PRDS, meanwhile, unveiled its Petroleum Exploration Development Plan in September 2017, highlighting new methods to commercialise natural gas discoveries in the M2 block, as well as a strategy to continue conducting a study of blocks JS5 and JS6, in partnership with France’s Total. The document also lays out plans for new exploration in the Cauvery Basin, as well as the acquisition, marketing and licensing of 2D and 3D surveys comprising seismic and gravity magnetic data in the Mannar, Cauvery and Lanka basins.
Medium-term ambitions include commencing domestic production to fuel a series of planned gas-fired power plants, with the PRDS noting that long-term development could see Sri Lanka become an LNG exporter as well. The government estimates it would take a share of between 40% and 50% of any offshore project profits in the form of royalties, tax payments, profit share allocations, national equity participation and bonus payments.
The oil and gas industry is relatively undeveloped. Petroleum exploration did not begin in the country until the late 1960s, and it was not until over 40 years later that any significant developments occurred. In 2001 the ADB financed a programme to study Sri Lanka’s petroleum potential, as well as draft accompanying legislation, including a petroleum resources agreement. This was followed by the TGS seismic surveys between 2003 and 2005, which were used to split the area into nine exploration blocks ranging from 3340 to 6640 sq km.
Three exploration blocks were eventually selected to be offered through the country’s first international licensing round. In July 2008 a subsidiary of Cairn India, Cairn Lanka, signed the first agreement for development in 25 years for block M2 in the Mannar Basin. In 2011 the company reported striking a 25-metre column that revealed gas and other liquid hydrocarbons potential in the CLPL-Dorado-91H/1z wildcat well, which was drilled to about 1354 metres.
Global oil market volatility impacted drilling, however, with Brent crude prices falling from an average of $115 per barrel to less than $60 between mid-2014 and 2016. Cairn India relinquished its interest in the project in October 2015, and the company was acquired by Indian mining firm Vedanta in April 2017.
Although oil prices remained subdued for much of 2017, oil markets began to regain traction later in the year, with Brent crude prices crossing the $70-per-barrel threshold in January 2018, potentially brightening the prospects for new investments in exploration and production.
In February 2017 the government launched a tender to re-open the offshore M2 block, inviting companies to appraise and develop the 2924-sq-km area, which includes the Barracuda and Dorado gas condensate recoveries. A data package containing well data and 2600 sq km of 3D seismic surveys as part of the new licence were also set to be released, though no updates had been announced as of March 2018. The combined potential reservoir capacity of the Barracuda and Dorado fields is estimated to be more than 2trn cu feet of natural gas and 10m barrels of condensate. The PRDS additionally reported that the basin’s thick, mature sedimentary deposits could yield sufficient high-quality oil and gas supply to meet the country’s domestic energy needs for up to 60 years, further improving development prospects.
Although no new exploration licences were awarded in 2017, according to the ITA, several major oil and gas companies have expressed interest in undertaking deepwater exploration in the Mannar Basin, and the government has recently announced plans to expedite new licensing rounds in order to meet its 2021 production deadline.
In January 2018 the PRDS said it planned to launch a third licensing round for offshore exploration blocks, including blocks in the Cauvery Basin. The announcement came just a week after it opened a bidding round for proposals to conduct airborne geophysical surveys over both basins to support exploration activities, with the PRDS reporting that 12 interested bidders had made it through to the expression of interest stage for the M2 block.
New downstream opportunities have also been developing in recent years. According to the ITA Sri Lanka’s sole refinery, the 50,000-barrel-per-day (bpd) Sapugaskanda oil refinery, is in urgent need of upgrading and expansion. In August 2016 the MPRD announced that it planned to invite bids for a $2.3bn modernisation project which would double its capacity to 100,000 bpd. Authorities are also planning to add a hydrocracker to expand production of jet fuel, diesel and kerosene, and replace the country’s primary 5.8-km oil pipeline. Built in 1969 and designed to refine Iranian crude oil, the Sapugaskanda refinery meets 30% of domestic demand; according to the CPC, which operates the refinery, the coming up upgrades would enable it to meet 100% of the country’s fuel requirements by 2025.
The CPC reported in January 2017 that 30 companies had expressed interest in the modernisation project. The expansion project would save reportedly $400m annually, and the CPC is considering either commissioning a suitable bidder to act as builder and supplier under a long-term contract that could include using domestic production from the Mannar Basin, or financing the project through a concessionary loan. As of March 2018, the project has yet to move into the tendering phase and no new developments have been announced.
While the refinery project will be critical for reducing import costs, the government’s long-term renewable targets have cast doubt on the conventional downstream industry’s long-term prospects. Published in September 2017, the 2018 budget proposed that the country phase out all fossil fuel-powered vehicles in the country by 2040, introducing measures to replace government fleets with electric vehicles by 2025, and roll out new incentives and tax breaks to encourage imports of electric three-wheelers, cars and buses. New taxes, including a special tax on vehicles with larger engine capacities, were also introduced.
The policy should help reduce Sri Lanka’s fuel import bill; the CPC reported that the cost of refined fuel products jumped from LKR110.9bn ($725.2m) in 2007 to LKR157.3bn ($1bn) in 2008, increasing each year between 2010 and 2014 to peak at LKR391.7bn ($2.7bn), before moderating to LKR244.2bn ($1.6bn) in 2015 due to lower oil prices. However, the policy also casts doubt on the long-term economic viability of refining projects and investments, given the government’s near-term focus on building LNG import and transportation infrastructure (see analysis).
While continuing to grapple with financial shortfalls, costly energy imports and external factors impacting traditional energy sources, Sri Lanka’s energy sector continues to hold high potential for future development. Although contract awards for many major planned projects have been delayed as the country adjusts its energy policy to reflect changing cost and climate realities, the government has sent strong signals that it intends to expedite private sector-supported power plant development over the medium term, with a focus on both gas-fired and RE projects.
Long-term development of the upstream oil and gas industry could dramatically alter the energy landscape, and while current global conditions are not particularly conducive to new investment in exploration and production, the aim of achieving long-term energy self-sufficiency is feasible, with strong government support expected to help the building of sustainable, cost-effective projects, reduce the import bill and put the country on track to meet its targets for Vision 2025 and beyond.