The energy sector has made noteworthy progress in a number of respects in recent years. Despite political turbulence in Sri Lanka, key strategic measures were enacted in 2018 to encourage growth, including increasing renewable energy generation capacity; opening the hydrocarbons sector to greater overseas investment; and forming joint working groups to expedite the construction of liquefied natural gas (LNG) power plants following a string of agreements with foreign governments.
Given Sri Lanka’s expanding fiscal and trade deficits, developing an efficient energy market has been cited as one of the key factors that could facilitate a stable macroeconomic environment. However, while recent developments signal the intent of policymakers to promote energy security, disagreements between technocrats regarding a long-term generation expansion plan have hindered development. Aside from a collection of small renewable energy initiatives, the country has not commissioned a major power plant since 2014.
Size & Shape
Sri Lanka’s energy sector has experienced significant transformation in recent decades, transitioning from a predominantly agrarian economy to an urbanised society. Access to electricity increased from 50% of the population in 1990 to 96% in 2016, according to the World Bank, and by 2018 the country had achieved 98% connectivity. The national grid has also seen considerable improvements in operational efficiency, with the rate of technical loss in transmission and distribution maintained at around 10% in recent years, which marks considerable progress from a 19% loss in transmission and distribution in 2002.
Total installed electricity generation was an estimated 14,764 GWh in 2017, according to the latest annual report from the Public Utilities Commission of Sri Lanka (PUCSL). Of this amount, some 35% was supplied by coal; 21% by major hydropower; 34% by fuel oil-based power from Ceylon Electricity Board (CEB) and independent power producers (IPPs); and around 10% by non-conventional renewable energy (NRE) sources, including mini-hydro, solar, wind, biomass, and biogas and waste.
Comparing power generation in the first seven months of 2018 with that of the same period of 2017 paints a mixed picture, though growth is evident overall. Statistics from the Central Bank of Sri Lanka (CBSL) report a 3.7% year-on-year (y-o-y) increase in total electricity generation between January and July 2018 to approximately 8800 GWh. As a result of increased rainfall, hydropower generation, excluding mini-hydro, increased by 99.5% compared to the same period in 2017, which was characterised by severe drought.
At the same time, total fuel oil-based power generation declined by around 22.6%, while several failures at the Norochcholai power plant saw coal power generation fall by 13.5% y-o-y. On the back of increased generation from solar and mini-hydro, total power produced by NRE sources during the period increased by 37.2% y-o-y. Meanwhile, electricity sales grew by an estimated 4.3%.
As of the fourth quarter of 2017 there were approximately 6.6m electricity consumers in the country, of which 87% were domestic, according to the PUCSL. In terms of total electricity demand, domestic consumers accounted for 34%, while industries stood for 29% and general purpose consumers 21%, with the remaining 16% accounted for by religious organisations, government institutions, hotels and street lighting. The utilities sector’s contribution to GDP reached an all-time high of LKR25.6bn ($161.2m), or approximately 1.1% of total GDP, in the third quarter of 2018, according to the latest available data from the CBSL.
With limited indigenous fossil fuel resources, Sri Lanka has become to some extent reliant on imports, which weigh heavily on the current account. During the first nine months of 2018, it spent $2.4bn on inbound fuel shipments, up 29% y-o-y. On the other side of the coin, earnings from the export of petroleum products increased significantly due to higher export prices of bunker and aviation fuel, despite a reduction in volume: in the January to September period exports of petroleum products increased by approximately 55% y-o-y to $453.8m.
With the government under pressure to reduce the deficit as part of its three-year loan agreement with the IMF, the power sector’s budget allocation decreased in 2018. Total recurrent expenditure allocated to the Ministry of Power and Renewable Energy (MPRE) was LKR498.15m ($3.1m) – a 74% reduction on the previous year. Total capital expenditure was estimated at LKR339.73m ($2.1m) compared to LKR6.99bn ($44m) in 2017, with LKR127.28m ($802,000) dedicated to infrastructure development – down from LKR6.4bn ($40.3m).
State-run oil firm the Ceylon Petroleum Corporation (CPC) recorded a loss of LKR11.1bn ($6.9m) in the first four months of 2018, according to a report by the Ministry of Finance, with bank borrowing totalling LKR375.49bn ($2.4bn). As a point of comparison, the firm recorded a profit of LKR3.55bn ($22.4m) in 2016. As of the end of April 2018 the CPC had accumulated losses of LKR218.6bn ($1.4bn) and was owed billions of rupees of arrears by the state-owned entities Sri Lankan Airlines and CEB.
Structure & Oversight
In terms of oversight, the Ministry of Petroleum Resources Development (MPRD) is the policy-making body responsible for upstream and downstream petroleum activity, while the MPRE is responsible for the formulation and implementation of policies, programmes and projects pertaining to power and energy.
The generation of electricity is managed by state-owned corporations along with the support of private sector players. The PUCSL is the national regulator for the electricity sector, and licensor for the petroleum and water service industries. As part of its role, it regulates the generation, transmission, distribution, supply and use of electricity. The Sri Lanka Sustainable Energy Authority (SLSEA) is tasked with the promotion of renewable energy projects through private investment under the MPRE.
The national grid is owned and maintained by CEB. It comprises 220-KV and 132-KV transmission networks interconnected to switching stations, grid substations and power stations. CEB also serves as the sole electricity buyer in the country, sourcing power from generation licensees through power purchase agreements. Electricity distribution and sales fall within the remit of CEB as well as Lanka Electricity Company (LECO), another state-owned organisation. CEB distributes electricity to localities at 33 KV and 11 KV, while LECO distributes at 11 KV. However, for small-scale customers, such as households and commercial buildings, CEB and LECO supply electricity at 400 V.
By the end of 2018 CEB had a total of 25 power plants under its purview after having granted one transmission licence and four distribution licences. According to the CBSL, CEB generation accounted for around 75.6% of the national grid’s installed capacity during the first seven months of 2018, while the remainder was supplied by IPPs and LECO.
Sri Lanka is home to a number of IPPs, which have been instrumental in the development of power generation projects across the country. IPPs have primarily been involved in thermal power generation, but have also instigated a few small hydropower projects. The largest IPP is West Coast Power, which owns and operates a 300-MW combined-cycle power plant at Kerawalapitiya, near Colombo, on the west coast of the country. In 2014 the plant reached a capacity of 270 MW, generating approximately 639 GWh in total that year.
The second-largest IPP is AES Kelanitissa, which operates a 168-MW combined-cycle plant that came on-line in 2003 and has operated in combined-cycle mode since 2005. In 2014 the plant generated nearly 488 GWh of electricity. Formerly a subsidiary of the US-based AES Corporation, the facility was acquired by Japan’s Sojitz Corporation in early 2016.
Lanka Coal Company, which was established shortly after the commissioning of the first coal plant in Puttalam, procures and supplies coal to thermal plants across the nation. Current shareholders include CEB, Ceylon Shipping Corporation, Sri Lanka Ports Authority and the Treasury department.
In an effort to reduce costs for consumers, policymakers have historically looked towards the least expensive option for power generation. The sector traditionally relied upon hydropower derived from the Kelani and Mahaweli river basins to supply the majority of the country’s needs. Over the years, however, economic expansion and population growth meant that the sector had to increasingly turn to fossil fuel imports. At present, thermal heat – supplied by coal, other fuel oils and biomass, an indigenous resource typically used for cooking by domestic households in rural areas – has the largest share in the energy mix.
A major hindrance to the launch of new power projects in Sri Lanka in recent years has stemmed from the non-implementation of CEB’s Least-Cost Long-Term Generation Expansion Plan (LCLTGEP) due to a disagreement between the regulator and government policy changes.
In 2013 CEB submitted the LCLTGEP 2013-32 for the approval of the PUCSL, which was granted in 2014. In 2015 CEB submitted LCLTGEP 2015-34 and received a conditional approval from PUCSL in 2016 due to the government’s decision to remove the Sampur coal power plant from the plan.
Expansion Plan 2018-37
In April 2017 CEB presented a new LCLTGEP 2018-37 proposal, which included coal as the primary source of generation with the addition of some LNG plants. The proposal was debated in a public consultation, which resulted in the PUCSL adjusting the fuel prices in the plan to current market prices in accordance to the leastcost principle. The revised plan did not include the coal power plants that were proposed in the initial iteration as their costs were considered too high.
In September 2018 local media announced that CEB and the PUSCL had reached enough common ground to implement the plan. This came after a subcommittee on power and renewable energy was assigned to resolve the ongoing dispute. The subcommittee recommended that the next edition of the LCLTGEP for the years 2020-39 include a mandatory signing of government-to-government memoranda of understanding with China, India and Japan for the construction of three LNG plants totalling 1400 MW (see analysis). The subcommittee also requested the PUCSL revisit the possibility of establishing coal-fired power plants after 2025. While CEB agreed to work with the PUSCL on the next plan, it has objected to the regulator’s timeline of activities. However, CEB stated it will commence the activities addressed in the timeline upon receiving a revised schedule for the LCLTGEP 2020-39.
Global Oil Prices
On the back of the decision by the Organisation of Petroleum Exporting Countries (OPEC), as well as some non-OPEC, oil-producing countries, to extend their agreement to limit crude production until the end of 2018, global oil price increases experienced in 2017 continued throughout much of 2018, so that by October 2018 Brent crude was trading at $86 per barrel, a level not commonly seen since before 2014. However, as oversupply resulting largely from prolific shale production in the US became more apparent, prices began to drop off the following month, with Brent crude trading at around $50-55 per barrel at the end of the year. Against this backdrop, average import prices paid by the CPC increased by 41.5% y-o-y in the first three quarters of 2018 to $77.54 per barrel.
The oil price fluctuations and strengthening of the US dollar caused the CPC to adjust the retail price for petroleum several times during 2018. For example, in May 2018 the price of 92-octane petrol was increased from LKR117 ($0.74) per litre to LKR137 ($0.86), while auto diesel was raised from LKR95 ($0.60) to LKR109 ($0.69). The price of kerosene products was also hiked that month to LKR101 ($0.64) per litre, only to be lowered to LKR70 ($0.44) in June to support low-income households and the fisheries sector. The following September and October saw additional hikes: 92-octane petrol increased to LKR149 ($0.94) and auto diesel rose to LKR123 ($0.77). As of January 1, 2019, the retail price for petrol had softened to LKR123 ($0.77) per litre, while the price of diesel and kerosene had dropped to LKR99 ($0.62)and LKR70 ($0.44), respectively.
In terms of fuel consumption, increased hydropower generation led to lower fuel demand from the power sector in the first eight months of 2018, with domestic diesel sales contracting by 8.6% over the period, according to the CBSL. Similarly, the sale of fuel oil decreased by 2.9%. However, due to higher demand from the transport sector, domestic sales of petrol showed moderate growth of 7.5% over the period, while kerosene sales increased by 30.9%.
Auctions on the Agenda
With a view to reducing the country’s reliance on energy imports in the future and gaining a better understanding of the country’s mineral potential, in May 2018 the government entered into an agreement with Eastern Echo DMCC, a subsidiary of oilfield services major Schlumberger, for 2D and 3D seismic surveys of selected offshore blocks around the country’s east coast. At no cost to the government, the agreement is seen as key to attracting investors to participate in oil and gas exploration at reduced financial risk.
Several offshore oil blocks have already been identified for exploration by the MPRD’s Petroleum Resources Development Secretariat (PRDS). They are located in the Mannar and Cauvery basins, which lie in the waters off the south-west and north coast.
The first exploration licence for the Mannar Basin’s M2 block was awarded to Cairn India, a subsidiary of London-headquartered Vendata Resources in 2008. Although the test wells produced natural gas, the firm relinquished their marine assets in 2015 after they were deemed commercially unviable during a time of low crude oil and natural gas prices.
In October 2018 Arjuna Ranatunga, then the minister of petroleum resources development, confirmed that tenders would be called in the near future for further exploration and development of the M2 block. He also indicated that a major licensing round would take place in August 2019 for exploration and development of the remaining oil and gas blocks in both the Mannar and Cauvery basins.
Initial data from the PRDS suggests the Mannar Basin alone could have the potential to generate 5bn barrels of oil and 9trn standard cu feet of natural gas, while seismic surveys conducted by an Australian subsidiary of the Norwegian TGS-NOPEC Geophysical Company in 2003 and 2005 found that a 30,000-sq-km area of the country’s northern waters could contain more than 1m barrels of oil resources.
In addition to upcoming exploration bids, the refurbishment of the country’s only oil refinery in Sapugaskanda is a top priority for the energy sector. The CPC has invited bids to upgrade the existing 50,000-barrels-per-day (bpd) facility and build a new one. At present, Sapugaskanda supplies 30-40% of domestic demand for refined fuels and the remaining 60% is imported. Preliminary discussions are also under way with companies from China, Russia and the Middle East for construction of a second 100,000-bpd refinery in Hambantota in the south. The facility would produce 5m tonnes of refined products per year for both the domestic and export markets (see analysis).
Stakeholders have also highlighted the importance of replacing Sri Lanka’s main 5.8-km oil pipeline, which has the potential to be a major investment opportunity once political tensions have eased. As of January 2019 the CPC was in the process of evaluating a number of international bids for the infrastructure (see analysis).
While a number of important steps have been taken to promote energy security, the sector has seen limited foreign capital inflows. Ongoing political turmoil triggered by the removal and reinstatement of Prime Minister Ranil Wickremesinghe in late 2018 has lowered investor sentiment and hindered the implementation of proposed projects. Sri Lanka’s sovereign credit rating was downgraded by all three major international credit rating agencies in 2018, severely limiting the country’s borrowing ability. Japan and the US also pulled back concessional loans and grants. Despite the setbacks some major initiatives, including the recent calls for exploration bids and a 1400-MW pipeline of LNG projects worth billions of dollars (see analysis), should bolster inflows in the coming years.
Efforts by policymakers to expand renewable energy generation could also boost investment inflows in the future. Sri Lanka generated at least 10% of its electricity from NRE sources in 2014, a target outlined in the National Energy Policy and Strategies of Sri Lanka, published in 2008. The government has since set a more ambitious goal, namely, to expand the share of major hydropower and NRE in the energy mix to 50% by 2030, by which time the total annual energy requirement is expected to be around 27,164 GWh. According to data published by the PUCSL, the country aims to generate a total of 30,000 GWh annually by 2030, with large-scale hydro accounting for around 17% and other renewables 33%, while coal and natural gas are expected to supply 20%, and oil some 10%.
Sri Lanka has a host of industry bodies driving the renewable energy segment, such as the Solar Industries Association, the Federation of Electricity Consumer Societies and the Bio Energy Association of Sri Lanka. In recent years a number of measures have been taken to expand renewables’ installed generation capacity. Within hydropower, construction of a 25-MW plant at the Moragahakanda reservoir was completed during the first half of 2018. Electricity will be generated by four turbines consisting of two 7.5-MW turbines and two 5-MW turbines.
Two more facilities are set to be commissioned in 2019: the Uma Oya Hydropower Complex in the Uva Province will include a 120-MW power station that will generate up to 231 GWh per year, while Broadlands Hydropower Plant will add 35 MW to the national grid. Other projects include the hydropower plant at Thalpitigala, pegged for completion in 2020; and the Gin Ganga, Moragolla and Seethawaka Ganga hydropower plants, which are expected finish in 2022. Wind energy is also being tapped, with CEB set to commission its first 100-MW, semi-dispatchable wind farm in 2020 on Mannar Island. A 275-MW wind power plant project is also in the pipeline.
Rooftop Solar Scheme
With the aim of capitalising on significant small-scale solar potential, the MPRE has launched its community-based Soorya Bala Sangramaya (“Battle for Solar Energy”) programme. A collaboration with CEB, LECO and the SLSEA, the scheme allows individuals and businesses with installed rooftop solar systems to sell any excess electricity back to the grid. According to Harsha Wickramasinghe, deputy director-general of the Presidential Task Force on Energy Demand Side Management, the initial response to the programme – which is targeting approximately 400 MW of installed capacity by the year 2025 – has so far exceeded expectations. “The solar rooftop market in Sri Lanka is poised to develop rapidly,” he told OBG.
A number of non-renewable energy projects are also set to complement the national grid in the coming years, such as the 100-MW, barge-mounted thermal power plant in the southern region, which is expected to be commissioned in 2019, and the three 35-MW gas turbine plants planned for installation in the Kelanitissa power station in 2019-20.
In 2017 the Asian Development Bank and the UN Development Programme co-published a study to explore the possibility of Sri Lanka’s electricity being generated entirely through renewables by 2050. The report proposed a gradual phasing out of fossil fuels and estimated that total investment of $54bn-56bn would be needed for renewables to achieve a 100% share in the energy mix. It also speculated that total reliance on renewables could potentially save the country up to $19bn in imported fossil fuels costs.
While the report highlighted the benefits of a renewables-reliant system, it also pointed out some of the technical challenges related to the ability of the grid to manage demand fluctuations on a dayto-day basis. As a high penetration of renewables would induce intra-day variability in power supply, the report said that major investment would be required to enable the grid’s ancillary systems to balance the grid in peak and off-peak times. Given that the country’s existing transmission network relies on hydro plants, the report stated that pump storage power generation technology would be crucial to ensuring uninterrupted supply.
Sri Lanka’s energy needs will continue to grow substantially over the coming years. By 2020 it is estimated that demand will be double the requirements of 2010. With a current shortage of approximately 500 MW and electricity demand growing by some 200 MW per year, implementing a long-term power generation policy is vital for the development of the national economy.
Over the medium to long term, technological innovation will take on a leading role in decreasing the cost of power generated by renewable sources. Similarly, IPPs are expected to play an important part in the next phase of capacity addition, which set the goal of renewable energy accounting for half of total power supply by 2030.
The refurbishment of the Sapugaskanda oil refinery is seen as essential for the long-term development of the petroleum industry, which will ultimately reduce the substantial cost of importing refined fuels. With this in mind, the government is positioning itself to acquire debt financing for the refurbishment (see analysis). Local industry will benefit from opportunities to supply equipment and services as a result of the exploration bids that are being requested for the near future and the refurbishment of the Sapugaskanda oil refinery. Converting auto diesel-fired plants to natural gas facilities will also be required. Likewise, boosting investments in mini-hydro plants, rooftop solar systems, wind energy projects and transmission capacity is expected to be prioritised by policymakers in their efforts to improve national energy security and reduce the country’s carbon footprint.