A CRITICAL ANALYSIS OF THE ENERGY SECTOR (ELECTRICITY FOCUSED) IN SRI LANKA

A CRITICAL ANALYSIS OF THE ENERGY SECTOR (ELECTRICITY FOCUSED) IN SRI LANKA A study by the National Agenda Committee on Energy of The Ceylon Chamber of Commerce August 2019 Colombo, Sri Lanka

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Disclaimer This document is intended to be a guide for informed, consultative policy making, but users are advised to independently verify any information they choose to base decisions on. It has been written in non-technical language, so that a lay reader will grasp the fundamental arguments, and, although every effort has been made to interview as many key stakeholders as possible in the time available, may not have captured all points of view. More detail on the National Agenda Committee’s (NAC) findings can be provided if requested in writing.

The downstream petroleum sector including the import of crude oil and refined product, domestic refining and blending and the lubricant, aviation and bunker fuel markets, will be covered in detail in a subsequent edition of this report.

Acknowledgements The authors of this report wish to gratefully acknowledge the time and effort of the various presenters and key information interviewees, many of whom were posed very challenging questions by the NAC team. The Economic Intelligence Unit of the Ceylon Chamber of Commerce proved to be an invaluable resource in terms of guidance in form and substance, logistical coordination and content editing. Prathaj Haputhanthri conducted the bulk of external interviews on behalf of the NAC and delivered an excellent first draft, capturing the main issues and providing a solid framework for subsequent expansion. Last but not least, the NAC members themselves tirelessly committed their time and expertise for over a year, attending countless meetings and presentations and contributing valuable material to the final edit.

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EXECUTIVE SUMMARY Energy costs Sri Lanka between 25% and 50% of her total import bill in any fiscal year, this number depending substantially on external market conditions and weather. As such, it is the highest import line item we have, and the benefits of mitigating its dependence on two factors that are completely beyond our control should be apparent to any Government. Such a goal can be only achieved by conducting a detailed and candid study of the sector as it is today, setting realistic economic goals and implementing strategies designed to optimize the integration of indigenous and renewable energy (RE) sources, reduce losses, and improve institutional capacity and sector governance. This initiative will also insulate the public from future civil unrest and disruption to productivity when, as often in the past, the supply and quality of such an essential public utility are threatened.

Climate change imperatives and ground-breaking technology disrupters have emerged as compelling reasons to reframe national energy policies in countries around the world. The recent Intergovernmental Panel on Climate Change 2018 report starkly describes the difficulties faced almost everywhere as a consequence of global warming, underlining that commitments made at COP 21 (setting a 2 deg C maximum target with 1.5 deg C aspirational, to which Sri Lanka is also a signatory) were wholly insufficient and that an increase of even 1.5 deg C from the pre-industrial era average would result in a catastrophic eco-system collapse. Since we are already over 1 deg C+ above the benchmark, it just leaves us with 0.5 degrees of average temperature increase to hit the red zone. The fact that the residents of Cape Town, South Africa, must manage today with a personal ration of water that is only 10% of the quantity enjoyed by individuals in the USA tells us that rapid decarbonisation and control of emissions by everyone is critical to re-balance the world. While Sri Lanka is not a significant polluter on a global scale, our weather patterns are highly sensitive to local and regional conditions.

The fact that severe flooding has increased in both intensity and frequency is testimony to the fact that we cannot adopt an ostrich-mentality to the climate problem.

Recent breakthroughs in RE generation and storage technology have sent costs spiraling down, changing the nature of generation planning in many mature jurisdictions. Utilities around the world have been adapting themselves to different business models, countering increasing grid defection by providing more value-added services to remain profitable. Those that continue to invest in yesterday’s technology (often cited in Sri Lanka as “proven technology�) and continue to force consumers to purchase power from them by limiting available options, run the inevitable risk of catastrophic grid defection and accompanying financial shock, to say nothing of leaving the economy burdened with heavily depreciating stranded assets. We therefore need to shift our utilities from being profit-driven to being cost and service driven. This will take a different approach from our policy and law makers.

Lack of substantive national policy plagues Sri Lanka across many sectors, thereby weakening negotiating strategy across the board, but the foregoing arguments prove that above all, a holistic, futuristic national energy policy is an urgent and fundamental requirement. Apart from curtailing ad-hoc projects, it should drive all other policies and practices such as investment, transport, and manufacturing, and electricity generation planning should be done to strictly support policy objectives. Right now, it seems to be the other way around.

Looking globally, our future direction should be in the direction of lower carbon footprint, higher efficiency and innovative technology in power generation, transmission and distribution. We should be drastically increasing the harnessing of renewable energy and seeking means by which we can convert other sectors to either electricity or natural gas.

Locally, our demand profile should be studied, growth scenarios projected, and steps taken to actively enforce energy conservation and deploy efficient appliances through a combination of policy and taxation. We need to map our desired energy landscape of 25 years hence and adopt strategies to achieve it through a balanced, adaptable planning approach in line with economic and social goals.

Instead, Sri Lanka is still proposing an arbitrary energy mix in conflict with our least-cost generation principle and merit-order dispatch methodology, embracing more coal and obsolete technology and leaving substantial carbon offset and green funding opportunities untapped.

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It is evident therefore, that the fundamental recommendation of this report is that we urgently embark on a systematic policy review based on critical vulnerabilities. In this report are itemized structural changes required to efficiently implement policy. These include transparency by following an open deep public consultative process and organizational reforms to counter the fact that at present, only a handful of individuals have the power to steer (or subvert) national interest. We are captive to outdated ideologies, possibly due to lack of international exposure and follow a regressive path in terms of new technology when in fact we should be embracing new trends set by other nations that are more sensitive to public sentiment and global imperative.

The compelling need to subject Sri Lanka’s energy sector to a ground-up revision at this time may be ignored at our own peril in the years to come.

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RECOMMENDATIONS SUMMARY Sri Lanka’s overarching need is for a holistic national energy policy, cutting across all sectors and aimed at long-term energy security by maximizing the use of indigenous energy sources consistent with the country’s social, environmental and economic development goals. This should be a living document, compiled by subject matter experts, presented in an internationally acceptable format providing clarity on all matters relevant to investment in and management of areas relevant to the energy sector of Sri Lanka, and stipulating explicit objectives within a well-defined implementation framework.

The fragmented nature of Sri Lanka’s current administration of energy, along with the overlapping and sometimes conflicting mandates of the State institutions involved, calls for a high-level harmonization of roles and responsibilities accompanied by rapid capacity building if the country is to align its resources effectively and move forward.

Therefore, the responsibility of independent consultation, analysis, drafting policy and planning may best be exercised by the establishment of a National Energy Commission (NEC), along the lines of other commissions currently active in Sri Lanka. The existing regulatory agencies perform their function as per statute, with the line Ministries and their institutions, while providing input to the NEC for policy and planning purposes, focusing mainly on project implementation. In this manner, the NEC, the regulators and the Ministries would form the autonomous triangle of policy, regulation and operations. This would centralise energy policy and related project decisions, reduce the effect of political changes at Ministerial level, coordinate and focus the activities of State institutions within Ministries, and provide both investors and consumers alike with a stable outlook.

Supplementary to this high-level re-structuring, the following non-exhaustive list of recommendations may be considered at institutional level. Each of them are described in more detail, in the relevant parts of this report.

Immediately Implementable Action Items 1. Take immediate steps to build power plants that would have the lowest economic impact on the country, changing the focus from cost to economic value and green technology. These include the Renewable energy power plants, and the natural gas power plants already approved by the cabinet and the PUCSL (refer Appendix 6).

2. Develop a short-term plan that covers generation and transmission to come out of the current energy deficit, accelerating RE addition to the grid while eliminating bottlenecks.

3. Introduce Key Performance Indicators (KPIs) aligned with economic goals for the utility companies.

4. Increase disclosure levels and streamline accounting practices to create transparency.

5. Review the business models imposed on the utilities to ensure they are realistic and practical.

6. When negotiating extensions of PPA, ensure the insertion of renegotiation clauses in power purchase agreements, and re-visit full-cycle project economics.

7. List a percentage of State-Owned Enterprises (SOEs) on the stock market to increase public oversight.

8. Include the National Agency for Public and Private Partnership (NAPPP) in the relevant part of an updated national procurement process in the energy sector.

9. Restructure and standardise the bidding processes including Request For Proposals (RFPs)s to increase competition, compare bids accurately, and capture maximum long-term economic value.

10. Engage professional industry advisory companies to protect national interest when evaluating and negotiating energy contracts with international parties, until Sri Lankan experts gain capacity.

11. Vest control of the Liquefied natural gas (LNG) supply portfolio in the Ministry of Petroleum Resources Development, to balance LNG imports with upstream development timelines.

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12. Align generation planning with sustainability goals and in-line with technological trends of the sector. Planning should be restricted to a single currency, with a sensitivity analysis taking into consideration full social and environmental cost.

13. Strictly adhere to all regulations 1 related to procurement of emergency power with full transparency (CEB).

14. Develop a technology roadmap for a 100% (renewable/indigenous) grid, utilizing global expertise to create a notional generation plan for alternative scenarios.

15. Mandate the National Procurement Commission (NPC) to perform the functions of the Procurement Appeals Board (PAB), so that the appeals process is done in an independent and impartial manner.

16. Ensure that CEOs of the SOEs are experienced corporate leaders and have sufficient time in the job to carry out tangible reforms.

17. Conduct mandatory dispatch audits of the System Control Center.

18. Simplify the process by which private power producers apply for RE PPAs and remove arbitrary scale limits, treating each project on its merits.

19. Research and implement strict demand management steps without any further delay.

20. Impose results-based targets on the SEA in terms of demand management.

Medium-Term Action Items 1. Empower the Public Utilities Commission of Sri Lanka (PUCSL) to regulate the downstream petroleum sector.

2. Update and upgrade national public transport strategies.

3. Phase in unbundling of the CEB based on functionality, with independent financial reporting, beginning with independent accounting between generation units, transmission licensees, and distribution units.

4. Attract competing utility companies to raise service standards after unbundling the monolithic SOEs. 5. Attract private sector participation in the sector through public private partnerships, including in electricity transmission and distribution.

6. Rationalise trade union activity in SOEs to maximise their contribution and limit disruption to society.

7. Implement effective engagement strategies with consumers and other stakeholders within the industry.

8. Introduce a ‘wholesale electricity market’ for a percentage of the electricity requirements.

9. Amend the Electricity Act to exclude the requirement to bid out small-scale NCRE projects on private property and implement a ‘Feed-in-Tariff’ with agreed formulae and periodic rate revision. Larger (>10MW) NCRE projects that are tendered should include a forfeitable bond with time limited approvals.

10. Remove requirement for CEB to approve NCRE projects approved by the Sri Lanka Sustainable Energy Authority (SLSEA) and the PUCSL.

11. Permit ‘power wheeling’ within the transmission network.

12. Implement key activities identified in this report to promote sustainable biomass supply chain development and managing the livelihood benefit to rural communities.

13. Build capability of CEB planners and operators to integrate intermittent RE into the power systems.

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For details of these please see the Emergency Power section in the Findings – Cost Related chapter

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Contents Disclaimer ...................................................................................................................................................2 Acknowledgements ..................................................................................................................................2 EXECUTIVE SUMMARY ...........................................................................................................................3 RECOMMENDATIONS SUMMARY ........................................................................................................5 Immediately Implementable Action Items ......................................................................................5 Medium-Term Action Items ................................................................................................................6 Introduction & Objectives .....................................................................................................................11 OVERVIEW ................................................................................................................................................12 Findings – Policy related ..........................................................................................................................16 Ownership of a National Energy Policy ........................................................................................17 National Gas Policy ............................................................................................................................17 Policy direction: The Ideal ................................................................................................................17 Findings - Quality related .........................................................................................................................20 Power Quality and Standards ..........................................................................................................20 Compliance to Standards .................................................................................................................20 Low Grade LPG....................................................................................................................................20 RECOMMENDATIONS ........................................................................................................................21 Findings - Cost related .............................................................................................................................23 Power Generating Cost & Tariff ......................................................................................................23 Cost of Future Generation Choices .........................................................................................................24 Impact of Solar PV rooftop systems .......................................................................................................26 Emergency Power ............................................................................................................................... 26 Petroleum Sector Costs ....................................................................................................................28 RECOMMENDATIONS ........................................................................................................................28 Findings - Sector reforms related ...........................................................................................................30 Electricity Sector .................................................................................................................................30 Petroleum Sector ................................................................................................................................ 30 Discussion ............................................................................................................................................30 RECOMMENDATIONS ........................................................................................................................31 Findings - Implementation related ..........................................................................................................34 Power Shortage ...................................................................................................................................34 Power Procurement Process ...........................................................................................................34 The Contracting process ..................................................................................................................34 The System Control Centre (SCC) ..................................................................................................36 RECOMMENDATIONS ........................................................................................................................37 Findings – Indigenous petroleum and natural gas related .................................................................41 7

Discussion Paper Submitted To the Cabinet of Ministers In Early 2017 By The PRDS ...41 RECOMMENDATIONS ........................................................................................................................42 Rooftop Systems ...................................................................................................................................47 Biomass ....................................................................................................................................................49 Strategy elements ...................................................................................................................................50 RECOMMENDATIONS ........................................................................................................................50 Findings – Demand Management related .............................................................................................54 Findings - Social, environmental and climate related ..........................................................................57 Findings – Generation Planning Process .............................................................................................. 61 APPENDIX 1 – NAC TOR AND KII LIST .............................................................................................64 Energy NAC Terms of Reference ....................................................................................................64 List of Presenters and Key Informant Interviewees (KIIs) .......................................................64 APPENDIX 2 - AREAS OF CONCERN ................................................................................................ 66 Energy Policy .......................................................................................................................................66 Implementation ....................................................................................................................................66 Environment .........................................................................................................................................66 Procurement .........................................................................................................................................66 Financial ................................................................................................................................................66 Generation planning...........................................................................................................................66 Sector reforms .....................................................................................................................................66 LNG, LPG and Mannar basin gas....................................................................................................66 Corruption .............................................................................................................................................67 APPENDIX 3 – AN OVERVIEW OF SRI LANKA’S ENERGY SECTOR ........................................68 APPENDIX 4 - ENERGY POLICY BACKGROUND ...........................................................................71 Energy Policy 2006 .............................................................................................................................71 Energy Policy 2010 .............................................................................................................................71 Energy Policy 2015 .............................................................................................................................71 Energy Policy 2016 .............................................................................................................................72 APPENDIX 5 - RECENT CABINET DECISIONS ON DEVELOPING RENEWABLE ENERGY SYSTEMS ..................................................................................................................................................73 Appendix 6 – Renewable Energy Power Projects that have been delayed or blocked .......74 APPENDIX 7 - RELEVANT LAWS, REGULATIONS AND GUIDELINES .....................................75 Acts on Electricity............................................................................................................................... 75 Acts on Petroleum .............................................................................................................................. 75 The Public Utilities Commission of Sri Lanka (PUCSL) ...........................................................76 The Sri Lanka Sustainable Energy Authority (SLSEA) .............................................................76 Procedure for the Procurement of Electricity on an Emergency basis – Section.............76 8

APPENDIX 8 – STRATEGY PAPER THE FOR DEVELOPMENT OF NATURAL GAS RESOURCES OF SRI LANKA ...............................................................................................................78 The Potential for Domestic Natural Gas .......................................................................................78 The Challenge ......................................................................................................................................78 The Strategy .........................................................................................................................................78 Key Requirements .............................................................................................................................. 79 APPENDIX 9 – Biomass Policy & Strategy 1995.............................................................................81

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Introduction & Objectives The Ceylon Chamber of Commerce set up the National Agenda Committee (NAC) on Energy in August 2017 with the aim of “recommending suitable strategies and advocating for the resolution of pressing issues in the energy sector”.

The complexity of the subject, diversity of stakeholders and overlapping jurisdictions precluded the NAC from meeting its Immediate Term (3 month) deliverable, which was a “rapid-action note on specific bottlenecks in the sector,” and required us to first develop a good understanding of all identified issues through a series of focused expert presentations, key informant interviews (KIIs), discussions and research. Conscious of the need to deliver a meaningful and practical assessment in today’s context, this analysis is based on a combination of quantitative and qualitative methods, including an analysis of secondary data, publicly available literature, on-line information and social media posts.

This report is therefore an in-depth assessment of the challenges to, and vulnerabilities of, Sri Lanka’s energy sector in terms of its operations, regulations and policy, as conducted by the NAC, with a view to identifying potential solutions and mitigatory measures required to keep the country’s economic development on track and unleash Sri Lanka’s fullest potential. The emphasis is on the power sector in this edition, with a detailed analysis of the petroleum sector planned for a future version.

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OVERVIEW In public discourse, the word energy is generally taken to be synonymous with electricity generation. This view, however, detracts from the fact that at a national level, energy consumed in the generation of electricity is dwarfed by that consumed in the transport, industrial, agriculture and domestic sectors combined 2. The demand for electricity in the future is expected to grow at just over 5% per annum, while like-for-like demand growth for energy in other sectors (currently supplied by petroleum products) is forecast to be nearly 9%3. Since Sri Lanka generates a third of electricity consumed using domestic resources, but imports all petroleum and coal, the island’s external dependency increases with each passing year. In terms of energy security, which in a mature environment generally includes access, affordability and choice but in Sri Lanka’s context has a broader meaning, the widening gap between indigenous capacity and import requirement is a glaring vulnerability. In addition to this, with climate change a global concern, it is imperative that all actions taken by government are aligned with reaching long-term total energy security in an environmentally sustainable manner.

Two basic facts are universally accepted to result in higher standards of service and quality in any industry - competition and healthy governance. With regards to the first, most Sri Lankans will agree anecdotally that the improvement in the petroleum and telecom sectors with the introduction of private sector competition has been noticeable.

Healthy governance is best described as maintaining policy, regulation and operations independent and autonomous, so that both producers and consumers are treated fairly, and national interest is preserved. For example, the Telecommunications Regulatory Commission (regulator) functions independently of the various operators in the industry (such as SLT, Dialog, and Mobitel, for example) and autonomously from the Ministry of Telecommunications (policy), resulting in a generally level playing field for the different operators and better service to the consumer. A similar triangle exists in other industries, where both local and international interests are balanced and protected.

However, successive governments have failed to apply this formula effectively to the energy sector.

While the retail fuel sector does have competition among operators (Ceylon Petroleum Corporation and Lanka Indian Oil Company), the regulation and policy aspects are ill-defined, with the State operator CPC playing a role in both until the PUCSL gets legislated to be the downstream petroleum regulator 4. Whereas the LPG sector has two operators (Laugfs Holdings and Litro Gas) and is governed by the Ministry of Finance, with matters related to pricing of LPG carried out by the Consumer Affairs Authority.

The segregation of the electricity sector into the areas of transmission, generation, and distribution makes the situation more complex. In Sri Lanka, the CEB is the sole transmission licensee but shares generation with independent power producers from the private sector. The distribution is licensed to 5 players, 4 of whom are CEB entities and the 5th is LECO, which is also a state-owned enterprise associated with the CEB. The statutory regulator in place (PUCSL), is mandated to regulate each of these areas independently of each other, with policy being discharged by the Ministry of Power and Energy via the Cabinet of Ministers. This may appear to be satisfactory at first glance, but the bulk of generation, all transmission and the bulk of distribution being held by the CEB gives them monopolistic power to influence the sector, in conditions of very limited disclosure, no defined financial targets, and a general lack of sectoral awareness amongst the policy makers and consumers.

The CEB continuing to defend bearing the cost of their employee’s PAYE tax in direct violation of a number of government rules5 choosing not to cooperate with the regulator6 on the basis of a disagreement with the PUCSL on multiple matters, violating environmental rules7, and enterering into power purchase agreements outside the procurement processes listed in the Electricity Act of 2009 indicate an institution that is monopolistic and politically overinfluential. A further example is the CEB refusing to pay the statutory levy of the PUCSL stating the CEBEU’s objection as per the minutes of the COPE meeting held on the 07th of August 2018 and suspending sending the information required by statute to the regulator. The role of the CEBEU, the trade union representing the electrical engineers of the CEB (who also represent all the key management positions) is openly touted, with multiple instances where CEB officials state their union affiliation as the reason for non-cooperation in regulatory matters with the PUCSL. A recent Appeal

Appendix 3 - Sri Lanka’s energy consumption chart and reference documents.

Appendix 3 – An Overview of Sri Lanka’s Energy Sector.

4 Appendix 6 - PUCSL 5 “CEB paid employees' PAYE tax”, Daily News, 11th May 2018, http://www.dailynews.lk/2018/05/11/local/150619/ceb-paid-employeespaye-tax ; “PAYE tax owed by CEB employees recovered from consumers: CaFFE”, Daily Mirror, 19th May 2018, http://www.dailymirror.lk/article/PAYE-taxowed-by-CEB-employees-recovered-from-consumers-CaFFE-150124.html 6 ”CEB engineers refuse to cooperate with PUCSL”, The Island, 17th June 2018; “CEB Engineers demand removal of PUCSL chief”, News 1st, 27th June 2018 2

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“Harmful emissions from Lakvijaya coal power plant”, The Sunday Times, 1st April 2018 http://www.sundaytimes.lk/180401/news/harmfulemissions-from-lakvijaya-coal-power-plant-288406.html 7

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Court judgement, in declaring a significant salary hike that the CEBEU attempted to give themselves via the Board to be illegal and bad in law8 also points to the reach of this union in how the Board is run.

A significant change took place after 1996, during which year the major drought and consequent power cuts saw the shift from 100% State-generated hydro power towards Independent Power Producers (IPPs) selling power to the CEB on negotiated Power Purchase Agreements (PPAs). Three PPAs studied by the NAC9 demonstrate significant differences in key areas with no apparent uniformity of approach. Neither has the NAC been able to locate rules or guidelines for the purpose of negotiating a PPA, clothing the entire process in opacity.

In this confusing landscape, it is unsurprising that the general public have not been able to clearly understand the root causes of problems in the energy sector that affect them. At the outset, therefore, the NAC members exchanged ideas and collected questions on key stakeholder concerns. These then framed the approach the Ceylon Chamber took in selecting presenters and KIIs to gather information prior to the research and analysis, which are presented in Appendix 02.

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http://www.courtofappeal.lk/index.php?option=com_phocadownload&view=category&download=5695:cawrit1932015-lanka-viduli-podu-sevakasangamaya-vs-ceylon-electricity-board-hon-mahinda-samayawardhena-j-&id=103:april2019&Itemid=136 9 Westcoast, Ace Power, and AES.

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FINDINGS: POLICY RELATED

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Findings – Policy related A comprehensive review of historical energy policy documents is presented in Appendix 4 – Energy Policy Background. In the past, domestic energy policies and action plans have indeed resulted in tangible sectoral achievements, such as universal availability of electricity, high penetration of the hydro resource potential in power generation and achieving the targeted 10% of electricity generation through nonconventional renewable energy sources (NCRE) by 2015.10 However, non-existent or incoherent policies and/or non-implementation also caused Sri Lanka to produce 65% of its electricity from oil (2002), and caused rolling blackouts in 1979, 1983, 1987, 1996, 2001-2002 and 2019.

The last document officially gazetted as a National Energy Policy was the “National Energy Policy and Strategies of Sri Lanka” in 2008. This document is still the basis for the CEB LTGEP, and all documents since then have been of varying levels of completeness and accuracy, some being more manifestos than properly structured policies. The absence of an updated and long-term policy has led to a host of ad-hoc proposals being entertained and directives being issued, with critical planned projects not materializing. A corresponding absence of national-level action plans in the sector has exacerbated the situation.

A properly consultative national energy policy will permit the selection of projects, either by open competitive tender or Government-to-Government bilateral co-operation, supported by an effective regulatory function, to offer maximum benefit in terms of cost and technology to consumers of Sri Lanka. Lack of proper guidelines and local technical expertise render many projects difficult to benchmark against accepted national or international standards.

The following examples raise significant concerns over the planning and procurement process; (a) The offering of projects aimed at the strategic introduction of natural gas into Sri Lanka’s energy mix on a G-to-G basis without the guidance of an international specialist consultant to protect national interest. (Local parties do not have the required technical expertise). (b) The “Swiss Challenging” of an unsolicited proposal for a long-term gas supply contract, initially providing only 5 weeks for international

bidders to submit proposals that would take 912 months to prepare even under favourable conditions11, and subsequently extending the deadline month by month. The technical committee appointed to study the original proposal and subsequent challenges to it does not contain a single industry expert, nor is it guided by a qualified institution. (c) The decision of the government12 on the nonimplementation of future coal power projects being reversed unilaterally by the President. In line with this a Cabinet Memorandum entitled “Deciding the Energy Mix for Electricity Generation in Sri Lanka” was approved in May 2018. The memorandum advocates numerous targets for generation, firm power capacity, generation mix and capacity mix, including maintaining 30% of firm plant capacity through coal power and a further 30% from natural gas.

This decision is not supported by any facts, analysis or financial modeling and inexplicably came just a year after the same President notified the Prime Ministers of India and Japan of Sri Lanka’s wish to switch the Sampur 500MW and 1200MW coal projects to natural gas, inviting them to each build 500MW natural gas plants instead13. In fact, the 1400MW of gas-fired power proposed in the memorandum (including the 400MW plant for the Chinese in Hambantota), when coupled with the alreadytendered 300MW plant at Kerawalapitiya, renders the energy mix proposed in the same memorandum contradictory and irrational.

A proper full-cycle economic evaluation of these projects against alternatives, if in fact done, has not been made available to the public, which may prove to be a great dis-service to the nation in the long run.

A reason for this ad-hoc approach may be the impression given to lawmakers that the CEB’s Long Term Generation Expansion Plan (LTGEP) was in fact the policy document they required and that amending it would effectively satisfy due process14. This is misleading, as the generation planning that feeds into it is at present an electrical engineering-driven exercise that does not sufficiently integrate technology trends and broader socio-economic parameters. In fact, the planners continue to volunteer the LTGEP as a tool to guide other policies (such as the climate change policy), as opposed to being one that should be guided by

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Ibid Initial scrutiny of the RFP documents indicates an absence of met ocean data, (over) specification of a new-build vessel, gas price linked to crude oil price that would prevent the CPC from buying on the spot market & thereby seize arbitrage opportunities, no Environmental Impact Assessment that will allow bidders to cost compliance and a host of other questionable conditions.

12 The Cabinet Committee of Economic Management, with the approval of the President (minuted) 13 “Sri Lanka to cancel Indian coal plant deal; proposes LNG instead”; Reuters, May 18, 2016; https://in.reuters.com/article/sri-lanka-india-coalidINKCN0Y90R8 14 Key Informant Interview (KII) of CEB Chairman 11

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them15. Generation planning is discussed in more detail elsewhere in this report.

Ownership of a National Energy Policy The Ministry of Power and Renewable Energy (MP&RE) launched a multi-stakeholder initiative to formulate a National Energy Policy in 2016. Details of this endeavor can be found in the section “Energy Policy 2016” in Appendix 4. However, it should be noted here that the MP&RE had, and still has, no mandate to prepare a policy on behalf of all energy providers and users in the country. Energy is consumed in a number of sectors including power, transport, industries, agriculture, commercial, households and fisheries.

The Extraordinary Gazette No. 1933/13 of 21.09.2015 has specified the functions assigned to different ministries, and according to this Gazette Notification, the policy formulation function of the MP&RE is limited to “Formulation of policies, programmes and projects, monitoring and evaluation in regard to the subjects of power and renewable energy”. All mention of natural gas is made under subjects assigned to the Ministry of Petroleum Resources Development in the same Gazette.

Therefore, if the MP&RE sought to develop a national energy or energy mix policy, it should have first sought the approval of the Cabinet of Ministers for that purpose and carried it out in co-ownership with other relevant Ministries including Petroleum Resources, Transport, Industries and Finance, supported by a meaningful representation of sector experts and administrators.

A Ministry having a cross-cutting mandate, such as one with the function of National Policy and Planning, may have been the appropriate entity to conduct the consultative process between all stakeholders and ultimately deliver to the nation the holistic policy document the MP&RE took the initiative to launch. In any event, the final proposed policy document from 2016 incorporating suggestions made by the public has only just been made available by the MP&RE, although details of the public input and specific responses to them has not yet been provided.

National Gas Policy Having a fully synchronised policy framework is never as critical as when planning to introduce a new fuel into the national energy mix. In the case of natural gas, with maximum long-term economic benefit contingent upon eventually producing and using Sri Lanka’s own gas reserves, plans must be made from the very outset to

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The Intended Nationally Determined Contributions (INDCs) submitted by the Climate Change Secretariat to UNFCCC as part of the COP21 Agreement (which becomes the climate change mitigation plan for Sri Lanka) moved away from the core principle of the summit which was to take ambitious steps to avoid dangerous climate change, so that the planned coal focus of the then LTGEP is maintained. Thus, the national mitigation ambition and approach was

attract investment in the sector, provide market assurances and fiscal stability, and take proactive steps to ramp-up demand while accelerating knowledge transfer. Whether (1) building a customer base on regasified LNG and then later phasing in domestic production, or (2) shortening time to first-gas locally and implementing an LNG import channel for redundancy and security, upstream (exploration and production) and downstream (distribution and consumption) activities must be planned in harmony. This calls for the formulation of a national gas policy as a subset of a larger National Energy Policy (NEP), with appropriate institutional arrangements, milestones and action plans.

Currently, the subject of natural gas is fragmented, with different Ministries taking initiatives while the mandated Ministry is bereft of the expertise it needs to take control of the task. Sri Lanka, having taken the vital policy step of officially moving to natural gas as an energy source, has still not come to the market in a structured manner but is instead entertaining ad-hoc unsolicited proposals, which in turn is sending a message of uncertainty and lack of knowledge of the sector, both of which are prejudicial to international investment.

The PRDS has compiled and submitted a proposed Natural Gas Policy designed to address these issues and this document has since been revised by the Institute of Policy studies in line with national practice 16.

The NAC is of the opinion that this document needs further work and should be reviewed by sectoral experts before being submitted for integrating into a broader National Energy Policy. This process should be guided by an internationally accredited and responsible agency, as Sri Lanka does not at present have the necessary expertise in-house.

In any event, the ideas of importing LNG and producing our own natural gas MUST be developed in parallel, by the same authority, or else they run the risk of becoming mutually prejudicial.

Policy direction: The Ideal Presently there is a rapid global transition in generation and delivery of electric power owing to the declining cost of renewable energy, technological innovations and environmental concerns.

This current electricity transition is threefold: (i)

Focus on energy efficiency/demand side management to reduce demand and shift peak loads.

decided by what the CEB planners were willing to concede at the meeting – whereas the national ‘ambition’ and policy should have guided the CEB planning process.

16 The most recent meeting on the Natural Gas Policy was conducted at the Ministry of Petroleum Resources Development on January 17, 2019

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(ii)

(iii)

Progression towards low economic cost, environmentally friendly generation such as wind, utility scale solar and natural gaspowered power plants. These generation sources are modular, with shorter development times and minimal environmental impact. Natural gas and storage devices add ramping and ancillary grid services to support the transition.

Decentralisation of power generation through roof top solar panels and battery storage, complimented by smart grid systems: the emergence of the prosumer.

Together, these trends are disrupting the traditional grid and a completely different approach is needed to plan, deploy and utilise these resources. They threaten the traditional utility business model and unless the utility adapts to the change in technology and consumer expectations, it will be left with high costs and underutilized assets that will become a burden on the economy.

Against this backdrop, Sri Lanka is experiencing a decline in the relatively high share of renewable energy use in sourcing its primary energy needs. According to the CEB generation plans, reflected in the latest energy policy draft proposed by the Ministry of Power and Energy, this trend is expected to continue, contrary to global shifts17.

Therefore, it is imperative to develop a sound NEP that visualizes the future and leverages Sri Lanka’s abundant renewable energy potential in a viable manner. The absence of such a policy document would inevitably result in long term infrastructural investments without an understanding of the full range of costs and impacts, which would invite corruption and lead to unnecessary financial burdens on the State.

An ideal energy policy should: (1) Maximize indigenous energy usage and make it consistent with social, environmental and economic development goals (2) Critically analyze and address the related climate, including environmental and social impacts (3) Understand the potential international trade implications based on energy sourcing and insulate against price volatility of coal and fossil fuels (4) Broaden the curriculum of educational institutions that generate sector professionals to cover advanced technologies, sector trends, and renewable energy integration.

If Sri Lanka’s policy is to leverage exports as a major economic instrument, there should be a targeted effort to increase and maintain our global competitiveness in terms of sustainability focus.

Policy makers and key stakeholders should be mindful that national competitive advantage would be provided not only through low cost, but also through sustainably sourced power, for which the primary energy mix and generation plan of the country should be designed. The apparel industry deployment of the Higg Index (currently used by over 10000 apparel factories globally) that measures and reports facilities’ carbon intensities, Product Environmental Footprint (PEF) labelling currently being piloted by the EU, the proliferation of voluntary schemes such as Science Based Targets Initiatives (SBTI), and WTO’s allowance of carbon taxes at the point of importation from countries which do not have appropriate policies, are all cases in point.

17

World Energy Outlook 2018, International Energy Agency. New Energy Outlook 2018, Bloomberg New Energy Finance.

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FINDINGS: QUALITY RELATED

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Findings - Quality related Power Quality and Standards Despite Sri Lanka’s near-universal availability of electricity and other energy sources, there are serious concerns about the quality of the energy supply and related services. According to the Global Competitive Index, Sri Lanka is ranked 83 out of 136 countries in respect to ‘Quality of Electricity supply’. The World Bank’s Ease of Doing Business Index ranks Sri Lanka in the 93rd position out of 190 countries in obtaining electricity. These indices indicate that the technical and commercial quality of electricity in Sri Lanka needs multipronged sectoral improvement. Although Sri Lanka’s current standing is better than its neighbors in the South Asian region, this is an area in which Sri Lanka has significant potential for gaining a competitive edge in attracting foreign investment.

According to interviewees in the industrial sector, Sri Lanka’s electricity system is beset with multiple power quality issues including low-voltage and unannounced power interruptions leading to high dependency on backup generators.

Based on PUCSL assessments, over 30 distribution areas suffer from low-voltage challenges. Low voltage has led to damages to sensitive equipment, business closure, inability to begin new businesses and some industries being compelled to obtain dedicated power lines. Numerous examples exist where voltage fluctuations lead to unnecessary utilisation of backup generators, adding significant costs to consumers.

A detailed assessment of power quality of the grid should begin with analysis of power quality measurements distributed across the grid. In this regard, Sri Lanka is significantly behind technologically, as neither these data nor analysis exist.

Low power quality has significant economic impact, as it results in disruptions to the consumer and damages to electrical equipment. Due to lack of standards and measurements, these costs are currently borne by consumers, with limited effort/urgency to address them.

Beyond this, lack of such data has resulted in difficulties in research regarding power quality and variable renewable energy integration such as distributed solar18.

18

It appears that bulk of the power quality, rooftop solar integration and grid stability studies have been done using measuring equipment installed in a single transformer in Epitamulla, due to the lack of other measurement points. This has resulted in skewing knowledge and decision making along with improper claims by the utility and experts based on characteristics of a single transformer and its connected loads rather than based on the wider system.

Figure 1: Generator use of a site

Compliance to Standards The Ministry of Power and Renewable Energy issued a gazette in 2016 titled ‘Electricity (Distribution) Performance Standards Regulations’ under the Electricity Act to address and improve the electricity quality. 19 This regulation attempts to gather ground level data to develop a benchmark through the distribution licensees reporting to PUCSL periodically for three years on identified performance indices. 20 Despite the issuance of this regulation in 2016, the CEB is yet to finalize the implementation methodology. The standoff between the CEB and PUCSL on the PUCSL’s role as the electricity sector regulator may further delay the CEB’s implementation of this important initiative.

Lanka Electricity Company (LECO), which is also a distribution licensee, has agreed on the implementation strategy on monitoring the performance indices and already publishes reliability indices. The CEB does not.

LECO has already begun the installation of meters and are already collecting data for analysis. CEB is yet to award tenders for the meters and does not even have a timeline when installations will be complete.

Low Grade LPG The presence of inferior quality LP gas in the market i.e.

LP gas with low calorific value, has been flagged as a serious issue for some industrial energy users. This concern continues to cause significant financial burden to such industries in terms of wastage of raw material and quality concerns of manufactured products. 21

19

Gazette No. 1975/44- dated 13 July 2016.

Indices include, e.g. total number of interruptions due to distribution system faults, total duration of interruptions due to distribution systems faults, system average interruption frequency index, etc.

21 ‘Key Informant Interviews 20

20

RECOMMENDATIONS 1. Immediate implementation of quality standards, with related infrastructure upgrades for measurements. All future network upgrades must include measurement instrumentation as a default.

Penalties for delay/nonimplementation should be considered by the regulator due to the potential negative impact on consumers and economy.

2. Mandatory reporting of the quality criteria and all complaints by the consumers, to PUCSL and adjudication/awards.

3. Appointment of an independent regulator for the downstream petroleum sector. The regulator would then be tasked with regulating quality concerns relating to petroleum and LP Gas products. These substandard energy resources indirectly affect the country’s economy as they impose a financial burden on many industries which contribute to the GDP.

21

FINDINGS: COST RELATED

22

Findings - Cost related Power Generating Cost & Tariff In 2017, the CEB incurred an operational loss of approximately LKR 50 billion,22 evidently due to nonimplementation of the cost reflective tariff methodology that envisages the revision of consumer tariff twice a year to recover the allowable costs of the utility.

Many in CEB have erroneously claimed that rooftop solar results in a loss to the CEB23 – a claim that has been echoed by consultants purportedly supporting renewable energy24. In fact, the CEB is ring-fenced from this type of financial impact through the cost-reflectivetariff methodology applicable to the sector 25, provided itis properly implemented.

The tariff methodology envisages a semi-annual tariff revision, yet no revisions has been done since 2014.

The PUCSL, who is responsible for tariff revisions, has claimed that they are unable to revise the tariff since CEB has not followed through multiple provisions of the methodology agreed between them that are necessary to identify allowable costs. These unmet provisions include dispatch audits, financial audits, heat rate adjustments of thermal power plants, and converting CEB owned generation assets into PPAs among others.

Tariff revisions are also likely withheld due to political reasons.

2010 2011 2012 2013 2014 2105 2016 2017 30 20 10 0 -10 -20 -30 -40 -50 -60 -70

CEB used to make profits in years with high rainfall, allowing it to displace expensive oil plants with hydro generation as in 2015. 2018 was also a high rainfall year with 31% hydro and 24% oil. 2018 CEB loss can be attributed to two factors – doubling of the costs of coal and a Rs 7 Billion increase of salaries (both compared with 2016). If both stayed at 2016 levels, CEB would have made a profit in 2018.

Much is said about the high cost of Sri Lankan electricity - though costs for some consumer segments such as industries appear to be on par globally. The overall cost of electricity is nevertheless unreasonably high despite the CEB receiving the benefit of the state absorbing the capital costs of most large hydro plants and the coal plant (together accounting for 2/3rds of the generation).

The high cost incurred in delivering a unit of electricity at the point of consumption can be attributed to the high dependency of expensive, liquid fuel-based power generation and high distribution costs (calculated to be Rs 3.21/kWh for 201828).

Internal and external circumstance over the years coupled with lack of innovation within, have led them to have to manage a generation portfolio rarely seen in other countries, weighted heavily by expensive oil-fired generation – the result of a lack of clear national policy amongst others.

CEB - Operating Profits (Loss) Billion LKR

Figure 2: CEB’s Financial Performance. 26

22

Annual Report 2017, Central Bank of Sri Lanka. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/public ations/annual_report/2017/en/7_Chapter_03.pdf.

23 A CEB GM famously made this comment at a local renewable energy seminar. This claim has been repeated by many including the current Minister of Power, Energy & Business Development.

24 Rooftop Solar Power Generation Project (RRP SRI 50373-002), ADB 25 Tariff Methodology, 2015. Public Utilities Commission of Sri

Lanka 26

CEB Financial Performance October 2018 report highlights, a) Staff costs increased by 34% compared to 2017 (year on year comparison) b) Distribution costs accounted for 17% of total unit cost (Rs 3.21) c) There are irreconcilable differences between costs shown in the review and regulatory filings27.

Ministry of Finance Annual Report 2017, Available at; http://www.treasury.gov.lk/documents/10181/12870/2017.pdf/2bce4f 3d-ebde-4409-b2b5-c8a0801b3edc

Additionally, the CEB may suffer from non-recovery of capital costs carried on their books29, and their accounts may also reflect subsidies promised by government but not paid, as losses, not booking them as receivables.

For example, the subsidy due as approved by the PUCSL in 2017 was Rs 11.5 billion, but this was not paid to the CEB. Furthermore, owing to the absence of ex-post corrections by the PUCSL, adjustments to account for poor/better rainfall and lower/higher fuel prices are not even known30. This has been happening 27

Numerous errors were noted in the financial performance document. It also highlighted various methods of recording and allocating costs used within CEB which are not reconciled. Analysis of Bulk Supply Transaction Account submissions showed that these are not actual costs as required by the tariff methodology but projections – costs of each hydro plant of CEB for each month is shown to be identical to the cent across 12 months.

28 CEB Financial Performance October 2018 29 The CEB does not carry all capital costs on its books - large infrastructure loans are repaid by the Treasury (PUCSL) 30 The PUCSL relies on audited accounts and the Bulk Supply Transactions Account for ex-post corrections. Both are not available - the latest available CEB audited accounts are from 2015

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every year, and the relevant amounts must be identified and separated out in order to measure true corporate efficiency.

depreciation. The change in coal prices for each shipment (in USD) from 2014-2018 is shown below.

Generation Cost Breakdown by Technology, 2017 NCRE 11%

CEB Hydro 7%

Coal 25% Oil Based 57%

Figure 5: Change in Coal Prices in USD CEB Hydro

Coal

Oil Based

NCRE

Figure 3: Generation Cost Breakdown by Source (2017).31

The cost conversation is difficult in Sri Lanka due to the lack of accurate figures – a problem made worse by the trade union action by CEB engineers leading to withholding of statutorily required information to the regulator and in turn to public for over a year34. This is compounded by: 1. Inaccurate and misleading figures (especially related to utility costs and how costs are allocated for different functions. It is noted that regulatory filings, Central Bank figures and CEB internal financial reporting do not match, leaving observers to guess and pick from different figures.

2. Confusion between Levelised Cost of Electricity (LCOE), economic costs, marginal costs and dispatch costs.

3. Confusion between present costs and future costs. For example, the current cost conversations do not factor in key issues such as Rupee depreciation, network costs, cost trends (especially solar, wind and battery storage), stranded asset risk (both transmission and generation) and fossil fuel price volatility.

Figure 4: Average Generation Cost to CEB by Source in 2017 32

*** In the above table, the cost of coal-based generation is computed without finance costs, as the loan is held by the treasury (depreciation is included). The full cost of coal based generation in 2017 is Rs 14.58/kWh, costs for 2018 is Rs 16.09/kWh and estimated costs for 2019 Rs 16.50/kWh33*** The cost of coal-based generation has continued to climb due to the rising cost of coal and Rupee

31

Calculated based on published Bulk Supply Tariff documents, Available at; http://www.pucsl.gov.lk/english/wpcontent/uploads/2017/08/Decision-on-BST-April-to-Sep-2017.pdf.

32 Calculated based on published Bulk Supply Transfer Accounts, Available at; http://www.pucsl.gov.lk/english/industries/electricity/bulk-supplytransaction-accounts/ 33 For these calculations, we have used regulatory submissions of costs and projections as the base. Depreciation was deducted from the costs and the loan payments (interest and capital) has been added based on actual terms.

Cost of Future Generation Choices The accepted methodology for comparison of new power plant costs is the Levelised Cost of Electricity (LCOE), which is the cost of building and operating a power plant across its lifetime divided by the electricity generated. Lazard’s35latest LCOE calculations indicate that renewable energy is now the cheapest generation source, followed by natural gas-based generation.

34

In an era where transparency in generation statistics and costs are the norm across the globe, this move of CEB to withhold such information is an act of public malice. It has created a vacuum in which interested parties have been able to critically influence dialogues with false data and no regulator, public or official scrutiny possible. That one Union is holding the nation’s energy future to ransom with such acts of questionable legality in an era where an active conversation on the energy future is being held should flag the highest level of concern.

35 A global financial advisory and asset management firm

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In summary, the lack of overall fiscal clarity and targets permits the CEB, and several other national institutions for that matter, to make unconstrained losses underwritten by the State. This is an untenable situation in the long run.

Figure 6: Levelized Cost of Energy Comparison – Unsubsidised Analysis

In Sri Lanka, these numbers further skew towards renewable energy when LKR depreciation is factored in, since all RE contracts are awarded in Rupees, while all thermal generation costs will continue to increase due to the exchange rate impact on fossil fuel imports.

The current cost conversations are also problematic as they are had outside the business model. When the planner’s mindset is a baseload grid, adding renewables pose challenges. Since renewable energy has now become cheaper than fossil fuels, planning has to be fundamentally rethought to provide the maximum benefit to the consumers and the economy.

Currently, utility scale solar, wind and mini-hydro are the cheapest generation options when considering financial costs – they are also significantly cheaper in economic costs compared with all fossil fuel generation options.

Based on the last awarded tenders, wind power was at Rs 10.07 (10MW in Chunnakam), Solar power was at 11.86 (10MW in Vavunathivu)36 and mini-hydro tariff is at Rs 14.00. Natural Gas based generation was at Rs 14.99 based on the 300MW tender37, while a new coal power plant would be more expensive on similar terms.

This suggests that adding more solar and wind can reduce overall generation costs.

This shifts in costs are echoed by energy forecasters such as Bloomberg38 and Lazard. Note that these do not add the social/environmental costs for analysis, which would further favour renewables.

Globally, solar plus storage (4 hours to address the peak) costs have been declining, with contracts as low as US Cents 2.3/kWh39 in the USA.

PUCSL – Electricity Generation Cost This is a LCOE cost with 2 years of operation with oil. Actual figure may vary at closure with fuel costs and exchange rate pulling it higher.

38 BNEF NEO 2018 notes wind and solar PV plants are currently cheaper than both coal and gas. Solar PV and wind plant costs expected to decline by 71% and 58% respectively by 2050. Coupled with batteries, solar and wind will account for 50% of global 36 37

Figure 7: USA solar PPA contract price/size trend

Comparing solar and wind costs directly with fossil fuels is not appropriate as it does not factor in other related issues such as intermittency, seasonality & lack-ofinertia. While some have argued that these issues are significant, some experts (including those that presented to NAC) have provided a compelling case that there is enough affordable & proven technology for larger adoption of renewables in Sri Lanka leveraging the country’s high large-hydro installed base and additional technologies such as storage systems. It was also noted that some hydro plants are designed with capability to be retooled into peaking plants allowing more solar absorption.

In view of such trends it is imperative that Sri Lanka seriously look at large scale penetration of solar and wind energy and how to manage such transition while keeping the grid transformation costs low.

A worthwhile exercise but outside the scope of this report, might be to separate out CEB’s losses attributed to: I. non-implementation of power plant projects (for example taking 2017 plan as a reference), II. assumptions used in the generation planning process compared to actual (exchange rate, capital costs and fuel costs) III. excessive distribution costs (compared with international benchmarks), IV. elements still not covered in the tariff methodology (RE above avoided costs, net metering/net accounting, etc.),

electricity generation by 2050. NEO 2017 noted that wind and solar will be cheaper than existing coal assets O&M costs – this already is the case in some instances in India, USA and even in Sri Lanka.

39 Green Tech Media, Nevada’s 2.3-Cent Bid Beats Arizona’s Record-Low Solar PPA Price, JUNE 12, 2018, https://www.greentechmedia.com/articles/read/nevada-beat-arizonarecord-low-solar-ppa-price#gs.lITUTWxI

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V.

overstaffing, staff costs and use of tariffs for electioneering

Although this would be a retroactive exercise, it may help properly identify and understand the reasons behind the fiscal burden shouldered by the CEB, and point towards future management reforms. It seems unreasonable to expect private sector corporate performance from a State monopoly whose price is regulated and on whom the cost of government subsidies is imposed.

Impact of Solar PV rooftop systems Recently, the increased penetration of roof top solar, although in line with other national objectives, has, according to the CEB, resulted in a revenue reduction.

Revenue reduction is a bad argument as it is also accompanied by a cost reduction, even though the net effect is different from scheme to scheme.

Out of the three rooftop schemes, net metering/net accounting of high consuming domestic customers would result in a revenue loss to the utility, which is larger than avoided generation costs 40. This is an outcome of a tariff methodology with crosssubsidisation that results in this category consumer paying significantly high tariff (Rs 45/kWh). Net metering by other consumers such as General Purpose tariff, do not lead to a loss. Thus the problem appears to be in how the cross subsidy is allocated rather than with net-metering itself.

One can then argue that high-consuming domestic users are also depriving revenue/contributing to the financial loss of the CEB by upgrading equipment to inverter A/Cs and LED lamps.

The revenue reduction would not be an issue to the utility if the cost-reflective tariff methodology is properly implemented, as this would isolate the utility from any losses from consumer renewable energy adoption.

Another argument put forth is that systems such as netmetering, when coupled with cost-reflective tariffs, will increase the overall costs of the consumers. However, rooftop solar is reducing CEB generation costs from the marginal cost (liquid fuel power plants with high dispatch costs) and reduces transmission and distribution losses in the system. It is also noted that solar rooftop systems are helping the utility by deferring network upgrades41 and avoiding much more expensive emergency power procurement. The power cuts in March/April 2019 would have started earlier and been more severe if the system did not have 165MW of

40

For Net Plus systems, the price paid by the CEB is less than the marginal cost of generation 41 KII 42 The economic loss of a unit of energy not served is substantially higher than even the Rs 45/kWh highest tariff band. CEB benefitted during 2018/19 via solar PV due to reduced dispatch of hydro during daytime reducing the impacts of powercuts.

rooftop solar installed42. In a system that has a capacity deficit (in generation, transmission and distribution) that is likely to continue for an indefinite period, these are critical benefits.

As the energy sector represents multiple actors in addition to the CEB, conversations purely based on the utility’s financials lead to the wrong picture43. Once all aspects are considered, it is likely that rooftop solar has had a significant positive impact on the economy despite the fact that it represents grid defection, a phenomenon faced by all utilities in the face of declining costs of renewable energy..

Not immediately addressing the revenue issue in the context of declining renewable cost poses an existential threat to all utilities through grid defection44. This includes off-grid solutions, net-metering and batterybehind-the-meter solutions. These continue to disrupt the traditional utility business model, driving the more progressive companies to adopt novel approaches to shoring up declining revenue through other value-added services Grid defection typically occurs when the average cost of generation is higher than consumer cost for local generation. If the utility uses cross-subsidisation, it hastens defection because some groups will have significantly higher tariffs (such as high consuming domestic consumers and commercial consumers in Sri Lanka). The sustainable solution is to reduce the overall cost of the utility by higher adoption of renewables and reducing the extent of the cross-subsidy. Forcing adherence to outdated objectives (such as CEB profitability rather than economic value to the consumer) by discouraging grid defection is analogous to forcing subscribers to stay with International Direct Dialling and SMS instead of using modern VOIP technology such as WhatsApp or Skype.

Emergency Power As a direct result of non-implementation of power plants as per the approved long-term generation expansion plan, the CEB has now resorted to purchasing emergency power as a routine practice. This process, which was expected to be used only in cases of natural calamity or long-term failure of a critical power plant, has now become the norm. It also does not seem to be carried out in the defined process, details of which can be found in Appendix 6.

While emergency power may be required on rare occasions, and has been procured from 2016 under various guises, it appears that the CEB has not in fact 43

On the same premise, high price oil based generation is also a net negative impact to the utility. Solar PV should not be treated as a special case to be vilified by Ministers and/or officials, while happily contracting more and more liquid fuel plants.

44 The Rocky Mountain Institute, The Economics of Grid Defection, 2014, https://rmi.org/insight/economics-grid-defection/

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procured the plants listed in the approved generation plans, nor expanded their transmission network, leading to year-on-year shortages and the 2019 power crisis45.

The responsibility for defining an emergency in terms of power procurement rests with the cabinet of ministers upon the recommendation of the utility, since it bypasses normal procurement processes. However, under all conditions it is the responsibility of the utility by law to submit the proposed emergency PPA to the regulator for scrutiny and approval, based on benchmarked costs.

However the emergency power contracts signed in 2019, (100MW and 70MW stationary and 200MW barge) had no regulatory approval before contract prices were agreed and signed. For these procurements, the Ministry appears to have bypassed the regulator before going to the cabinet for approval, raising significant questions on governance.

It is deeply concerning that these procurements are being done on an ad-hoc basis without proper detailed assessments of shortage, how power plants are dispatched, scenario analysis (due to hydro variation) and economic impact, which are the regulator’s obligations to provide in protecting public interest.

As an example, due to the absence of new power plants, ACE Power Embilipitiya was extended in 2015 and 2016 for short term power requirements. In 2018, CEB signed 3 year PPAs claiming an emergency, without following the emergency procurement guidelines, including Cabinet and regulatory approval. This matter is now under investigation by the Presidential Commission.

A similar attempts to award 3 year contracts to Ace Matara (20MW) and Asia Power (50MW) in 2018 was stymied due to the regulator opposition and public outcry.

These two plants were given new PPAs in 2019 under emergency procurement guidelines.

The Ministry has obtained multiple cabinet approvals with varying costs while providing no rationale,, with some contracts based on guaranteed plant factors – again with no analysis on financial and economic impact.

The contracts appear to be for varying periods (from 6 months to 3 years), and it is not clear what happens after they expire, as the current pipeline shows deficits for much longer and while the Ministry has rushed through to implement emergency power, no equal urgency has been given to fast track the implementation of the planned power plants.

Since renewable energy can be developed faster and are more scalable, accelerating renewable energy projects coupled with battery storage by offering a better payback via a higher tariff for the first three years (which will still be much cheaper than emergency power) would reduce the overall cost to the utility and burden on the economy, instead of emergency power fossil fuel-based generation for shorter periods of time.

45

Discussed further under implementation

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Petroleum Sector Costs The CPC is also beset by monumental financial issues – its estimated that institutional debt in 2015 was nearly LKR 500 billion. Compelled to supply fuel to the armed forces, Sri Lankan Airlines, and the CEB as well as bear the taxes on the products supplied, they are about as far from an efficient, free-running corporation as can be.

A detailed study of their fiscal burden, corporate structure and business environment will be presented in the next phase of this report.

All these considerations need to be carefully reevaluated in the course of crafting a new National Energy Policy (NEP). Arbitrarily apportioning the blame for their losses on the CPC and CEB themselves without rationalizing their imposed fiscal environment and government obligations is not logical.

as loss levels, and operational and management targets that would eventually help increase efficiencies among the SOEs. This would prevent the transfer of inbuilt inefficiencies as tariff to the consumers.

3. Streamline accounting practices to create transparency. These practices should adhere to PUCSL’s Bulk Supply Transaction Account (BSTA) requirement. This practice would allow for clear classification and accounting of subsidies.

4. Implement strict processes to ensure compliance of regulations by the operator (CEB).

5. Ensure the insertion of renegotiation clauses in power purchase agreements in order to guarantee an equal risk allocation between the private party and CEB. A transparent and fair PPA structure should be imposed on future projects.

RECOMMENDATIONS 1. The need to look beyond quick fixes - although the tariff methodology would help the balance sheets of the CEB, it will result in significant price increases in electricity in the next few years. Therefore, it is essential that immediate steps are taken to build power plants that would have the lowest detrimental economic impact46 on the country.

2. Introduction of Key Performance Indicators (KPIs) for the utility. Both the fuel pricing formula and the electricity tariff methodology need to be linked to KPIs. These indicators should encompass both technical targets such

6. Full transparency and disclosure of generation data and costs irrespective of squabbles with regulator by the utility with independent verification (ideally by the regulator) on an ongoing basis.

7. A study to be commissioned on price trajectories on renewables and integration choices and technologies.

8. An open public professional debate on cost and tariff methodology, with all participants held accountable by public scrutiny.

46

This would include social, environmental and opportunity costs, framed in the context of long-term impact on the national economy

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FINDINGS: SECTOR REFORM RELATED

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Findings - Sector reforms related Electricity Sector Sri Lanka’s electricity sector was run by the Department of Government Electrical Undertakings until the establishment of the state-owned Ceylon Electricity Board in 1969. This integrated monopoly, regulated by the Ministry of Power and Energy, carried out all functions of electricity generation, transmission and Distribution. In 1983, another state-owned electricity distribution company, LECO was instituted to distribute electricity to designated urban areas.

In 1996 private sector participation in the electricity generation was permitted with the entry of independent power producers (IPPs) and small power producers (SPPs). Thereafter in 2000, the CEB was internally unbundled into into a generation, a transmission and four distribution divisions through an administrative decision, with no legal or financial separation.

Subsequently, further reforms were proposed through the Electricity Reforms Act, No. 28 of 2002, which proposed the complete unbundling of the CEB into independent state-owned entities to carry out generation, transmission and distribution activities.

However, the Ministerial Order which is required to operationalize this legislation was not issued due to strong opposition from the CEB as well as other political stakeholders. This rendered the Electricity Reforms Act non-functional. Thereafter, the PUCSL was established in 2003.

The PUCSL was empowered with its duties in 2009 through the enactment of the Sri Lanka Electricity Act, No. 20 of 2009 (Amended by Sri Lanka Electricity (Amendment) Act, No. 31 of 2013). This new Act made way for a partial unbundling of the CEB with tariff decision-making being handed over to the PUCSL. The functional unbundling of the CEB’s operational divisions was a partial attempt at addressing its virtual monopoly in the industry. However, while the entity is now required to separately license its divisions, this has had little effect on operational transparency, since all revenue to these various licensees are credited to the CEB’s general cooperate account.

Petroleum Sector Prior to 1961, Sri Lanka’s petroleum distribution market was dominated by a multinational oligopoly (Caltex, Esso and Shell). During this time, states intervention was limited to collecting taxes. In 1961, the CPC was established to counter the virtual cartel that existed among the multinationals.

47

Introducing competition to a State monopoly would require unbundling and opening up segments of the market to the private sector.

48 “CEB Engineers demand removal of PUCSL chief”, News 1st, 27th June 2018

In 1964 the petroleum sector was nationalized, with CPC becoming a state-owned monopoly within the sector. In 1969 the Sapugaskanda oil refinery commenced operations. In the mid-1990s, competition was introduced in the lubricant and bunkering sectors.

LIOC entered the major petroleum products market in 2003, subsequent to the government’s liberalization agenda in 2002 to open up the sector to three distribution companies. In 2003 a fuel pricing formula was introduced, which was discontinued in 2004. The PUCSL has not yet been empowered as the independent regulator within the downstream petroleum sector due to the Petroleum Products (Special Provisions) Bill not being presented to Parliament, so presently it functions as the shadow regulator within the lubricants industry.

Discussion Both CEB and CPC have consistently made financial losses over the last decade except for a few occasions where profits were declared – see the section on Findings – Cost related. Even these declared profits were achieved due to external factors such as heavy rain fall and reduced fuel import costs, and not by means of improvements within the SOEs. Although the introduction of the fuel price formulas could steer both SOEs away from financial losses in the future, the inherent structural weaknesses that create inefficiencies continue to be unaddressed. Furthermore, large unionized labour pools with competing political and personal interests add to management inefficiencies, hindering competition47 and affecting performance within the sector. The recent very public campaign by the CEB Engineers Union lobbying for the removal of the Director General of the PUCSL is a case in point. 48This union received appointments with both the Prime Minister and President via the subject Minister to privately lobby for the removal of specific officials including the regulator himself.

The IMF’s Extended Fund Facility (EFF) for Sri Lanka recognizes the need to reform CEB and CPC owing to its ‘poor financial performance’. 49 However, all efforts thus far to reform the energy sector have not come to fruition due to a combination of lack of political will and robust protests by some stakeholders.

49

International Monetary Fund. Staff Report for the 2016 Article IV Consultation and Request for a Three-Year Extended Arrangement under the Extended Fund Facility – Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Sri Lanka.

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RECOMMENDATIONS Given the above analysis, in order to institutionalize meaningful reforms in the energy sector, targeted interventions should focus on the two SOEs in the sector. These interventions should be based on the three interdependent elements noted below.

1. Competition, efficiency, transparency, and cost Introduction of competition, increasing efficiency and bringing down costs are vital. This could be achieved through the following recommendations. i.

Complete unbundling of CEB based on functionality. Establishing the six CEB licensees into independent companies would be the first step in moving away from the vertically integrated monopolistic structure, as proposed in the Electricity Reforms Act No.28 of 2002. Separate and independent financial reporting would facilitate the introduction of competition, since it would improve organization transparency, and reject culture of inefficiency caused by the lack of performance incentives due to licensees offsetting each other’s profits. Additionally, technical and managerial KPI’s needs to be included within each of the units, which would help keep these units accountable, transparent and efficient.

ii.

Employee ownership, extended to a limited public offering. Providing employees and the public a percentage of the stake in the company through share ownership will help further incentivize efficiency and performance.

iii.

Management reforms to develop the middle management to overcome managerial inefficiencies. These need to be done through, (i) recruitment of managers beyond electrical engineers, (ii) head hunting and (iii) promotions based on performance over seniority. The current practice of short-term figure head General Managers at CEB, and the political appointment of the Managing Director of the CPC needs to be changed.

The Chief Executive Officer should have a significant time span to carry out tangible reforms.

iv.

Private sector participation: Aging infrastructure in terms of the refinery and pipelines, have hindered CPC operations and profitability.

Furthermore, the lack of capital restrains the CPC from investing in infrastructure development projects including the strategic storage facilities. Therefore, it is vital that private sector participation is attracted through public private partnerships. In this regard, the CEB should also take measures to attract the

v.

private sector especially in terms transmission and distribution activities.

of

2. Effective stakeholder engagement and communication Effective stakeholder engagement is critical in implementing and sustaining reforms in order to meet the ultimate objectives. For example, the complete failure to operationalize the Electricity Reforms Act, No.28 of 2002, was solely due to the absence of stakeholder buy-in during the planning stages.

Therefore, clear communication amongst the stakeholders on the objectives, backed with evidencebased research on the consequences together with strategies to address and mitigate negative impacts on the vulnerable groups is critical. This could be addressed through; i.

Engaging with the unions: Both the CPC and the CEB has a large unionized workforce which at times undermine decision making both within and outside of the organization. Large work forces, with steady and comfortable employment are resistant to change. Therefore, it is critical that the apprehensions of the workforce are addressed throughclear communication of the need for restructuring.

ii.

Separating the management from the collective: A unique feature common to both SOEs is the high participation of management personnel in trade unions. For instance, the CEB Engineers Union (CEBEU) membership includes the entire senior management, except the General Manager. This feature blurs the distinction between the management and union to the extent that it undermines the basic principles of collective bargaining.

iii.

Engaging with the users: Consumers have become accustomed to subsidized energy, and this could oppose cost reflective price mechanisms, since such price mechanisms have a direct impact on cost of living. Therefore, it is essential that consumers are meaningfully engaged in the conversation and clear communication is established with the various market segments.

iv.

Engaging with other stakeholders within the industry: It is vital that the experience and the expertise of the private sector is considered when envisioning reforms. This is particularly critical in the event that increased private sector participation is envisioned.

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3. Independent Regulation The crucial role of an independent regulator within the energy sector is threefold i.e. economic, technical and safety. In this regard, the lack of an independent regulator in the petroleum sector should be remedied expeditiously. This can be achieved through legally empowering the regulator with clearly defined roles and responsibilities. It must further be noted that the role of the regulator should ideally be an evolving one. For instance, though the regulator should initially have an interventionist role to implement reforms and establish market structures, it should thereafter move on to a role of monitoring compliance.

curating all energy pricing mechanisms in a transparent manner. ii.

Promote competition within the sector. Through adopting best practices to counter anti-market practices, the regulator can strive to maintain an equal and level playing field for both private sector and state-owned institutions.

iii.

Promote efficiency: Through periodic evaluations of the processes and outcomes, the regulator can optimize operations and benchmark energy quality and service to increase efficiency within the sector.

iv.

Inspectorate and consumer affairs: Through proper implementation of the relevant policies the regulator can protect interest of the consumers as well as the state.

Key tasks of the regulator would be to: i.

Create transparency within the sector. This could be achieved through the regulator

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FINDINGS: IMPLEME NTATION RELATED

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Findings - Implementation related Power Shortage The power crisis in 2019 showed that the CEB had not procured the power plants in the approved generation plans for a number of years despite a published LTEGP. A list compiled in 2019 showed over 3000MW of power plants including large capacity of renewable energy that could have been added to the grid but were not. The reasons fall into several broad categories. a) Failure to complete tender processes in an appropriate timeline (LNG 300MW) b) Failure to tender projects on the generation plan (200 MW HFO plants, large/medium scale solar and wind) c) Delays in finalizing G2G projects (LNG projects with governments of India and Japan) d) Delays in implementation of hydro projects such as Uma Oya, Moradgahakanda and Broadlands. e) Stopping the NCRE tariff (solar, wind, biomass and mini-hydro projects) f) Failure to offer a reasonable tariff and renew the expired PPAs of mini-hydro power plants (100MW) g) Stopping the announced smallscale (upto 5MW) solar PV programme (1480MW) Instead of focusing on large power plant procurements, CEB spent significant resources tendering for 150 x 1MW solar power plants – an exercise not seen in any other country in the world50.

In addition to the generation projects, transmission network upgrades are also significantly delayed. For example, the approved generation plan has a 300MW multi-fuel combined cycle plant in Kerawalapitiya this year, yet the transmission line for this plant is yet to be tendered. This has resulted in quick solutions proposed to the significant power shortage, such as offshore generation, being unable to connect to the grid.

It is noted that while the Ministry is looking for emergency power to fix the gaps in the system, there appears to be a lack of urgency to procure the power plants listed above in an expedited basis. No proper analysis has been made on the reasons for such delays and no steps appear to be taken to fix the implementation challenges. This creates a risk of the country being dependent on emergency power for the foreseeable future.

Power Procurement Process Clear procurement processes and guidelines are essential in acquiring technically and commercially

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1MW is too small in scale to tender, does not support economies of scale and drive up transaction costs and resources. CEB could have used the resources spent on this to procure other projects on this list. For 1MW scale, feed-in-tariffs are sensible in terms of resource utilization.

sound energy services. This section analyses the procurement process in the power sector at two stages: (i) (ii)

Procurement related concerns in the contracting process.

Procurement related concerns in the real time electricity purchasing at the System Control Center of the CEB.

The Contracting process At present, most electricity projects in the pipeline have stalled due to surrounding legal, structural and community concerns. Many of them are completely avoidable by proper planning, stakeholder consultation and communication.

Land Two recent tenders which were awarded for solar and wind power plants are facing significant obstacles in terms of their construction due to issues relating to acquiring land.51 This would not have arisen if the procuring entity had taken the necessary measures relating to acquiring the land prior to initiating the tender process.

Law52 The development of small scale NCRE projects has been stalled by the ambiguity caused by section 43 of the Sri Lanka Electricity (Amendment) Act No. 31 of 2013. It was intended while drafting that as per section 43 (4), a permit issued by the Sri Lanka Sustainable Energy Authority was sufficient to proceed with small scale NCRE development. However, upon seeking clarification of section 43, the legal opinion of the Attorney General has stated that the section 43 calls for ‘all power plants to be tendered’ which includes small scale NCRE development.53 In practice, this legal interpretation has brought the development of smallscale non-conventional renewable plants of less than 10MW to a standstill, due to the complex nature of having to tender for small-scale power plants on private land.

Another issue, the impact of which has yet to be felt, is the unexpected opinion by the Attorney General’s Department upholding the CEB’s request to only hold consultations with power producers, as opposed to the PUCSL’s claim to have open public consultations. This, if implemented, will further exacerbate public unrest and protest. The issue is discussed in more detail in the Generation Planning section of this report.

Lastly, a recent concessional Asian Development Bank loan for roof-top solar was delayed for 11 months on the 51

Multiple Key Informant Interviews Since all these opinions have been the purview of one particular official in the Attorney General’s Department, the NAC has sought an appointment with him without success thus far 53 Ibid 52

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opposition of an official of the Attorney General's department, who took the view that prioritising losses to CEB over accruing benefits to the country54. The agreement was finally signed after public, media and political pressure.

Process In addition to arguments put forward in the Policy consistency section before, the development of largescale thermal power plants has also been delayed due to inherent weaknesses in the procurement processes, which are being aggravated by decentralization of decision-making caused by appointing a plethora of committees of undefined empowerment.

A clear example can be seen in the ongoing bid evaluation process (which called for bids in November of 2016) for the natural gas fired 300MW combined cycle power plant; In this instance, the Request for Proposals (RFP) attracted 39 interested organizations, but only 8 organizations submitted bids. The reasons for the low number of bids was due to (i) the perception of the bidders that the RFP may have been structured to favor a particular bidder (ii) unrealistic timeline (only three months to submit bids), and (iii) incomplete and inconsistent sections within the RFP which led to nearly 900 pre-bid clarifications.55 Thereafter, the excessive back and forth between the Technical Evaluation Committee (TEC), Standing Cabinet Appointed Procurement Committee (SCAPC) and Cabinet Committee of Economic Management (CCEM) contributed further to the delay. The procurement process was then dislocated by the decision taken by the Procurement Appeals Board (PAB) to overrule the TEC’s decision on this matter. This overruling caused the Cabinet to postpone the award until the opinions of the Finance Ministry and the National Procurement Commission (NPC) was secured. During this confusion relating to the final decision, a fundamental rights case was filed against the PAB decision effectively pausing the process as the matter is now pending before the Supreme Court of Sri Lanka. A parallel for this is hard to find in any country, as the root causes appear to be poor definition of objective and inability to structure clear and unambiguous eligibility and evaluation criteria.

54

Outside the scope of this report, this decision may have been partly based on the erroneous comparisons with average cost of generation rather than the more appropriate marginal cost

55

Key Informant Interview

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The System Control Centre (SCC) The purchasing process at the SCC of the CEB (the sole entity responsible for the real time electricity purchasing for the country) is unique in that it allows for instantaneous decision making by a single official.

However, while this process cuts through bureaucratic red tape, it raises serious concerns in terms of transparency.

The SCC is responsible for maintaining the electricity system of the country, therefore the electricity demand is matched with the electricity supply through a dayahead electricity purchasing process. This procuring of electricity is done based on the lowest cost principle while taking into account related technical constrains. In purchasing electricity from a generation plant, the tariff payable is mainly based on two components; (i) Capacity Charge (the cost payable by CEB to the generating entity for making the power plant available as per the specified levels), and (ii) Energy Charge, which is the variable cost associated in generating electricity. At the SCC’s procuring process the capacity charge is considered a sunk cost, and decisions are made based on the energy charge.

Many utilities globally have moved away from dayahead purchases, to sub-hourly (every 15 minutes) procurement processes, supported by predictive modelling, as such a system supports high renewable integration56.

As per regulations, the CEB submits anticipated Bulk Supply Tariff (BST) charges for PUCSL’s approval. The BST document contains anticipated generation quantities for each power plant and the anticipated capacity and energy charge payable for a six-month period.

When these anticipated levels of purchasing are compared with the actual purchasing of thermal power plants there seem to be a mismatch (See Figure 9). It is seen that certain expensive electricity generation plants have generated more electricity than anticipated, while some of the cheaper power generation plants have not been used to their full potential. These changes could be significant in terms of financial costs, since the total bill for thermal power purchases in 2017 was over LKR 200 billion57.

80.00

90.0%

70.00

80.0% 70.0%

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60.0%

50.00

50.0% 40.00 40.0% 30.00

30.0%

20.00

20.0%

10.00

10.0%

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Energy cost per kWh

Forecasted PF

Actual PF

Figure 8: Comparison of Forecasted vs Actual Power Generation (2017)58. Costs indicated are dispatch (energy) costs & not the full cost of the power plant

56

Day-ahead procurement with high renewable penetration will increase the system reserve requirements of the grid. Software systems such as plexos help model and plan using real-time data from satellite systems.

57 Calculated based on published Bulk Supply Tariff documents, Available at; http://www.pucsl.gov.lk/english/wpcontent/uploads/2017/08/Decision-on-BST-April-to-Sep-2017.pdf.

However, this is an indicative snapshot. A future version of this report will analyse this phenomenon further, viewing other time frames to test for frequency, comparing water value and forecast vs actual, hydro inflow forecast vs actual, etc, to determine how much of the number was actually under CEB control 58 Ibid

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v.

Involving the private sector in infrastructural development in the petroleum sector. Public Private Partnerships (PPPs) could serve as a medium through which the private sector could get involved in the construction of the new crude oil refinery and the infrastructure for strategic petroleum reserves. This would not only alleviate the burden of the CPC in finding capital expenditure, it would also accommodate risk sharing.

vi.

Separating of CEB’s roles as procurer and shareholder. Presently, CEB has 67% ownership of LTL Holdings (Pvt) Ltd, the latter is a significant local player within the power sector involved in power generation. CEB’s ownership of this entity has raised a point of concern for other private parties due to CEB’s key role as the procurement entity. In order to increase LTL Holdings (Pvt) Ltd.’s competitiveness together with improving participation of other private developers, it is imperative that this conflict be properly studied and resolved.

vii.

Mandating the National Procurement Commission (NPC) to absorb the mandate and functions of the Procurement Appeals Board (PAB), so that the appeals process could be carried out in an independent and impartial manner.

viii.

Conducting mandatory dispatch audits of the System Control Center. These mandatory audits should be conducted periodically to ensure transparency and good practices within the system.

ix.

Implementing strict regulations to oversee and monitor the emergency power purchases.

x.

Introducing a ‘wholesale electricity market’ for a percentage of the electricity requirements (See Box 2).

Petroleum Issues relating to procurement are not confined to the power sector. Significant delays are experienced in the petroleum sector. These delays can be separated in terms of (i) delays in upgrading/replacing the refinery has resulted in approximately 66% of all petroleum products being imported as refined products, (ii) delays in upgrading the ageing pipelines transporting petroleum products from Colombo harbor to oil storage terminals, and (iii) delays in establishing the infrastructure to establish and maintain strategic petroleum reserves59.

A future edition of this report will contain a more detailed analysis.

RECOMMENDATIONS i.

Simplifying the procurement process. The procurement process should be restructured in a manner which gives the authority or ownership of purchase to the procuring entity.

ii.

Unplug the small scale renewables from the need for tendering and re-introduce the feed-intariff mechanism.

iii.

iv.

Including the National Agency for Public and Private Partnership (NAPPP) in the procurement process in the energy sector.

Power projects that are public private partnerships must be brought under the review of the NAPPP, who have the skills and training to assess fiscal risk to the State for different options. This would allow for the NAPPP to assist the procuring entity (CEB Transmission licensee) in structuring the RFP and the related transaction, which in turn would help reduce the delays and increase private sector interest in the process.

Revaluating and restructuring the bidding processes including the RFPs which promote inclusivity to attract more proposals. Presently, the RFPs are restrictive (i.e. over-specification of technical requirements) and fails to entertain alternative bids.

A wholesale electricity market functions on ideal market forces of supply and demand and causes fluctuations in pricing depending on demand. In Sri Lanka, the participant pool could be (i) retired oil-based power generators, (ii) several CEB owned oil-based power plants, and (iii) renewable energy plants. This pilot structure would help reduce electricity costs and provide the basis for a full-scale wholesale electricity market in the future.

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The US SPR has a capacity of 750 million barrels, designed to support essential national services such as the military and medical installations for a period of 2 months

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Wholesale Electricity Market A wholesale electricity market is a real time electricity market facilitated by an independent system operator where generators would bid quantity and prices to meet the required total electricity requirement for a given time period. These bids could happen as frequent as up to 15 minutes. The bid prices would then be stacked in the order of lease marginal cost, and all power plants are paid the market clearing price for the required quantity of electricity.

Figure illustrates, an example of the bid stack and the market clearance prices in the Texas grid.

Box 1: Wholesale Electricity Market60

xi.

Amending the Electricity Act. Legal reforms should explicitly exclude bid submissions for small scale NCRE developers and make provisions which would enable them to sell electricity based on a ‘Feed-in-Tariff’.61

xii.

Allowing ‘power wheeling’ within the transmission network (See Box 3). This measure could lead to significant investment in power generation by major industries. This mechanism would help in achieving the NCRE generation targets, while reducing CEB’s need for generation capacity additions.

Power Wheeling: Transferring of electrical power through transmission and distribution lines (leasing out transmission and distribution capacity). For example, a consumer can either generate or sign an agreement with a generator to generate electricity, at a suitable location which would then be transmitted through the already existing transmission and distribution infrastructure to the consumer. The consumer will pay a wheeling charge for the use of the network. At present the Electricity Act does not allow wheeling, since it follows a single buyer model, with the CEB transmission licensee acting as the single buyer.

Box 2: Power Wheeling.

Figure is extracted from article, “Are solar and wind really killing coal, nuclear and grid reliability?”, Available at: https://www.resilience.org/stories/2017-05-15/solar-wind-really-killing-coal-nuclear-grid-reliability/ 61 Feed in Tariff: predefined tariff structure for power generating technologies.

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FINDINGS: INDEGE NEOUS PETROLEUM & NATURAL GAS RELATED

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Findings – Indigenous petroleum and natural gas related The reason it makes sense to have at least part of baseload and the bulk of industrial thermal power gasdriven, is that Sri Lanka has her own indigenous gas and condensate reserves (refer Appendix 5 for a broader description). The advantages in making domestic gas consumption our endgame are both strategic and economic. As the country’s own resource, it carries only “lift” cost, free from liquefaction, transport and re-gasification costs when compared with imported LNG. As such, both price reduction and insulation

against external supply shocks are accomplished simultaneously. However, despite the cost equation tilting in favour of gas even in a direct energy-equivalent comparison with coal, without counting externalities, acceptance of it as an addition to Sri Lanka’s energy mix has been mixed. While there are legitimate reasons for caution, some of which are presented below. There is however a lot of opposition from groups that are invested in coal and/or emergency power and will benefit from the delay in the introduction of natural gas.

Discussion Paper Submitted To the Cabinet of Ministers In Early 2017 By The PRDS62 While Sri Lanka’s discovered gas reserves and significant oil potential provide energy security for the country in the long term, the cost of installing production infrastructure raises the bar for economic access to them at present. Current global supply overhang in both crude oil and LNG markets and the resultant price weakening, while reducing further the return on investment in domestic production, on the other hand provide a compelling opportunity to create and expand gas infrastructure in the country at a competitive cost, based on imported LNG. Such a strategy will both advance economic benefit to the citizens of Sri Lanka, as well as reduce the unit cost of eventual domestic gas production by spreading the infrastructure expenditure over a larger demand spectrum in time.

The Ministry of Petroleum Resources Development (MPRD), supporting the Governments recent policy decision to “go gas”, wishes to propose the following points for consideration to optimally implement this decision;  Introducing a new energy form and building up end-user dependency on it requires a low-risk approach to supply assurance. It is not a project that can be allowed to fail, and therefore the lowest cost solutions may not necessarily be the best in the nascent stages. The experience, reputation and financial strength of potential partners should therefore be considered in their selection.  Moving demand from zero to a significant volume over a relatively short period of time (starting with power generation and moving into transport, industry and domestic sectors) requires the solution to be scalable or phase able. Therefore, it seems reasonable to set targets for the short (3-5 years), medium (5-15 years) and long term, and evaluating options for each of them. Proper planning will be the most crucial element of success.

The project scope of “gassifying” a country is vast, but could be broken down into the following 4 main areas, each of them complex in their own right; 1. Import, storage and regassification of LNG (itself broken into import contracts and terminal components) 2. The transmission of gas to major consumption centres; power, fertilizer, fabric mills, rubber products, cement, steel, ceramic and petrochemical plants 3. The distribution of city gas, CNG and other derivatives to consumers 4. The integration between upstream and downstream operations, allowing domestic gas to replace or supplement imported LNG when economically viable.

In view of the predicted power shortages in the next few years, a short-term solution focused primarily on power generation seems sensible. However, power generation projects should not necessarily be tied to LNG import contracts and terminal infrastructure, since this needs to be accommodate other users as well. Since a country of Sri Lanka’s size may not require more than one or two import facilities ever, the location and size of these facilities also needs to be well planned.

The following assumptions have been made in proposing an approach; A. That the GoSL wishes to reduce overall project risk in order to ensure success. This may require the overall project to be structured so that there is overlap/redundancy between parties to ensure that no single arrangement becomes a bottleneck.

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As provided to the NAC by the Committee Co-Chair and then Director General of the PRDS

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B. That the GoSL wishes to provide tangible economic benefit to citizens in the shortest possible time, yet sustain them C. That the MPRD has, by Extraordinary Gazette Notification No. 1993/13 dated 21.09.2015, been mandated “to undertake the import, refining, storage, distribution and sale of petroleum-based products and natural gas� and will therefore be responsible for the supply of gas to all end-users in Sri Lanka.

Considering all of the above, the MPRD feels that items 2 and 3 will carry the greatest impact on society, and should be the core focus at this stage; ie the generation of gas-fired power to reduce cost of electricity, and the availability of CNG to motorists to reduce the cost of transport. Although the second objective is longer term due to the need for new infrastructure, a positive environmental impact will also accrue from these, strengthening our climate commitments.

Accordingly, partners with experience in gas powered generation and city gas/CNG distribution should be identified, and the procurement of LNG based on their initial requirements, although not necessarily coupled with their projects.

For item number 1 above, LNG supply should initially be on contract, possibly from a seller with the flexibility to enter into medium-term supply contracts, with spot parcel purchases (lower cost but higher supply risk) entering the portfolio later in time, as demand and storage capacity increases.

In terms of the optimal terminal infrastructure, the most economical short-term solution may well be a Floating Storage and Regasification Unit (FSRU) or a combination of Floating Storage Unit (FSU) with land-based modular re-gas unit.

As the demand increases past the 1.5 MTPA threshold, the better economies of scale of a land-based terminal start to emerge. Accordingly, projects proposing to deliver a scalable and economical supply of gas to the country, without being tied to a power plant or other, may be interesting, especially if the proponent is also active in oil and gas exploration and production. Such projects may start with a floating solution and migrate later to a land-based terminal when volume increases. In the event of domestic production commencing, a land-based terminal will still provide valuable redundancy of supply and be a strategic asset.

The above ideas are not prescriptive, and simply serve to form the basis for more detailed discussions on cost, flexibility and timing. In all cases, the Petroleum Resources Development Secretariat (PRDS) has comprehensive economic modelling software that can be used to understand the impact of any variable on overall project economics, including statistical and sensitivity analysis, which can be made available to any other Government institution wishing to use it.

A strong recommendation when considering the scope and scale of the above project, is that Sri Lanka should contract a suitably qualified and experienced third part consultant, whose role would be to (a) protect Sri Lankan national interest in technical discussions with whichever implementing partner she selects, for whichever part of the overall undertaking, and (b) to provide seamless integration between the various component parts and partners towards ensuring a timely and economical project delivery.

RECOMMENDATIONS 1. Rationalizing short term LNG imports. Strategic LNG imports in the short term through flexible contracts, use of an offshore delivery solution (FSRU or FSU+ barge) instead of land-based terminal, would be beneficial in balancing imported LNG with possible natural gas production in the future. Ideally, this could be achieved through agreements with institutions involved in both exploration and the LNG retail business.

This requires that the Government of Sri Lanka to have decision-making power over the procurement of LNG. Subordinating procurement to long-term contracts without flexibility may irreparably prejudice the ability to monetize offshore gas reserves by leaving us with no market to offer E&P investors.

2. Providing exposure to local parties. It is imperative that concessions are made to give exposure to local parties to gain experience within the sector which is unfamiliar to them at present.

3. Creating an institution or an organization that is capable of entering into a Public Private Partnership with a producer. Selected industries should be allowed to enter into agreements with producers in this regard. For instance, there is potential within the fertilizer industry. This organization will most likely be Sri Lanka’s oil and gas exploration and production company.

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FINDINGS: RENEW ABLE ENERGY RELATED

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Global Trends The electricity sector is undergoing a disruptive transformation globally that is driven by climate change and environmental concerns on the one hand and the rapidly declining costs of renewable electricity generation (and supporting technologies) on the other.

These trends are disrupting the business models of established utilities, forcing them to innovate and adapt.

Bloomberg envisages that cheap solar and wind supported by batteries will result in half of the world's electricity being generated by 2050. Whilst most countries in the world show a rapid expansion of the percentage of renewables in the generation mix, Sri Lanka’s long-term generation plans see a steep decline in renewable energy, going in exactly the opposite direction. This carries a significant risk of cost and stranded assets to the economy.

Figure 10: CEB Proposed Plan for 2037 LTGEP Figure 9: Global Power Generation Mix

The rapid declining costs of renewable energy is seen across all geographies including Sri Lanka 63. Levelised costs of utility scale solar and wind are currently cheaper for new generations in almost all markets globally.

Figure 11: Wind Experience Curve

Figure 12: Solar Experience Curve

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The last tenders awarded for utility scale wind and solar comes below the generation costs of all fossil fuel-based generation options including coal

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Supported by falling battery storage prices, 100% renewable energy targets are rapidly becoming feasible,already emerging in national level (Costa Rica, Nicaragua, Uruguay, Sweden, Scotland), regional level (Quebec & British Columbia in Canada, South Island of New Zealand, California & Hawaii) and city level power plans64.

further underscoring the futility of ignoring scale and currency in setting out project parameters.

Large-scale renewable integration requires utilities and planners to rethink conventional energy/grid planning, including baseload power. It also requires tools for real time forecasting of renewable energy generation and mechanisms to control and manage a stable grid. Some of these tools including utility scale storage, flow condensers and predictive tools are already available, while more mechanisms are being developed.

Many countries currently have high variable renewable energy penetration, including Germany (45% solar and wind), and Denmark (45% wind power) with both countries projected to hit 85% by 2035. India is expecting to reach 22% of solar + wind by 2022.

Utility Scale Renewable Energy Deployment While most of Sri Lanka’s large-scale hydropower projects have been developed, the wind and solar potential has not been fully utilised. The pricing advantages are related to project size – due to economies of scale for components and lower transaction costs. 10MW solar PV projects are at the low end of global solar PV and wind development range.

Large scale projects have been able to attract prices below 3 US cents/kWh in number of geographies globally. Development of large-scale wind power through competitive auctions has stalled due to the opposition of the CEB, even though Sri Lanka has some of the most attractive potential wind power sites in the world. Land availability has been a problem for large scale solar deployment, but this too can be avoided through deployment of floating solar systems (currently 1.1GW installed globally, with a potential market size of 400GW according to the World Bank 65).

The Soorya Bala Sangramaya programme, initiated by the Ministry of Power & Renewable Energy in 2016, called for tenders for 150 x 1MW solar PV plants. While the tenders saw very low tariff rates offered, due to the currency depreciation in 2018 it appears that large portion of these projects will not be developed, with many licences already up for sale. This scale does not attract serious solar PV developers globally, and unless a mechanism to manage currency risk is already established (such as a debt repayment component in USD as practiced in fossil fuel IPPs), Sri Lanka will not be able to tap into the global players who can bring price and scale advantages to Sri Lanka. As far as the Chamber as been able to ascertain, only 2 of these 150 projects have been implemented at the time of writing,

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https://www.cdp.net/en/articles/cities/over-100-global-cities-getmajority-of-electricity-from-renewables, https://www.sierraclub.org/ready-for-100/commitments

Figure 13: Energy sector transformation from a business as usual scenario to a network of intelligent microgrids powered by renewables visualized by Rocky Mountain Institute. As a country which is still building our grid, it is possible to leap frog to scenario 4 (transform)

Global programmes such as Scaling Solar by IFC have helped countries (Kenya, Zambia, Senegal) and utilities to setup mechanisms to attract and scale solar programmes in a cost-neutral model. Such support may help Sri Lanka scale solar development.

Small Scale Renewable Energy Development Sri Lanka has been a pioneer in small scale renewable energy deployment in the world with small-hydro development, a skill we have exported to other geographies such as Nepal and multiple countries in Africa. This rapid development came from the feed in tariff model. This resulted in 557MW deployed with 64% small hydropower systems.

Since 2016, the Feed-In-Tariff SPPA’s have been blocked by the CEB, purportedly due to an interpretation of the Electricity Act issued by the Attorney-General’s department, contested by the RE developers and subject to court proceedings at present. It should be noted that SPPA’s were blocked from early 2016 although the legal opinion dates from 2013 and legality has not prevented the same officials from extending PPAs for fossil fuel plants as reported widely in the press in 2018.

Where Sun Meets Water – Floating Solar Market Report, The World Bank.

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As seen through results on the ground, this has completely stifled small scale renewable deployment in the country, and associated investment. While the NCRE tariff methodology (developed by CEB) calls for periodic revision of rates (to ensure price advantages to the utility where possible), this was not done. Deploying an appropriate feed-in-tariff model for small scale development is important as tendering merely increases transaction costs, risks while being impractical for projects such as biomass (due to supply chain development risk) and mini-hydro (due to location). It is important that these barriers are removed, and projects are fast tracked.

Rooftop Systems The Soorya Bala Sangramaya rooftop systems project has been the most successful renewable deployment in the last two years with close to 150MW added to the grid in the space of two and a half years. This has also facilitated employment of 7000 skilled workers and 600 engineerswith over 200 solar rooftop installing companies in the country. There is further potential in this sector since the original target was 1 million households, which has now been stymied by operational and bureaucratic challenges faced by the solar PV companies related to delays in grid connection, disputes on harmonics measurement conditions imposed by CEB, inconsistent approach/support by regional engineers and lack-of-transparency on substation/network capacity limitations raised by CEB. While some argue that these systems are subsidized by other consumers, this is at best an incomplete argument, as these systems displace expensive oil thermal systems, reduce network losses and also reduce/defer network upgrade costs.

Renewable Energy Grid, Storage and System Stability A 100% renewable pathway for Sri Lanka is not prescriptive and must be custom-made design based on the availability of sources and their characteristics. It was estimated that less than 1% of landmass covered by solar PV (easily achievable through rooftops and floating solar) can meet the total energy demand of the country. Sri Lanka’s wind power potential exceeds the energy demand by a large multiple.

Some common issues raised for such large deployment are intermittency, predictability and seasonality. It is noted that distributed deployment and judicious sizing of storage (less than 1% total solar system capacity – location based) can overcome intermittency issues.

Time of day availability needs to be looked at with storage options and hydro deployment model.

Seasonality can also be looked at via diversification of sources (for example, wind + hydro availability complements solar in Sri Lanka). Such systems can be supported by smart grids and subsystem level storage systems.

The role of storage systems in supporting system stability was amply demonstrated by Tesla’s big battery, Hornsdale Power Reserve in South Australia. During the first year of operations, the battery provided multiple services to the grid such as system security, frequency control, fast frequency response (with a 100ms response time), ramping and support for sudden capacity loss66. The battery also significantly reduced the spinning reserve requirements in the grid and reduced the grid services costs to the utility and the consumers while contributing to system stability.

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Hornsdale Power Reserve Case Study by Aurecon https://www.aurecongroup.com/markets/energy/hornsdale-powerreserve-impact-study

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Figure 14: Hourly Operability in a High-Penetration Renewables Scenario developed by Rocky Mountain Institute in 2011

Figure 15: Electricity Production in Germany in week 12 in 2019

It is important to assess the capability, technology needs and pathways for such a system through appropriate planning and system design supported by high end modelling activities. Such skill is presently available globally at locations such as Manitoba HDVC Research Centre. Once the blueprints and pathways are mapped, Sri Lanka will be able to decide the pace and ambition of such a journey by looking at all aspects of such transition.

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Biomass In 2016, biomass fuels provided 44 percent of Sri Lanka energy needs (Figure 15). About 38 percent was used in the industrial sector and 62 percent by the domestic and commercial sectors.

A survey by SLSEA in 2013 noted that brick manufacture and tea processing were the dominant uses of biomass fuels (Table 1). Its use as a commercial fuel has increased significantly over time – in 1990, only 16 percent of biomass fuels were used in the industrial sector.

Figure 16: share of Energy Consumption in 2016

Table 1: Biomass Fuels Used in Industry 201367 The dominance of the fuel in the energy mix and its increased use as a commercial fuel, primarily to displace petroleum fuels used to produce process heat in industries has not been accompanied by a concerted effort of similar scale to develop a sustainably harvestable commercial fuel. The sector primarily depends on sourcing fuels as a byproduct from the agricultural sector (rubber, tea, mango, cashew, timber, paddy) and mixed wood that is too often unsustainably harvested from forests.

Other benefits Beyond the energy attributes, biomass offers benefits that further enhances its value to Sri Lanka and globally, as noted by the Bio-energy Association of Sri Lanka: • Carbon Sinks - Energy plantations will act as carbon sinks to absorb CO2.

• Soil Enrichment - The establishment of short rotation coppice plantations with nitrogen fixing trees such as Gliricidia and Leucena in degraded lands previously used by shifting cultivators will over time upgrade the land to its original status. A survey done in 1980-84 found that there were over 1.7 million hectares of such 67

lands in Sri Lanka. The SLSEA with support from the UNDP is undertaking a new survey.

• Soil Erosion - Gliricidia has been proven to be ideal for Sloping Agricultural Land Technology (SALT).

• Pricing - Energy for energy, sustainably grown fuelwood is cheaper than oil and not significantly affected by foreign exchange fluctuations.

• Employment & Growth in Rural Economy - Fuel-wood farming can become an attractive employment opportunity in rural areas. However, one of the challenges facing biomass as a commercial crop is that high biomass prices at farmgate are to make such enterprises profitable, which makes less attractive as a fuel to compete with oil.

• Foreign Exchange – It is a hedge against currency depreciation and foreign exchange saved from not importing fossil fuel can be diverted to other important areas or reserves.

• Land Use and Green Cover - Large extents of unproductive lands would now be better utilized as energy plantations. Not only will there be plantations but

Sri Lanka Sustainable energy Authority, Assessment & Mapping of Biomass Consumption in Sri Lankan Industries, undated.

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simultaneously the green cover in the country will be enhanced.

Strategy elements Strategy development: It is important to move from an ad hoc sector development as has been the case, to one that is based on a systematic assessment of options and involving participation by key sector actors.

As early as 1995, the National Forest Policy and the Forestry Masterplan 1995-2000 recognized the important role for biomass and proposed a systematic policy and plan (see Appendix 9). Unfortunately, policy and plan implementation were incomplete at best. It is evident that good policy and planning must be accompanied by effective implementation with the necessary political, government, industry and public backing; and with competent staff, empowered institutions, and financial support.

The 2013-2017 GEF-supported UNDP project, cited previously, and implemented by SLSEA, offered a means to prepare and implement a policy and development plan to support increased use of biomass by industry. Unfortunately, this work, that was expected to be completed in 2017 is behind schedule. This project objective was to support the Sustainable Energy Authority (SEA) goal of replaceing10% of the fossil fuels used in the industry by 2017 by biomass-derived energy. It was expected to achieve this objective by promoting biomass (wood and waste) as a viable renewable energy source for industrial thermal applications over (imported) fossil fuels; and to ensure continuous and sustained supply of quality-assured biomass as an industrial fuel.

RECOMMENDATIONS 1. Remove all scale, tariff and process related barriers to entry for private development of RE, mandating storage as well where necessary to manager grid stability in the near-term.

2. Acquire the latest tools and training to model grid planning for RE and conduct an exhaustive study into the challenges and benefits of aiming for 100% RE for Sri Lanka in the future.

3. At the moment our generation plan is based on antiquated concepts. The very latest technology and methodology should be utilized when planning generation, so that Sri Lanka can attract funding available globally in support of climate change and green energy initiatives.

4. Develop innovative models to promote more wider scale adoption of rooftop solar systems including donor funded schemes and low interest facilities.

5. A four-pronged strategy is needed that addresses, the enabling environment, the

supply of biomass, biomass use, and key institutions. a. Policy, Legislation and Regulation: There needs to be a review of existing policies, laws and regulations to assess any unintended bottlenecks that will hurt sector development.

Where such exist, they should be changed and now policies/laws/regulations adopted to facilitate biomass sector development, including those noted in Box 1. Among these are, laws pertaining to diversion of paddy lands to grow alternative crops; wood transport laws; improving the biomass tariff formulation in the small power purchase agreement to share the risks of unexpected fuel wood price changes (similar to how fuel price risk is shared between CEB and IPP in oil thermal IPPs). b. Supply-side interventions: Increase biomass supplies for both residential and industrial use as well as power generation, by proactive mobilization of small holder farmers and support to establishment of larger commercial farms on marginal and underutilized agricultural lands. The highest priority for the sector must be to move from being primarily a “by-product� of agriculture and being a contributor to loss of forest cover, to becoming a large- and smallholder- scale profitable commercial energy supplier. A related requirement is to find suitable land, without displacing land for food production, that could be used for biomass crop production, either as monocrops or underplantation with other crops such as coconut. c. Demand-side interventions: Efficiency of use of biomass must be improved in industries such as brick making, tea, rubber, coconut, paddy, tile, pottery, food processing, textiles, and to a smaller extent, biomass power generation. Anongoing SLSEA investigation has noted significant opportunities for biomass fuel savings in major biomass consuming industries. d. Institutional development: Build institutional capabilities in the biomass sector based on the directly relevant experiences and capabilities of the major agricultural sectors of coconut, tea and rubber. Establish a fully resourced and staffed organizations such as for Biomass Research Institute and Biomass Development Boards along the lines of CRI, CDB, TRI, TDB, RRI, RDB etc. to improve sector productivity, provide extension and development services etc. to make a biomass as a major plantation and small holder crop.

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FINDINGS: DEMAND MANAGEM - ENT RELATED

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Findings – Demand Management related Whilst demand side management has been spoken of and supported for more than a decade, real benefits and schemes have not been received by the country. The Sri Lanka Sustainable Energy Authority (SLSEA) is the designated authority for programmes related to energy efficiency. However, core programmes that are globally practiced have not been scaled and implemented in Sri Lanka, much to the detriment of the country. It should be noted that reducing demand is significantly cheaper than adding new generation capacity.

McKinsey estimated in 2010 that US economy could save 23% of annual energy consumption compared to Business as Usual scenario purely using positive NPV projects68. Others such as IEA have suggested a larger potential in developing countries.

India’s Unnat Jyoity by Affordable LEDs for All (UJALA), the Domestic Efficient Lighting Programme (DELP) programmes target replacing 770 Million incandescent lamps with LEDs. The National Ujala Dashboard shows the current progress, energy and funds saved and avoided capacity at peak through this programme.

Focusing on domestic consumers (end of line in the network) such a scheme will reduce material energy consumption and avoid peak demand capacity while reducing distribution losses. Targeting low income households for the programme (whose tariffs are subsidised) will ensure programme will pay for itself and reduce the CEB loss.

Figure 17: National Ujala Dashboard by the Government of India

Implementation of mandatory building energy codes and rating systems is a necessity as Sri Lanka has significant building stock that is currently being developed. Inefficiencies of the same will be borne by consumers and the economy.

Other measures such as restricting (through bans or higher tariffs) on fixed speed compressors for air-conditioners and refrigerators as practiced in many Asian countries are quick fixes that will reduce the strain on the electricity grid.

The overall reorienting the SLSEA for results-based deliverables and away from solely focusing on education is a necessity if programmes such as these are to succeed.

RECOMMENDATIONS 1. Implement a national LED lamp scheme like that deployed in India to reduce the peak demand targeting low income households.

2. Fast track establishment of mandatory building code with a high minimum energy performance threshold, with accompanying implementation mechanism.

3. Introduce minimum efficiency thresholds and technology for high energy consuming items such as air-conditioners, pumps, motors and refrigerators using tariff barriers and bans.

4. Hold SLSEA accountable for real output for the programmes and strict timelines for implementation.

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McKinsey & Co, Energy Efficiency: A Compelling Global Resource https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/ sustainability/pdfs/a_compelling_global_resource.ashx

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FINDINGS: SOCIAL, ENVIRONM -ENT & CLIMATE RELATED

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Climate Considerations Sri Lanka has high vulnerability to climate change, due to its location, geography and rainfall patterns, rated as the sixth most vulnerable country out of 67 69. The past decade has shown a climate system with increasing rainfall and temperature extremes creating rapidly intensifying damage. Rainfall intensity has increased – with floods and landslides while persistent drought has intensified with elevated temperatures. Climate related crop damage has been increasing in the country.

The Meteorological Department of Sri Lanka is projecting a decline of the North-East monsoon, threatening the nation’s food supply. A larger increase in rainfall in the wet zone (with higher incidence of floods, flash-floods and landslides), increase of minimum and maximum temperatures across the country (higher evapotranspiration, heat stress in people and animals), and high variability of second inter-monsoon (drought, crop failures) is expected to disrupt the ecosystems and agricultural productivity while threatening human habitations.

The World Bank projects a temperature increase of 1oC – 1.5oC in Sri Lanka by 2050 even if the 2015 Paris agreement is met, with the highest increases in the Northern and North Western provinces, classifying them as hotspots. If emissions are not curtailed, average temperature of Sri Lanka is expected to rise by 2 oC or more by 2050. While this represents the average increase, heat waves will push these values

significantly higher. The World Bank predicts these changes would result in a GDP drop of 7%.70 2015 Paris climate agreement attempts to limit the future warming below 2oC as a firm target, and 1.5 oC as aspirational. The emission reduction contributions committed by the countries are insufficient to meet even the 2oC target. The recent IPCC report on 1.5oC warming71 noted even the 1.5oC limit would represent serious challenges for countries and ecosystems, including near certain destruction of sensitive ecosystems such as coral reefs.

In this light, the assumption that simply complying with our submitted National Determined Contributed (NDCs) will be an adequate response is a fallacy of confusing the response to the climate crisis with a treaty obligation. Complying with the NDCs does not come anywhere close to actually reducing the risk of climate vulnerability.

UN Secretary General, Antonio Guterres has asked countries to not build coal plants beyond 2020, and that countries should not subsidise fossil fuels, noting “taxpayer money should not be used to boost hurricanes, spread drought and heatwaves, melt glaciers and bleach corals.72” For Sri Lanka (and the world) to sustain viable ecosystems and a human habitable climate system, rapid global reductions of greenhouse gas emissions are required. While it is true that Sri Lanka’s contribution towards the global emissions are minute, there are multiple reasons that a decarbonization as the most sensible pathway for Sri Lanka. a) It is the only sensible policy alternative available for all nations b) Nationally Determined Contributions (NDCs) are to be submitted every 5 years by countries with each successive NDC making deeper cuts c) This will be tied to trade policy and will also be applied by B2B commercial organisations supported by data driven systems73 d) As countries rapidly shift away from high carbon energy forms, investment to the same will be reduced with a resultant risk of stranded assets

Figure 18: Image shows required emission trajectories to keep the world under 1.5oC and 2oC scenarios. Image indicates that even if all the national commitments are met, the world will not meet the agreed emission reduction targets.

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Fragile Planet: Scoring Climate Risks Around the World, HSBC Global Finance 2018 70 South Asia’s Hotspots the Impact of Temperature and Precipitation Changes on Living Standards, the World Bank

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Global warming of 1.5oC published by IPCC https://www.un.org/press/en/2019/sgsm19584.doc.htm 73 See Higg Index of Sustainable Apparel Coalition 72

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Figure 19: Coal dust and fly ash on vegetation, fruits and vegetables affected by pollution.

Environmental Issues Related to Power Generation Lakvijaya Coal Power plant, Norachcholai The Norachcholai power plant has posed serious health, environmental and social issue for people in the neighbourhood and larger community. As noted in the national print and electronic media74, the plant has been operating without an Environmental Protection Licence (EPL) from 1st June 2017 for multiple years, and is currently violating multiple environmental laws (unit 2 functioning without its Flue Gas Desulphuriser (FGD) from 25th August 2018 resulting in SO2 emissions more than double the legal limit, unit 1 bypassing the FGD with similar violation, unauthorized ground water withdrawal and localized air pollution). A study conducted by IPEN found elevated mercury levels in women in Norachcholai and Puttalam.75 A study has found particulate matter (PM 2.5) transportation to Colombo and the Western slopes of the country76. A fundamental rights case filed against the power plant is pending at the Supreme Court of Sri Lanka.

The plant has rudimentary environmental protections, which rely on weak air quality standards 77 and lack of

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The Island, Norochcholai EPL still not extended, June 30, 2018; Daily News, Authority to inspect Norochcholai coal plant, May 16, 2018 http://www.island.lk/index.php?page_cat=articledetails&page=article-details&code_title=187135 http://www.dailynews.lk/2018/05/16/local/151099/authority-inspectnorochcholai-coal-plant 75 Mercury Threat to Women & Children Across 3 Oceans: Elevated Mercury in Women in Small Island States & Countries, IPEN 76 http://www.sundaytimes.lk/190310/sunday-times-2/norochcholaiash-contaminates-lankas-western-atmosphere-339797.html 77 Sri Lanka works with ‘interim air quality standards’ published over a decade ago which are lax compared to global standards and even standards set in India and China. The standards are currently being revised by the CEA.

proper enforcement by the North Western Province Provincial Environmental Authority, who appear to be lacking both technical skill and enforcement capacity.

The power plant design has limited to no ability to manage key pollutants such as particulate matter and mercury/heavy metals. The location of the plant results in stockpiling approx 1.3 Million tons of coal during the monsoon season leading to significant coal dust pollution of communities extending beyond Puttalam, while the difficulty in disposal of fly ash has resulted in a fly ash ‘mountain’ taller than 25 feet with pollution through wind and leachate. The facility is yet to implement a comprehensive environmental monitoring and management system with basic sensor functionality and has still not met the conditions stipulated in the EIA/EPL, including air quality/environmental monitoring78. Factors such as sourcing of coal from South Africa (globally highest mercury levels and low inherent moisture leading to higher percentage of dust at and after unloading) have enhanced these ills while plans to mitigate some issues with solutions such as a wind barrier have been stymied by bad design 79. The community health & social impacts, along with public outcry will again surface by May, during the monsoon season.

78

These facts were established in submissions to the Supreme Court in the ongoing fundamental rights application including the agreement entered between CEB, PUCSL, NWP-PEA, EFL and local community members.

79 A comprehensive analysis using modelling and fluid dynamics simulations by the University of Moratuwa found that the planned wind barrier, currently being constructed at a cost of Rs 732 Million would be unable to shield the wind in the coal yard for the required level. The modified design that was proposed by the University was ignored by the power plant. See Analysis on the Effectiveness of Proposed Wind Barrier for Lakvijaya Power Station Coal Yard prepared by Dr R. C. A. P. Ranasinghe.

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The problems in the coal power plant also severely affect employees. A petition sent to the CEB GM signed by over 65 engineers working at the power plant, dated 17th June 2017, alleged respiratory and other health impacts to the workers along with multiple serious environmental concerns80.

collaboration with the CEB to address these issues, but this process has also stalled due to the conflict with the CEBEU.

The window of acceptability for coal-based power generation is now closing globally, as social awareness is rising and public protests over tangible damage to life and property are gaining momentum.

Countries around the world are de-commissioning coal plants and existing plants are becoming stranded assets. At this stage, committing 30 years forward to a polluting, non-indigenous fuel appears an unwise policy path to take. Credible policy debates and analysis on this option need to be taken to avoid policymakers basing decisions on incorrect or incomplete technical information.

These issues are brought to public gaze through the press and the emergence of activist websites which work as critical public dissemination points.

Social Awareness The environmental challenges of Lakvijaya Coal Power plant in Norochcholai have resulted in a public mistrust of future coal power generation in the country. This is made worse by the state response towards the crisis by effectively placing the power plant in the ‘too big to fail’ category. The plant provides approximately 35% of total energy load. If the plants are unable to provide power, Sri Lanka will face significant power shortages due to lack of other large-scale generation capacity, resulting in an approach where the plants are allowed to run even with serious environmental violations. This attitude has pervaded the entire system, including CEA & NWPPEA, CEB, MPRE and even the Courts and has resulted in even fixable issues not being addressed. It also means that the state will continue to fund any and all funding requests (including staffing) without any questions asked.

Environmental controversies also surround other renewable options as well, especially on mini-hydro power plants in sensitive and critical ecosystems, wind farms established across bird migratory pathways and land use in large scale solar power systems. Some of these are related to issues in the environmental impact assessment and environmental clearance processes.

RECOMMENDATIONS 1. Take immediate steps to bring Norachcholai power plant compliant with all local laws and regulatory requirements. Address critical community concerns including dust pollution, heavy metals (including mercury) with technically sound solutions.

2. Establish a high-powered team that can review the environmental safeguards & operational issues, global best practices to make recommendations and actions to mitigate damage. Inclusion of environmental NGOs who can bring critical social/environmental issues for discussion will add credibility to the process.

3. Make environmental performance data available to the public.

4. Improve institutional capacity to handle environmental issues by hiring environmental professionals into CEB and the Ministry to handle environmental issues.

5. An assessment by a globally recognized utility operator (preferably from Europe) to advise CEB on good environmental controls and practice in operating a coal power plant.

6. A Remaining Life Assessment (RLA) of the Lakvijaya Coal Plant to understand the level of system degradation so that proper remediation and alternatives can be put in place in time.

This matter has been compounded due to the operational issues of the plant. A typical coal power plant is expected to have an availability of 80-90% capacity, whilst Lakvijaya has not been able to exceed 67% in 2016, 2017 or 2018. Multiple failures have resulted from improper operational practices and negligence81. In many instances, the plants have not been able to come out of a shutdown on the planned date (plant 1, 2 & 3 shutdowns in 2018 are examples).

Joint efforts taken by CEB and PUCSL to resolve the issues were blocked in the guise of the conflict between the PUCSL and CEBEU82.

A critical power plant to the grid running in violations of legal standards and contributing to public nuisance becomes a significant risk to the national power system as it is merely a court order away from being shut down.

Liquid Fuel Power Plants The heavy reliance on liquid fossil fuels, especially heavy fuel oil (HFO) and diesel for power generation (including emergency power) also creates significant air quality issues locally, especially particulate matter (PM) and SOx – the two main contributions to local air quality problems in the country. PUCSL began a process in Energy Leaks, “LVPS Petition to GM”, August 2, 2018 https://energyleakslk.wordpress.com/2018/08/02/lvps-petition-to-gm/ 81 http://www.sundaytimes.lk/180617/news/lakvijayas-unit-1-underpowered-for-half-the-time-since-2015-298665.html 80

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Lakvijaya Coal Power Plant management has informedPUCSL that they are unable to honour the agreement signed by the CEB GM due to the ongoing trade union action. KII

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FINDINGS: GENERATI - ON PLANNING RELATED 61

The CEB Long Term Generation Expansion Plan (LTGEP) is a comprehensive plan/report made by the generation planning division of the CEB that details the existing status of the system, future options and scenarios supported by multiple modelling runs. The planning horizon is 20 years, and the plan proposes the power plant mix for this period. It is based on the least cost generation approach that is the legal basis for planning in the country.

The LTGEP is also at the heart of the conflict between the CEB and the regulator. This appears to be a result of CEB not accepting the regulator’s authority for approving the CEB Long Term Generation Expansion Plan (LTGEP), suggesting that the regulator cannot force any changes but should simply approve the CEB’s plan. The CEB has also taken the unusual step of obtaining an opinion from the Attorney-General stating that public consultation on the generation plan is illegal, notwithstanding the role of public comments on such matters stipulated in the PUCSL Act and global practice.

The CEB Engineers Union has instituted industrial action on this issue, threatening an island wide blackout in April 2018 and instituted a policy of non-cooperation with the regulator.

The planning process has been challenged on multiple aspects by experts and the public, some of which are listed below; a) Planning composition – although the planning process looks at and integrates multiple aspects (economic development, social and environmental issues), the complete planning exercise is carried out by a small group of electrical engineers. During conversations it was revealed that key assumptions such as future GDP growth (linked to demand growth) are also determined by them. b) There is a question whether CEB should be the entity who conducts the planning exercise due to the failure to unbundle the generation, transmission and distribution arms. From the content of the Long Term Generation Expansion Plan (LTGEP), it is evident that the planners assume that the CEB will remain a unitary agency with the mandate to develop power plants within the planning time horizons. c) The generation planning process does not include transmission network costs for the plan.

However, the transmission plan is later developed to match the generation plan and then later used to justify the future generation

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The CEB continues to build a high capacity transmission line to Trincomalee even after the Sampur coal power plant was cancelled by the Government.

84 PUCSL decision document on LTGEP 2018-2037 85 KII 86 Wien Automatic System Planning package 87 CEB denoted floating solar as a small pilot project globally and thus not a proven technology during their presentation to the NAC in late

plans. It is not always revised when generation planning changes83. d) The generation plan uses impractical time horizons for power plants. For example, LTGEP 2018-2037 (published in April 2017) adds 300MW coal power generation capacity by 2023 – a mere 6-year window, without a completed feasibility assessment, funding plan, environmental clearance or confirmed location.

Using impractical time horizons inevitably leads to power shortages which then leads to expensive liquid fuel and emergency power plants to be contracted on ad-hoc basis. e) Future costs – assumptions on fuel price (a critical aspect of a generation plan based on least cost) are arbitrary at best84. It appears that coal prices are depressed while LNG prices are enhanced during the planning exercise.85 f) While the generation plan has multiple scenarios, it appears that they are not used for any meaningful decision-making process. g) The generation planning process uses WASP86 as the primary modelling tool, which is not suited for planning high renewable energy penetration into the grid. While a more appropriate software has been obtained by CEB, it is not clear when this will be used for generation planning. h) CEB claims that they are only using ‘proven technology’ as a filter for candidate power plants even though the planning exercise is for 20 years. This is used to exclude critical components of modern power systems (such as utility level battery storage, floating solar 87 etc.) The terms proven technology is not defined in the report, nor is it used in the context of current projects in more progressive energy regimes. i) The generation planning exercise is conducted in dollars, uses fixed costs and exchange rates for the planning horizon (fuel and capital), and does not consider decreasing cost trends and increasing efficiencies.

These choices structurally disadvantage renewables.

The LTGEP is designed to use economic costs rather than financial costs, but no proper assessment was done on economic costs over the years. A World Bank study conducted in 2010 listed six values ranging from Euro 6 cents to 0.01 cents/kWh with CEB later picking the cheapest (0.01 cents/kWh)88 even though the data used for this last value was from 1995. These assessments undervalue the impact by limiting the scope of environmental damage and the true costs of 2017. The World Bank notes that the total installed capacity globally is 1.1GW by end 2018, with a LCOE that matches ground mounted solar and a total global market potential of 400GW. Where Sun Meets Water: Floating Solar Market Report, The World Bank.

88 Sri Lanka: Environmental issues in the power sector by ECM, RMA and ERM.

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treating the same. By failing to use current knowledge and methods for such calculations the CEB understates the true costs of power generation to the economy, thereby setting the stage for challenges on multiple grounds.

RECOMMENDATIONS 1. Broad basing the planning process by bringing in a diversity of technical knowledge into the planning process including economics, commodity pricing and trends, and a better structured public stakeholder engagement process.

2. Shift to a better planning software that allows modelling of high renewable integration.

3. Better use of scenarios for decision making and execution.

4. Use of more robust assumptions including costs and timelines.

5. Generation planning for 30 years should be futuristic, factoring in trends in costs, technology, consumer needs and environmental concerns. While end-user risk mitigation is indeed part of a robust plan, it would be more appropriate to rely on source diversification and improved process to achieve this than yesterday’s technology. ‘Proven technology’ should not be a filter to build a backward-looking plan.

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APPENDIX 1 – NAC TOR AND KII LIST Energy NAC Terms of Reference Original Areas of Engagement 1. Provide a private sector perspective, and develop Chamber advocacy positions to government regarding the country’s energy generation plan, as well as an investment programme to meet the power needs 2. Evaluate the latest “Least Cost Long Term Generation Plan” for electricity 3. Recommendations for an accelerated road map to meet the immediate needs of the industry by 2020 and prevent shortages 4. Develop recommendations on the way forward with regard to introducing LNG in Sri Lanka and way forward for private participation in LNG 5. Develop recommendations on monitoring and addressing electricity quality issues affecting industry (brownouts, fluctuations, outages) 6. Evaluating the current status and providing recommendations on next steps for exploration of petroleum deposits in the Mannar basin (including establishing credible and transparent mechanisms for foreign investors) 7. Developing recommendations for investor-friendly policies to attract private participation in the energy sector 8. Advocating for implementing electricity tariff reforms and energy pricing formula Additions from members 9. Implementation of new power projects of the CEB LTGEP – 2020, which was approved by the PUCSL; a. 300 MW NG fired CCGT at Kerawalapitiya b. 100 MW HFO plant in Galle c. 100 MW solar plant in Moneragala d. 100 MW solar plant and 170 MW wind plant in Pooneryn e. 4 x 24 MW HFO plants in Kappalthurai, Moneragala, Horana and Pallakele GSSs 10. Unbundling of CEB Generation, Transmission and Distribution with autonomy and accountability 11. Reintroduction of Feed-in-tariff for renewable energy projects below 10 MW instead of tenders, to speed up the renewable energy development and to achieve the set target of 20% by 2020 12. Reintroduction of incentives for power sector FDI 13. Promotion of investment by local companies in foreign countries with speedy Central Bank approval 14. Power (as in electricity) and Energy (power plus oil and gas) need to be addressed separately 15. Fast-track the development of the Mannar Basin oil and gas, including recommending a way forward to make Sri Lanka gas-ready a.s.a.p.

List of Presenters and Key Informant Interviewees (KIIs) Presenter 1.

2.

3.

4.

5.

6.

7.

8.

Dr Anil Cabraal

Consultant, World Bank Group

Eng. Buddhika Samarasinghe and Dr Wijekoon Banda Dr Dharshana Muthumani Mr Saliya Wickramasuriya Ms Sabrina Esufally

2.

3.

Ceylon Electricity Board Manitoba HDVC Research Centre NAC Energy Verité Research

Mr Damitha Kumarasinghe and Mr Kanchana Siriwardena Mr Vidhura Ralapanawa Dr Narendra de Silva Interviewee

1.

Institution

Dr S. Batagoda, Secretary Mr Upali Marasinghe, Secretary Mr W.B. Ganegala, Chairman

Public Utilities Commission of Sri Lanka MAS Intimates LECO Institution Ministry of Power and Renewable Energy Ministry of Petroleum Resource Development Ceylon Electricity Board

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4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

Mr A.H.S. Wijesinghe, Additional Secretary Development Mr W.D. Jayasinghe, Secretary General Mr M.K. Garusinghe, Deputy General Manager, Commercial and Supply Chain Mr Damitha Kumarasinghe, Director General Mr Harsha Wickramasinghe, Deputy Director General (Demand Side Management) Mrs Preeni Withanage, Director (National Benefits) Dr Eteri Kvintradze, Resident Representative Eng. Athula Wanniarachchi Past President Mr Raja Amaratunga, Senior Consultant Petroleum Sector Mr Chamath Goonawardena, Director Regulatory Affairs Dr Tilak Siyambalapitya – Resource Management Associates Mr Vidura Ralapanawa – MAS Group

National Procurement Commission Ceylon Petroleum Corporation Public Utilities Commission of Sri Lanka Sustainable Energy Authority Petroleum Resource Development Secretariat IMF CEB Engineers Union Public Utilities Commission of Sri Lanka (PUCSL) Public Utilities Commission of Sri Lanka (PUCSL)

Mr U.D. Jayawardena – Lanka Transformers Ltd Mr Manjula Perera – Windforce Mr Chas Charles – Hayleys Energy Services Mr Sanjay Tiwari – Piramal Glass Mr Saliya Wickramasuriya - Independent Mr Shyam Bohra – Lanka IOC Mr Nimal Cooke – Capital Maharaja Group Mr Dinesh Dharmadasa – Industrial Association of Sri Lanka Dr Jagath Peiris – National Institute of Exports Interviews Sought But Not Yet Granted

1.

Ministry of Petroleum Resources Development

Mr Milinda Gunatillake

Energy NAC members

Institution Attorney General’s Department

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APPENDIX 2 - AREAS OF CONCERN Members’ questions have been initially grouped topically.

5.

6.

7.

8.

9.

10.

Energy Policy What energy policy does Sri Lanka have, and where is it going?

Are all projects aligned with this policy?

How can we increase private sector participation in the energy sector?

What enhancements are being made to public transport to meet the challenges of the future?

What incentives are given for private sector investment in the energy sector?

How can we map Sri Lanka’s domestic hydrocarbon reserves into a National Energy Policy?

Implementation 11. What has prevented Sri Lanka from not implementing any new base-load power plants since 2015?

12. Why has Sri Lanka, despite losing self-sufficiency two decades ago and now producing less than 40% of her petroleum products locally, not managed to increase her refining capacity?

13. How can we improve the quality of electricity supply, particularly in rural areas? Frequent power cuts and fluctuations Environment 14. What steps are being taken to adjust our Renewable energy targets in line with the recent IPCC report 89, to say nothing of Sri Lanka’s formal commitment to climate management made at COP 21?

15. Are we accurately capturing the impact of coal on the environment?

Procurement 16. How can power sector procurement be made more efficient and transparent?

17. How come Sri Lanka cannot put together an RFP which easily allows comparing proposals? Why are power tenders complex, over-prescriptive, and always controversial in evaluation?

18. Why are bidders not given enough time to respond? The excuse is power cuts, but no new power plant has been implemented in nearly 10 years!

19. Why don’t the CEB fix the price and tender licence fee?

Financial 20. Why are the CEB and CPC always making losses?

21. Why is Sri Lanka’s electricity tariff so high compared with regional norms?

22. Doesn’t the PPA being denominated in LKR attract a much higher risk premium?

23.

24.

25.

26.

27.

Generation planning Will the CEB permit flexibility of scale in the sizing of solar and mini-hydro projects?

Why are we not looking at global practices and future technology when planning power generation? Using “proven technology” means we are always 20 years in the past.

What is Sri Lanka’s future fuel for industrial thermal fuel? Both coal and biomass are unsustainable What does CEB do when market conditions change from those prevalent during their generation planning? For example, planning at a coal cost of USD 80 per ton when landed cost becomes USD 130/ton?

When are we going to plan weather uncertainty out of base-load power generation?

Sector reforms 28. Why don’t we unbundle the CEB into independent Generation, Transmission and Distribution units as envisaged 10 years ago?

29. How can we resolve the issue of CEB non-cooperation with the PUCSL? 30. How can we make the CEB and CPC more efficient and less costly to run?

LNG, LPG and Mannar basin gas 31. Why aren’t we focused on introducing LNG into Sri Lanka?

32. How can we balance the need to commence importing LNG immediately with the eventual production of Mannar basin gas?

33. With respect to introduction of natural gas into the energy mix, has Sri Lanka failed to plan or planned to fail?

34. What can be done about the variable quality of imported LPG?

89

This calls for radical de-carbonisation, including a moratorium on coal

66

Corruption 35. How true are the allegations of large-scale corruption in the power sector of Sri Lanka, and how can this be mitigated?

36. What can we do to reduce the burden of obtaining licenses? It takes 23 approvals for a mini-hydro plant, each one an opportunity to block and demand!

37. Why is there no transparency around the negotiation and award of a Power Purchase Agreement? All PPAs should be public documents90

90

The NAC has studied 3 different active Power Purchase Agreements in detail, and, although the results are outside the scope of this report, may publish their findings in a later edition.

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APPENDIX 3 – AN OVERVIEW OF SRI LANKA’S ENERGY SECTOR Energy is a major driver of economic growth, as per the demonstrated correlation between energy usage and economic growth in Sri Lanka.91 For instance, while the country’s Gross Domestic Product (GDP) has grown at an annual average rate of 4.56%92 over the past five years, the primary energy demand has grown at an annual average rate of 4.3%. 93 Presently, the primary energy supply in the country is an amalgamation of five resources, namely biomass, hydro power, petroleum, coal and non-conventional renewable energy i.e. wind and Solar (NCRE) (See Figure 14).

Major Hydro 6%

NCRE 2%

Coal 10% Biomass 36%

Petroleum 46%

Figure 20: Primary Energy Mix for Sri Lanka (2016).94

While petroleum accounts for a major share in the country’s primary energy mix, the entirety of the country’s petroleum requirement is imported, either as refined products or crude oil. While the importation of crude oil has been limited by the capacity of Sri Lanka’s only refinery (40,000 bpd), refined petroleum products and LP gas imports have been increasing over the past five years.95 It should be noted that the CEB uses the oil substitution method, which inflates the hydro component of electricity generated to about twice that obtained when using the direct equivalent method.

Biomass, which is a significant component of the primary energy mix (mainly used as fire wood for cooking purposes in rural and suburban communities) has been experiencing a slight decline during the five years up to 2016 (See Figure 3)96. This trend could be attributed to socio-economic growth in the country leading to an increased penetration of LPG, since this has been experiencing an annual average sales growth of 22.24% over the past 5 years97 compared with an annual average growth of 8.7% for refined petroleum products.

Electricity consumption in the country was estimated at 13,353 GWh in 2017, or approximately 600 KWh per capita. 98 While electricity demand has grown at 5.1% over the last five years, the Ceylon Electricity Board’s demand projections indicate an annual growth rate of 5.4% over the next decade.99 Notwithstanding this, Sri Lanka is currently 6th from the bottom in Asia, after Nepal, Cambodia, Myanmar, Bangladesh and Pakistan. Malaysia, Hong Kong, Japan, Brunei, Singapore and South Korea have approximately 8-20 times the national electricity consumption per capita of Sri Lanka.

91

Long Term Generation Expansion Plan 2018-2037 (Draft), Ceylon Electricity Board. Available at: http://www.pucsl.gov.lk/english/wpcontent/uploads/2017/05/LTGEP_2018-2037.pdf; Sri Lanka Electricity Industry: Long Term Thermal Generation Fuel options. Available at http://www.ips.lk/wp-content/uploads/2017/01/01_srilanka-electricity-ips.pdf 92 Annual Report 2017, Central Bank of Sri Lanka. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2017/en/5_Chapter_01.pdf 93 Sri Lanka Energy Balance, Sustainable Energy Authority, Available at: http://energybalance.axioon.com/.

94 Ibid 95 Annual Report 2017, Central Bank of Sri Lanka. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2017/en/14_Appendix.pdf.

96 Sri Lanka Energy Balance, Sustainable Energy Authority, Available at: http://energybalance.axioon.com/ 97 Annual Report 2017, Central Bank of Sri Lanka. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2017/en/14_Appendix.pdf.

98 Annual Report 2017, Central Bank of Sri Lanka. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2017/en/7_Chapter_03.pdf.

99 Long Term Generation Expansion Plan 2018-2037 (Draft), Ceylon Electricity Board. Available at: http://www.pucsl.gov.lk/english/wpcontent/uploads/2017/05/LTGEP_2018-2037.pdf.

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Electricity 11% Coal 1%

Biomass 44%

Petroleum 44%

Figure 21: Share of Energy Consumption in Sri Lanka (2016).100

Given the above, the overall demand for imported energy has grown at an average annual rate of 8.2%, at a total cost of USD 18.48 billion. This amounts to 19.15% of the country’s overall import bill over the past five years,101 leaving Sri Lanka’s economy vulnerable to external commodity price volatility.102

Petroleum Consumption by Type, 2016

Petroleum Consumption by Usage, 2016 Share of Petroleum Consumption

3.4% 7.0%

5.3% Transportation

67.8%

43.9%

Diesel Gasoline

Power Generation

11.7%

Furnace Oil

10.9%

Industrial Use

9.3%

Household Use

8.9%

LPG Keroseane Other Bunkering and Aviation

1.4%

Other

1.8%

28.7%

Figure 22: Statistics of Primary Energy usage in Sri Lanka.103

100

Ibid Annual Report 2017, Central Bank of Sri Lanka. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2017/en/14_Appendix.pdf 102 World Bank Commodity Price Data (The Pink Sheet) http://pubdocs.worldbank.org/en/799841528151608411/CMO-Pink-Sheet-June-2018.pdf 103 Sri Lanka Energy Balance, Sustainable Energy Authority. Available at: http://energybalance.axioon.com/ Annual Report 2017, Central Bank of Sri Lanka. Available at: https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/publications/annual_report/2017/en/14_Appendix.pdf 101

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Primary Energy Trends 14000 12000 49.1%

42.2%

47.7%

49.1%

55.7%

10000 8000 6000

50.9%

57.8%

52.3%

50.9%

44.3%

4000 2000

Primary Energy (ktoe)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

0 2012 Indigenous

2013 Imported

2014

2015

Total Primary Energy

2016 Biomass

Imported

Figure 23: Petroleum Energy Mix (2016)104

104

Sri Lanka Energy Balance, Sustainable Energy Authority. Available at: http://energybalance.axioon.com/

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APPENDIX 4 - ENERGY POLICY BACKGROUND Energy Policy 2006 In 2006 the Ministry of Power and Energy took the initiative to prepare a National Energy Policy and Strategies of Sri Lanka document in consultation with relevant stakeholders. It was published in a Gazette Extraordinary No. 1553/10 of 10 June, 2008105. The Policy spells out the implementing strategies, specific targets and milestones through which the Government of Sri Lanka and its people would endeavour to develop and manage the energy sector in the coming years in order to facilitate achieving its millennium development goals. Specific new initiatives are included in this policy to expand the delivery of affordable energy services to a larger share of the population, to improve energy sector planning, management and regulation, and to revitalize biomass as a significant resource of commercial energy. However, this policy is biased more towards the Electricity or Power sector and does not cover other energy related sectors such as transport, industries and petroleum equitably.

Some of the key recommendations in the 2008 Policy document were:  Dedicated energy-related plantations will be encouraged.  Development of bio-fuels for transport will be encouraged  By 2015, share of hydro to be 28%, that from oil to be a maximum of 8%, that from coal to increase up to 54% and that from renewable energy sources to be at least 10%. However, the actual oil share in 2015 was 42% while that from coal was 11%  The Government shall not initiate or entertain any proposal either by the electricity utilities or private developers to build power plants that will use oil, oil-based products or fuels of which the price is indexed to the oil price. (this is thought to have been stipulated to prevent introduction of natural gas)  The strategy of the Government shall be to immediately diversify into a third fuel. To ensure maximum possible security against price and supply fluctuations, and to ensure the growing demand is reliably met, this third fuel shall be coal.  A minimum level of 10% of electrical energy will be supplied to the grid from NRE by 2015. This target has since been achieved.

Energy Policy 2010 The Ministry of Planning then published in 2010 a Development Policy Framework of the GoSL document, which described developmental activities to be undertaken in all sectors during the ensuing decade, 2010-2020. Under the power sector, it has been proposed that “the high cost oil fired operation technology in thermal power plants will be replaced with low cost LNG technology and in addition, new LNG power plants will be established”. The document gave an artist’s visualization of an LNG receiving terminal and the proposed energy mix for generation electricity by 2020 as 24% from gas, 27% from hydro, 22% from renewables and 27% from coal106.

Energy Policy 2015 Then in early 2015 the Ministry of Power and Renewable Energy (MP&RE) issued a policy statement under the theme “Sri Lanka Energy Sector Development Plan for a Knowledge-Based Economy 2015 – 2025”, with a view to align the country’s development drive to provide affordable, high quality and reliable energy for all citizens by conserving the country’s precious natural environment, giving priority to indigenous energy sources, and capturing the full potential of all renewable and other indigenous resources in order for Sri Lanka to become a nation self-sufficient in energy107.

The policy proposed a target of increasing generation capacity of low-cost thermal power plants fired by natural gas and biomass to 2,000 MW to reduce the generation costs and to diversify the generation mix by 2020. The energy mix by 2030 was targeted to be 44% of biomass, 34% of renewables, 14% of hydro, 6% of natural gas, 1% of oil and 1% of coal.

The policy has also formulated an action plan to be achieved during 2020-2025, with proposals for improving the infrastructure for electricity generation at a cost of USD 1,800 million, improve transmission and distribution network at a cost of USD 1,945 million and investments in the petroleum sector including upstream and downstream developments at a cost of USD 3,600 million.

105

http://powermin.gov.lk/english/wp-content/uploads/documents/national_energy_policy.pdf National Planning Department, The Development Policy Framework Government of Sri Lanka, pp. 49 & 50, https://www.adb.org/sites/default/files/linked-documents/cps-sri-2012-2016-oth-01.pdf 107 M/P&E (2015). Sri Lanka Energy Sector Development Plan for a Knowledge-Based Economy 2015 – 2025. http://powermin.gov.lk/sinhala/wp-content/uploads/2015/03/ENERGY_EMPOWERED_NATION_2015_2025.pdf 106

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Some of the projects incorporated in the policy statement including promotion of solar and wind energy systems, improvements to transmission systems, introduction of light rail systems, establishing a supply chain for biomass collection, improvements to the petroleum refinery and further development of domestic petroleum resources have been initiated. Nevertheless, projects such as feasibility studies for converting the combined cycle gas turbine power plants at Kelanitissa and Kerawalapitiya and rehabilitation of oil pipelines are yet to commence.

It should be noted that all three energy policy documents; from 2008, 2010, and 2015, have not superseded each other, and therefore remain in the public domain in parallel. They contain several contradictory elements, and the 2015 document, while outlining the projects described above, does not indicate potential investment or operational modalities for any of them.

Energy Policy 2016 Therefore, the Ministry of Power and Renewable Energy (MP&RE) in 2016 decided to review the situation with a view to preparing a holistic National Energy Policy, and prepared a draft that was posted in its website in February 2017 inviting public comments by registered cover by May 2017 108. The preamble to the policy draft says “Aligning Sri Lanka with Goal 7 of the Sustainable Development Goals of the UN, this policy would; (a) contribute to achieve universal access to energy by 2020, a decade ahead of the requirement, (b) contribute to lessen the dependence of Sri Lanka on fossil fuels below 50% of the primary energy supply and also to halve the specific energy use across all end users by 2030 (Demand Side Management, or DSM), (c) pave the way to realize the vision of Sri Lanka in achieving carbon neutrality and complete transition of all the energy value chains by 2050, and (d) provide the necessary space for establishing key manufacturing industries by supplying sustainable energy technologies to the local market, and forge alliances with other developing countries through South-South cooperation by developing knowledge products and sustainable energy technologies in line with the Goal 7 of the SDGs”.

The new draft, while highlighting issues such as energy security, improving efficiencies, increasing dependence on indigenous resources, reducing losses, enhancing diversity, minimizing environmental damage, increasing accessibility, reducing prices, etc., which are found in policy documents of any country, has reversed some of the directions given in the 2008 Policy, such as giving priority for coal for electricity generation. It also removed the embargo on using oil or any fuel linked to oil prices for electricity generation, which means that now natural gas could be used. It states “Energy supply from cleaner sources and technologies will be encouraged to minimize harm to the local and global environment while taking into consideration the impacts on the national economy and the long-term environmental benefits”. Thus, while there is provision to introduce natural gas into the country on these grounds, the document refrains from explicitly referring to natural gas.

Though the draft is described as a national energy policy, it is focusing more on the power sector than the rest, and some key areas that need to be addressed urgently in other sectors have been left out. For example, under “Providing Access to Energy Services”, the policy document only refers to access to electricity saying “Access to electricity using either on-grid or off-grid sources will be ensured to all citizens in the country”. However, the availability of petroleum oil for transport and household needs has not been ensured throughout the country. In rural areas, petroleum outlets are few and far between, and it is illegal for others to trade oil officially, resulting in a thriving black-market business.

The proposed policy also does not promote private sector investment in development of renewable energy resources.

For example, it says “Larger scale renewable energy investments for power generation will be implemented through competitive bidding schemes to unlock larger market for renewables”. This means that an investor has to wait until the utilities invite bids for setting up such systems, which in itself is not a problem except that such bid rounds are few and far between, and projects on privately owned land cannot commence.

108

Sri Lanka Sustainable Energy Authority http://www.energy.gov.lk/sites/default/files/files/Energy-Policy-eng.pdf

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APPENDIX 5 - RECENT CABINET DECISIONS ON DEVELOPING RENEWABLE ENERGY SYSTEMS During the last 12 months, the Cabinet of Ministers has taken several policy decisions to promote renewable energy systems. However, follow up by the utilities has been slow. These decisions taken by the Cabinet of Ministers are accessible through the following links: http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=93 61 (Decision 05.11.2018 on Biomass 2022 project) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=89 79 http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=86 82 (Award of 10 MW solar farms in Vavunathivu and Polonnaruwa) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=92 78 (Decision 28.10.2018 Surya Bala Sangramaya Loan scheme) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=93 02 (Decision 16.10.2018 Award of contract for Mannar Wind Farm) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=88 38 (Decision 15.05.2018 on 100 MW Manner Wind Farm) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=82 87 (Decision 17.10. 2017 on developing small-scale solar power plants) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=81 52 (Decision 26.09.2017 on utilizing abandoned paddy fields for setting up solar parks) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=81 52 (Decision 09.08.2017 on rooftop solar power generation) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=77 54 (Decision 23.05.2017 on constructing a 240 MW Wind Power and 800 MW Solar Power Hybrid Energy Park at Pooneryn) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=77 08 (Decision 02.05.2017 on setting up solar panels in public institutions) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=75 25 (Decision 28.02.2017 on establishment of Floating Solar Power Energy Plants on Mahaweli reservoirs beginning at Madura Oya Reservoir) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=73 45 (Decision 16.12.2016 on establishment of a Solar Power Park of 100MW in the Siyambalanduwa) http://www.cabinetoffice.gov.lk/cab/index.php?option=com_content&view=article&id=16&Itemid=49&lang=en&dID=84 33 (Decision on 05.12.2017 on installation of solar power systems in 63 Government hospitals, 13 Government schools and 01 Divisional Secretariat Division, to the institutions)

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Appendix 6 – Pipeline of Pending Power Plants and their Approval Status109 Year

Solar (MW)

Wind (MW)

Thermal

Biomass

Hydro

2018

160

5

15

95

50

100 + 150 + 70 MW Oil 300MW Natural Gas

2019 2020

105

100 + 120

2021

55

75

2022

6

50

2023

55

60

300MW Natural Gas

2024

55

45

300MW Natural Gas

2025

104

85

300MW Natural Gas

2026

55

2027

54

5 5 5 5 5 5 5 5 5 50MW Biomass in the generation plan upto 2027 80MW Biomass pending CEB approval and PPA

15 15 15 10 10 10 10 10 10 120 MW Mini Hydro in the generation plan upto 2027 150MW Mini hydro potential pending CEB approval and PPA Uma Oya (122MW), Moragahakanda (25MW) and Broadlands (35MW) are delayed

744MW solar in the generation plan upto 2027  Cabinet approval granted for 800MW at Pooneryn  Surya Bala Sangramaya  1MW x 60 already tendered only some implemented Total  1MW x 90 already tendered only some implemented  100MW Siyabalanduwa  5MW Solar plus Storage  Rooftop Solar – 220MW installed.

1000MW target by 2025  1500MW applications for small scale ground mounted is pending approval and tariff

109

150MW Natural Gas

150MW Natural Gas 25

150MW Natural Gas

610MW wind in the generation plan upto 2027  100 MW already tendered for Mannar Wind Park I  270MW will be develope d under Mannar Wind Park II, III & IV  Cabinet approval granted for 240MW at Pooneryn

320MW Furnace Oil in generation plan.

Instead of building the same, short term measures were implemented  100MW Obtained through emergency power procurement  170MW obtained through extension of retired plants

 

1650MW Natural Gas 300MW tender awarded 1350MW to be implemented with India, Japan and China (G to G)

Full details of each of these projects are available with the NAC on Energy and will be provided upon request

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APPENDIX 7 - RELEVANT LAWS, REGULATIONS AND GUIDELINES Hitherto, the supply and distribution of fuels for the generation of energy and electricity have been entrusted to (a) the Ceylon Petroleum Corporation (CPC) established under Parliament Act 28 of 1961 110 and mandated as the sole importer, refiner and distributor of petroleum fuels into the country, and (b) the Ceylon Electricity Board established under Parliament Act No 17 of 1969111 mandated with the development and coordination of generation, supply and distribution of electrical energy in Sri Lanka. From inception until 2002, they were operating to meet consumer demand without any form of regulation or monitoring by any external agency other than routine government auditing.

Acts on Electricity Then in 2002, the government established the Public Utilities Commission of Sri Lanka (PUCSL) under the Parliament Act No. 35 of 2002 as a body to regulate the petroleum, electricity and water utilities 112. While the original schedule included only the electricity and water service sectors, the (downstream) petroleum sector was added to the schedule through a Parliament resolution later. For the PUCSL to be effective, laws have to be brought in to make provisions to empower the PUCSL to regulate and monitor the activities in the fields of petroleum and electricity. Thus far, this has been achieved only for the electricity sector through the enactment of two laws on electricity - Sri Lanka Electricity Act, No. 20 of 2009113 and Sri Lanka Electricity (Amendment) Act No. 31 of 2013 114. The Ministry of Petroleum Resources Development (MPRD) is now in the process of amending the current laws or formulating new laws enabling the PUCSL to undertake regulation and monitoring of the downstream petroleum sector.

Through these Acts on electricity, the PUCSL is mandated to ensure fairness in the setting of electricity tariffs and service charges; ensuring the safety of electricity to living beings and property; licensing for generation, transmission and distribution; regulatory affairs to ensure the safety and efficiency of the electricity industry; inspection ensuring the quality and safety of the electricity supply; consumer affairs addressed to consumer protection, disputes and awareness; energy security, energy conservation, efficient use of electricity and mitigation of environmental concerns resulting from power sector investments; establishing the electricity market structure to promote competition; and dissemination of information on the industry to stakeholders.

Under the Electricity Act 20 of 2009, the Minister, subject to approval by the Cabinet of Ministers, shall have the power to formulate general policy guidelines in respect of the electricity industry taking into consideration, among other matters, the requirements for electricity in Sri Lanka in order to attain national targets for sustainable economic growth, including requirements in respect of different geographical areas, including rural areas and different socio-economic groups; fuel diversity and the preferred fuel for new electricity generation, along with pricing policy in respect of the supply of electricity.

Acts on Petroleum The Ceylon Petroleum Corporation (CPC) Act No. 28 of 1961 (amended in 1963 and 1965) established the CPC to carry on business as an importer, exporter, seller, supplier or distributer of petroleum, defined as any product or byproduct manufactured from hydrocarbon or hydrocarbon compounds. The Amendment of 1963 included the petroleum products to be regulated specifically as petrol, kerosene, diesel oil and furnace oil115.

The Petroleum Products (Special Provisions) Act No. 33 of 2002 was enacted to to provide for an alternate procedure for the import, export, sale, supply and distribution of petroleum and to provide for the establishment of an Energy Supplies Committee (ESC) which will exercise, perform and discharge the powers, duties and functions hereinafter set out including granting of licences for undertaking any of the above functions 116. The Minister on the recommendation of the ESC, may grant a licence to any person or body of persons, to import, export, sell, supply or distribute petroleum.

The MPRD has initiated action towards amending the CPC Act and the Petroleum Products Act, in order to empower the PUCSL to regulate the petroleum industry. Matters on granting licences, revoking licences, ensuring safety aspects and appointing inspectors are addressed in the proposed amendments, rendering the ESC non-operative at present.

An important amendment that has been proposed is the inclusion of natural gas as one of the petroleum resources and LNG as one of the petroleum products as appearing in the Glossary appearing on the last page. However, no mention of natural gas or LNG has been made either in the title or in the text where only petroleum resource or petroleum product 110

https://www.lawnet.gov.lk/1948/12/31/ceylon-petroleum-corporation/ http://www.commonlii.org/lk/legis/consol_act/ceb538285.pdf 112 Public Utilities Commission of Sri Lanka http://www.pucsl.gov.lk/english/wp-content/themes/pucsl/pdfs/pucsl_act.pdf 113 Public Utilities Commission of Sri Lanka http://www.pucsl.gov.lk/english/wp-content/themes/pucsl/pdfs/electricity_act_2009.pdf 114 Public Utilities Commission of Sri Lanka http://www.pucsl.gov.lk/english/wp-content/uploads/2013/09/Act-31E.pdf 115 Ceylon Petroleum Corporation Act 28 of 1961. http://www.commonlii.org/lk/legis/consol_act/cpc220385.pdf 116 http://www.pucsl.gov.lk/english/wp-content/themes/pucsl/pdfs/PetroleumProducts(Special%20Provisions) ActNo.33of2002.pdf 111

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appear. The two amendments will therefore make the PUCSL the regulator for natural gas to the consumer, and the CPC the implementing agency for the import, regasification and distribution of LNG. The two draft Acts are still with the Legal Draftsman’s Department.

The Government enacted the Petroleum Resources Act No. 26 of 2003 to make provisions for the exploration and recovery of petroleum resources in Sri Lanka and for the regulation of the same, with Petroleum Resources defined as crude oil, natural gas and hydrocarbons whether natural liquid, gaseous, solid, or semisolid state, hydrates of oil and gases117. This act is also being amended to provide for the exploration, development and management of all available petroleum resources and the development of the upstream petroleum industry of Sri Lanka: for the establishment of the Petroleum Resources Development Committee and Petroleum Resources Development Secretariat; provide for government guarantee for investors who may undertake exploration, and for the formulation of a master plan for the upstream Petroleum Industry. The Act also makes provision for the establishment of Petroleum Resources Development Secretariat (PRDS) as a separate corporate body functioning as the upstream regulator and for the formulation of a master plan for the upstream petroleum industry. The draft is still with the Attorney General’s Department.

The Public Utilities Commission of Sri Lanka (PUCSL) As mentioned before, the PUCSL is a body set up under the Parliament Act No. 35 of 2002 to regulate the petroleum, electricity and water utilities 118. While the original schedule included only electricity industry and water service industry, the petroleum industry was added to the schedule through a Parliamentary resolution later. The Commission has been empowered to regulate the electricity industry by the Sri Lankan Electricity Act No.20 of 2009 and the Sri Lanka Electricity (Amendment) Act No. 31 of 2013. Such matters as planning of long-term generation expansion, additions of power plants and any changes to tariff and other matters need the approval of the PUCSL. The PUCSL has published a Regulatory Manual - A guide to the work of the PUCSL, in March 2014 119, for the benefit of the public, operators and investors and describes the functions and procedures adopted by the PUCSL in performing its functions.

The Sri Lanka Sustainable Energy Authority (SLSEA) The SLSEA was established on 01 October 2007 by the Sri Lanka Sustainable Energy Authority Act No. 35 of 2007, to realize the necessity of having an apex institution to drive Sri Lanka towards a new level of sustainability in energy generation and usage, through increasing indigenous energy and improving energy efficiency within the country. Among its objectives are to develop renewable energy resources; to declare energy development areas; to implement energy efficiency measures and conservation programmes; to promote energy security, reliability and cost effectiveness in energy delivery and information management. The SLSEA serves both as a promoter and a regulator of renewable energy systems. No person can connect a renewable energy system to the grid unless permitted by the SLSEA. Procedure for the Procurement of Electricity on an Emergency basis – Section Provision in the Act

Requirement to be fulfilled

43 (2)

Procurement of power plants should be based on the Long-Term Generation

43 (4) (c)

Expansion Plan

43 (2)

Transmission Licensee shall submit a proposal to the Commission to proceed with the procurement, for approval of the Commission

43 (1) & 43 (3)

Commission approval to proceed with the procurement

43 (4) (c) 43 (4) (c) (ii)

Approval of the Cabinet of Ministers is received based on 

Emergency situation determined by Cabinet of Ministers



During a national calamity or long forced outage of major generation plant



Where a protracted bidding process may outweigh the potential benefit of procuring emergency power

In this case, the Transmission Licensee may bypass the tendering process

117

Petroleum Resources Act No. 26 of 2003. http://www.prds-srilanka.com/pdfs/petResources.pdf http://www.pucsl.gov.lk/english/wp-content/themes/pucsl/pdfs/pucsl_act.pdf 119 http://www.pucsl.gov.lk/english/wp-content/uploads/2014/05/Regulatory-Manual-March-2013-Version-3.pdf 118

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43 (6) (b)

The Transmission Licensee shall negotiate with the person selected to satisfy itself that the person is capable of developing the plant

43 (6) (b)



In compliance with technical and economical parameters



Selling energy at least cost

Submit the recommendations of the Transmission Licensee and the draft Power Purchase Agreement for the approval of the Commission

43 (7)

Commission to grant the approval if it is satisfied that 

If recommended price meets principle of least cost



Requirements of Least Cost Long Term Generation Plan is met



Terms and conditions of procurement is within the accepted technical and economical parameters of Transmission Licensee

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APPENDIX 8 – STRATEGY PAPER THE FOR DEVELOPMENT OF NATURAL GAS RESOURCES OF SRI LANKA The Potential for Domestic Natural Gas 90 percent of Sri Lanka’s land mass consists of up-thrust pre-cambrian metamorphic basement rock with no inherent hydrocarbon generation potential. The balance 10 percent is of limited sedimentary thickness and burial, and therefore of relatively low hydrocarbon potential. On the other hand, by virtue of Sri Lanka’s geographical location in the Jurassic age, where it was positioned in the centre of what is now the African Rift System, within the ancient Mozambique Ocean, our offshore sedimentary basins hold great promise. We share our pre-historic depositional environment with Mozambique and neighbouring East African countries, where the largest gas discoveries in the world were made over the past 3-4 years.

PRDS120 geoscientists have estimated the risked Mannar basin potential to be around 9 TCF (trillion cubic feet) of natural gas and 5 billion barrels of crude oil and condensate. This has been done on the basis of existing seismic and other information, and is believed to be a conservative number, expected to increase with the acquisition of more data providing greater resolution and visibility of the subsurface.

The Challenge However, Sri Lanka’s thickest offshore sediment lies under very deep water, which significantly increases both technical and commercial risk in the exploration for, and extraction of, hydrocarbons. With no physical or institutional infrastructure in place to produce and market deep-water gas, we are therefore a frontier province facing tremendous competition for limited Exploration and Production (E&P) investment. The risks associated with deep-water oil and gas fields are such that only a handful of global oil companies have both the appetite and experience to develop them, and it is partnerships with them that Sri Lanka needs at this time to accelerate her entry into the sector.

The depth, breadth and length of the recent industry downturn have been unprecedented, although turmoil in the Middle East has now started pulling prices up. Several major International Oil Companies (IOCs) have curtailed exploration activity almost completely as a result. Aggressive screening of commercial return has become the primary measure of project selection, and in this respect, Sri Lanka needs to provide market assurance – i.e. commit to purchase, or otherwise permit the monetization of her deep-water gas reserves – in order to make the cut on full-cycle economics.

Therefore, a coherent policy framework for energy, and in particular natural gas, must be in place to complement a strong legal framework and progressive fiscal regime.

The Strategy The cost of exploration and development of virgin, or green-field, deep-water areas like Sri Lanka amounts to billions of dollars. Over the years, the industry has evolved to the point that exploration risk is predominantly borne by international oil companies, with domestic or national oil companies increasing their participation in the lower-risk stages of development and production. Therefore, the most logical approach for resource holders like Sri Lanka to take is to mitigate financial exposure by encouraging international oil companies to bear exploration cost, in return for a share of the profits if found. Our current petroleum law permits us to enter into risk-sharing mechanisms such as Petroleum Sharing Contracts (PSCs) or Petroleum Resource Agreements (PRAs), as developed in Indonesia in the early 1960s.

In these contractual frameworks, the resource holder (in this case Sri Lanka) encourages investment in exploration activities by international oil companies in return for sharing with them a portion of the produced oil and gas, after first allowing them to recover their costs. Over time, and with increasing profitability, the bulk of production swings over from the investor to the resource holder, leaving the resource holder with the majority share over the life of a typical field.

For these partnerships to be effective, the resource holder, or State, must provide the investor with a strong legal framework, stable and predictable fiscal conditions, and fair regulation. Only under these circumstances can reputed companies be persuaded to invest in others’ territories. The world is replete with examples of where equity has not been achieved, sometimes on both sides, and Sri Lanka is expected to learn from the experiences of others in crafting her industry governance norms.

The PRDS has therefore been focused on creating an enabling environment to attract a diversity of high-quality international investment as an essential first step towards developing the sector. Signs that this is paying off are that now, while Indian subcontinent exploration and production (E&P) activity remains low, world-leading companies such as Total of France, Statoil of Norway, and Schlumberger of the US, are active in Sri Lanka.

The benefits of this are rapid capacity building, so Sri Lankans will soon be able to manage oil and gas operations independently, substantial revenue and job creation with minimum risk, and increased international goodwill through commercial relationships. Both upstream and downstream elements have been considered in Sri Lanka’s strategy, and a summary of these elements, recommendations and observations is presented in the table below; 120

Petroleum Resources Development Secretariat, under the Ministry of Petroleum Resources Development

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Key Requirements Item Petroleum Resources Bill 2015

National Economic Impact Study

Full-basin Resource Assessment

National Policy

Gas

Description A revised version of the 2003 Petroleum Bill with institutional enhancements, clearer definition of powers and functions, and increased autonomy between Policy, Regulation and Operations.

A detailed cross-sectoral analysis of the overall economic impact of inducting domestic natural gas into Sri Lanka’s energy mix, under scenarios of varying intensity, projected over 25 years A detailed technical estimate of the projected total potential of the basin on the basis of available information, with each asset identified and individually risked A policy to capture a road map towards inducting as much domestic natural gas as possible into Sri Lanka’s economy across all sectors

Purpose Better governance of the industry through efficient and transparent law

To guide national policy towards increasing domestic demand, and to provide monetization options for investors down the value chain Provides a supply-side estimate of Sri Lanka’s offshore hydrocarbon resources Bridge supply and demand for maximum economic benefit to Sri Lanka and maximum options for investors

Joint Study in Bay of Bengal and Mannar basin with Total of France and Statoil of Norway

A Joint Study agreement with Total of France will be a milestone event, signifying the entry of a global player into Sri Lanka and impacting global industry confidence positively

Capacity building and additional data acquisition that will greatly enrich Sri Lanka’s knowledge and attract further investment

Multi-Client Data Acquisition Programmes

PRDS has received several proposals from reputed multi-national oilfield service companies to acquire data all around Sri Lanka at their own cost, in return for being licensed to sell them to oil companies and recover their investment and profit

Petroleum data is the most valuable asset any country in the early stages of industry can have. More data will increase our knowledge, and make blocks more marketable

Commercialisation of Dorado Field gas

A conditional commitment from GoSL is required to drive the further appraisal and development work required to produce gas from the 2 Cairn discoveries in Mannar block M2. A Cabinet paper has been prepared seeking appropriate approvals accordingly

Deferment of economic benefit has a much more detrimental impact over 25 years than today’s market conditions and pricing. This is required to “get the ball rolling”

Closure of 2013 Bid Round

Sri Lanka conducted an international licensing round in 2013, which resulted in 3 bids being received on 29 November 2013. These bids still lie unevaluated. A Cabinet paper prepared requesting the appointment of a CANC

Sri Lanka needs to secure her credibility by evaluating these bids and awarding blocks accordingly, despite the bid round being only moderately successful. Failure to do so

Status Draft complete, pending certification by AG prior to Cabinet and Parliament Phase 1 done.

Phase 2 will capture new industries and other options Done for Mannar basin

PRDS has provided initial input into the last NEP exercise by the MPRE East and South coast seismic acquisition is finished, and data is now being processed Western Geco, a 100% owned subsidiary of oilfield services giant Schlumberger, has already commended a large-scale island-wide seismic survey A Licensing Round for block M2 has already been communicated to the industry

by Sri Lanka’s international business consultant HIS Global Cabinet approved the evaluation of bids and award of Cauvery blocks C2 and C3 in May 2015,

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Downstream preparation (this is an observation by the PRDS)

and TEC for this purpose in December 2013 lies un-signed.

The Mannar and Cauvery basins contain both oil and gas, and Sri Lanka’s National Energy Policy should be capable of monetizing both effectively. One of the areas of focus should thus be a review and upgrade of the refining, processing, transport and storage mechanisms that currently exist in Sri Lanka. In particular, enhancing refining capacity will allow us to inhouse the refining premium per barrel, and thus increase domestic value addition to our crude oil. It will also provide an exportable service to the industry both national and regional.

Increasing petroleum storage capacity will increase our enjoyment of currently depressed crude pricing worldwide, and provide the infrastructure to become a regional trading hub

will compromise any future marketing initiatives The PRDS recommends a simple metric such as “cost per incremental barrel� be considered to prioritise the various capacity enhancement options, taking technology advances and more stringent fuel standards into account, in particular the large requirement from the marine industry for lowsulphur bunker fuel after January 01, 2020.

and this has now been done.

Ongoing (CPC) Critical projects and areas of focus are the SOREM project, and the strategic deployment of the Trincomalee Tank Farm

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APPENDIX 9 – Biomass Policy & Strategy 1995 National Forest Policy and the Forestry Masterplan 1995-2000121 The National Forest Policy (1995) was drawn up to provide clear directions for safeguarding the remaining natural forests of the country in order to conserve forests, biodiversity, as well as soil and water resources. It mentions regarding the management of private forests and tree resources: • Tree growing on homesteads, and other agroforestry, will be promoted as a main strategy to supply wood and other forest products for meeting household and market needs.  The establishment, management and harvesting of industrial forest plantations by local people, communities, industries, and others in the private sector will be promoted.

• The state will promote tree growing by local people, rural communities, NGOs and other nonstate sector bodies for the protection of environmentally sensitive areas.

The Forestry Master Plan (1995-2000) was formulated to implement the Policy. One of its 13 programmes is dedicated to bioenergy development. The Plan mentions the development a national bioenergy strategy, and the establishment of a single agency responsible for coordinating the implementation of this strategy, although this has not happened yet. The following strategies are highlighted for the promotion of fuel wood plantation as the main biomass source for future energy applications:  Maintain an adequate percentage of fuel wood plantations in national reforestation programmes;  Encourage planting multiple tree species in home gardens with the objectives of increasing productivity and providing an additional income to the owners;  Plant multipurpose tree species on available spaces along the state roads, stream banks and other available lands owned by institutions to create a supplementary source of fuel wood as a by-product;  Provide state lands on a long-term lease with suitable tree tenure arrangements to anyone willing to plant trees;  The fuel wood-consuming industries should make every effort to have their own fuel wood plantations wherever possible;  Make arrangements to provide credit facilities and other necessary incentives, including tax concessions;  Convert around 15 % of uneconomical tea lands into fuel wood plantations with fastgrowing and high calorific value fuel wood species having coppicing ability; • Design training courses for governmental, NGO and plantation organizations working in forestry and tree production systems at different levels to plan and implement integrated tree-based farming systems.

121 Cited in: UNDP, Sri Lanka Global environment Facility Project Document: Project Title: Promoting Sustainable Biomass Energy

Production and Modern Bio-Energy Technologies, 2013. http://www.undp.org/content/dam/srilanka/docs/environment/GEFBiomass%20Energy%20(FSP)%20PIMS%204226%20SRL%20Biomass%20ProDoc%20draft%20for%20signature%20March%2028% 202013.pdf

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