Tariff hikes and powercuts - how can we deal with the costs to the people?
The charge towards cheaper energy
A mere 6 months after the last tariff increase, the CEB has increased electricity tariffs yet again.
For a country already battered by a series of price hikes in 2022, for a country reeling from massive shortages across 2022 (and even now, in the pharmaceutical sector), for a country still mired in a terrible economic crisis, this additional tariff hike feels quite hard. The increase looks especially bad, given the relative increases at different levels. It’s painful, especially coming after a period of relative consistency in prices. But was it necessary?
In a previous article, I spoke about the numbers behind the CEB, and how the CEB was in a cashflow crisis. The main thesis from that is mentioned below in a few extracts:
From end-2021 to end-2022, Sri Lanka’s energy costs have skyrocketed, primarily driven by the rise in global energy prices adding on top of the depreciation of the local currency.
What this data shows, is that despite the personnel costs being quite large in absolute terms (around 3-3.5 bn LKR per month!), they’re only a relatively small component in context of the overall costs of the CEB, which are primarily driven by costs related to generation (between 70-90% depending on what is included within this category). That makes it clear that the primary cost issue that the CEB is facing has more to do with direct generation costs rather than high administrative costs.
As long as the CEB was in a negative cashflow position, especially given it would have been a significantly worse position than in the past, meeting these requirements would have been barely possible. In the context that the CEB was not able to make the LKR payments needed to purchase the USD for coal imports, it’s quite likely that the coal supply would have been hindered. This would have been similarly true for other petroleum payments, and there was some allusion made to this point as well in local media. The CEB, despite being a monopoly provider of energy, could simply have been forced into massive blackouts again, simply on a cashflow basis.
So don’t worry about the non-generation expenditure? Shouldn’t we restructure the CEB?
Not at all. I think the salary and inefficiencies side is critical EVEN IF it doesn’t matter too m uch on the numbers. Given that there is a strong narrative that the there is a lot of wastage and corruption (which of course is true I feel), then taking steps towards that is absolutely critical to build confidence. How can the people be asked to take a sharper hike if the CEB is getting off scott-free?
But this isn’t really where it has to stop. While these numbers are so bad this year for the reasons I laid out earlier, it doesn’t take away the fact that smaller, yet significant, losses have been building up for years before that. This I feel is very much tied to the corruption in the sector (though there is ALSO a lot of complexity in addition to corruption IMO). It’s also quite likely that this is a part of the reason why we have remained in this power mix where we are forced to use so much expensive thermal power and why we haven’t invested as much in renewables in the past.
This mess is part of the reason why something like “restructuring the CEB” is a difficult task as well. If you want to privatize the CEB for example, any firm that comes in will want to avoid significant negative cash flow too - and end up doing a tariff revision as well. There’s also all the legacy debt, the complex organization structure of the CEB and its subsidiaries, and all the technical complexities in the way we’ve set up our grid as well - we can’t really move forward and implement a great renewable energy plan in such a financial and operational environment.
GIven all that, I don’t think a quick restructuring is realistic. However, these facts need to be put out, publicisized and explained - and a credible time-bound plan put out that can inspire some level of confidence that there is SOMETHING that is in the works. Put simply, I shouldn’t need to write these articles at all! While there is clearly something in the works, in order to inspire confidence that it is actually a proactive measure being taken, an easy first step would be to publicise the committee report on CEB restructuring recommendations, with any sensitive information being redacted as necessary.
Beyond this, there may be some medium term solutions possible as part of the restructuring exercise. Two such possibilities I mentioned in my previous piece would be ringfencing the CEB’s liabilities (and possibly taking over past debt to the treasury - which seems to have at least partly happened in 4Q 2022) and looking into the use of blended finance in partnership with multilaterals to finance renewable investment.
While these factors don’t immediately create any short-term relief, it will continue to be a critical part of making sure that any future costs are managed and of the government being able to move towards cheaper electrification for all. With Sri Lanka’s power generation being so skewed towards expensive diesel and secondarily coal, unless there’s a sustainable plan to move away from these, the costs will only continue to rise in the future. Restructuring the CEB is an absolutely critical part of being able to invest in cheaper energy in the future, since the current structure really isn’t conducive to this.
So what can we do for the CEB and the energy sector?
What happens after a reasonably successful restructuring is underway? Then we need to actually move away from the current expensive-generation mix towards cheaper and self-generated sources, ideally renewable. The issue is that this will likely take time - setting up solar farms, wind farms, connecting our grid to India are all things than can and should be done IMO (done well of course), but won’t happen in a few months. A clear plan, consistently communicated, can help inspire confidence until this takes place, but that won’t stop the pain. What could be done in the meantime?
This is a tough one. A key limiting factor is money - the capital costs of renewable energy is still quite high, and possibly could remain high in the current global environment. Getting past this will either require more credit from our partners, bilateral and multilateral, or further depreciation of the rupee to buy dollars for capital investment (running the risk of higher costs in the meantime!).
There are 3 short-term solutions I can think of that can reduce the pain on the energy sector directly. However, the problem here is that realistic implementation might make most of these into medium term solutions only.
The first is to provide an urgent expansion of cash transfers to low-usage consumers, possibly expanding on the welfare system currently being implemented. The proposed increase in the electricity tariffs seem to come to around 2000-3000 LKR per low-income family, and accounting for the knock-on increases, perhaps giving a 5000 extra cash transfer to the bottom 2 mn households would be a price worth paying. For simplicity’s sake, we could also explore providing this transfer to the CEB itself in the future, so that the tariffs don’t have to rise for said households - though once again, with inefficiencies and corruption, whether that’s a fair process isn’t clear. I’m more biased to suggest a direct transfer for now alongside the existing welfare process, and then in the future move towards a subsidy to CEB.
A second option might be seriously considering the subsidizing of solar capacity for industry. Industrial tariffs still remain heavily subsidized and as a category, is likely equal to the deficit from residential users. Here, setting up solar energy seems far more practical than setting it up for low-usage consumers - the poorer you are, the harder it will be to access credit, payments, and even something as basic as physical safety for a solar system (the per unit cost is also higher for a low-usage consumer, since the fixed cost will be spread over a relatively smaller number of units). Setting up solar systems for industry will likely be a tough task and an expensive one, but I feel this is one place where if we can convince some investment/credit to come in, will be net beneficial for Sri Lanka overall, despite the increased cost of said credit. If this is self-financed, and the regulatory stifling is relaxed, that could also be an avenue through which this could happen. Overall, this also creates space for the CEB to cross-subsidize low-usage consumers in the future again.
Third, I think it can be made easier for individuals to set up their own renewable system. This would reduce prices for them but increase for everyone else, since it would mean a high paying consumer is no longer on the grid, which actually worsens the cashflow deficit for the CEB. This option, therefore, is less about the cashflow directly, but more about managing public sentiment. I’m more biased to not prioritizing this option too much given the financial costs seem overall negative - but move towards improving this in the future instead.
No easy way out in the end - but many things we can still do
All I’ve looked into the CEB and the energy sector overall, suggests that there are no easy options here. It does really look like we’re stuck between the proverbial rock and hard place. However, just because things are difficult, doesn’t mean there is nothing that can be done.
I believe that the way to help people deal with this is to make their lives easier in other ways. That requires of course, a strong level of coordination in government, but it’s not impossible to imagine SOMETHING happening. For example, for low usage consumers who are disproportionately poor as well, this rise in cost could perhaps be mitigated by better welfare support, better labour support, and better access to food and medicine - things that we are struggling with at some levels not because of a lack of USD anymore, but rather due to terrible processes including that of procurement (the pharmaceutical chaos is the best example for this). If the overall economic environment improves alongside this, that too could be one way that the situation can be made more bearable. The current appreciation of the USD is one way this can pass through to consumers, especially if prices adjust downwards at least for a short while.
For the rich and the middle class, the improvement could be by making processes work faster and smoother, show a serious commitment to listening to their demands for state sector reform, and even something as simple as making it easier to engage with the energy sector when needed (anyone who’s tried to talk to the CEB about setting up any system knows this). For businesses, especially export businesses, giving regulatory reform including moving on land and other factor reform, I feel can be a critical tool to make things better operationally, even as some aspects like the cost of energy get worse.
Of course, the point is that all of this won’t happen alone. I think the energy crisis is in a sad way, an opportunity for the people to use the pain to force this reform in turn. This can look like public conversations, this can look like lobbying, this can look like engaging with different organizations that do these things - but this moment is one of action I feel. Without that action, I fear that we’ll be leaving things up to the government. The last time we left the energy sector up to the government, we had 13 hours without power and we stood in fuel queues for literal weeks. This time, I think we can shine at least part of the light ourselves.