Economic Impacts of Energy Prices

SLEA Annual Sessions

Tilak Siyambalapitiya 15 Oct 2011

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News, not really news, or should not be news....

Ceylon electricity Board is incurring heavy losses due to burning more fuel for power generation, CEB sources say. (2011) Petroleum Corporation to post losses: subsidised fuel supply for power generation and kerosene subsidy, the reasons (2010) Ceramic industry in trouble: energy costs unbearable, says Ceramic Council (all the time)
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The Public Say .......

Sri Lanka has the highest price of electricity in the region !
Fact or fiction ?

Petroleum prices never match costs, but we need subsidies.

When will this end ?

Build renewable energy-based power generation !

Willing to pay for them: No Willing to have one in your back yard: No
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Presentation Outline
Energy intensity of the economy and its trend
What can be done to retain the healthy trend ?

Energy costs of individual companies/processes.

Which way should we move ?

The new electricity pricing policy

How will it resolve the sub-sector burden on the Treasury Can we replicate it in the petroleum sub-sector?
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Sri Lanka Primary Energy Supply: 2007

Coal 0.5%

Hydro 9.5%

Biomass 47.7%

Petroleum 42.3%

Total primary energy supply: Per capita supply: Share of renewable energy

10 million toe 0.5 toe 57.2%

Sri Lanka Electricity Prices Compared

Average Unit Price in LKR (unity power factor) Sri Lanka 5.00 6.07 Malaysia Thailand 5.58 7.04 8.79 8.76 8.75 8.49 8.46 8.38 Pakistan Customer Class South Korea 8.46 7.77 Maharashtr a, India Bangladesh Tamilnadu, India Philippines Singapore Electricity Maximum Usage Demand (kWh/mth) (kW) 30 90 300 1,000 58,000 600,000 5,000 65,000 270,000 1,050,000 -

Kerala, India

Small Household Medium Large Small Commercial Medium Large Small Industrial Medium Large Very Large

5.31 4.58 4.94

2.82 3.98 7.53

1.87 6.59 9.12

2.78 4.61 7.32

8.00

7.80

Nepal

3.26 11.92 21.09 5.68 14.54 21.09

8.00 10.05 9.41 11.50

7.63 18.31 21.09 12.92 23.87

5.33 21.23 14.02 15.73 14.56 13.85 17.32 26.44 21.09 10.52 19.74 10.11 180 8.82 15.03 21.02 16.52 13.29 12.66 12.01 18.93 21.09 1500 6.67 11.23 18.47 16.08 12.76 12.15 10.68 16.95 14.60 6.81 180 4.12 600 7.71 2250 5.25 8.11 11.95 12.04 12.77 10.27 11.60 16.33 21.09 9.20 12.31 11.86 12.13 8.84 13.21 11.45 8.49 13.18 11.40 9.39 8.84 9.83 10.72 18.37 20.95 9.47 10.18 16.61 20.49 7.61 9.72 16.36 14.09 9.44 22.09 7.67 20.98

5.74 10.55 10.65 6.50 12.47 6.51 11.55 6.35 11.48

Sri Lanka: Status of Energy Services

Energy: Per capita total energy consumption (including biomass):
0.4 tonne of oil equivalent per person per year

Electricity
Total electricity consumption: 460 kWh/person/year About 90% of households have an active grid electricity connection, 3% off-grid services Ambitious target to serve the balance 7% by end 2012 Demand fully served, pricing problems remain

Petroleum
Demand served, pricing problems remain
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Energy Demand is Growing and will continue

Supply of Energy by Different Sources (Thousand TOE) 12,000 Biomass (Thousand TOE) Hydro (Thousand TOE) 10,000 Petroleum (Thousand TOE) Non-conventional (Thousand TOE)

Thousand TOE

8,000

6,000

4,000

2,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

Source: Sri Lanka Energy Balance 2007

Energy Intensity of the Economy: Primary Energy

Energy Intensity of the Economy: Commercial Energy

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Macro Picture of Energy Use and trend : Good

Reasons ?
Structural change in the economy: Services need less energy than manufacturing High energy prices keep consumption low, discourages waste

Other indicators are not that healthy ! However ........ severe problems in end-use sectors
Transport: excessive waste Heavy industry: no longer competitive Electricity use in households growing, industry: low growth, problems to supply

Severe issues in energy utilities

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Energy Imports
140 120 100 80 60 40 20 0
44.8 37.8

Average import price of crude oil (USD/bbl) Share of export income used to import oil

108.5

20.7

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2007
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What are the Solutions ?

Transport sector
Many solutions proposed by economists, specialists. Effectively NONE have been implemented. Highlight one proposal: Electrification of suburban railways
Project can be justified on energy savings alone Many professional proposals for the past 30 years, mostrecently by the Institution of Engineers No where near implementation

Manufacturing industry
Some indicators show growing specific energy consumption Needs more focus on energy efficiency
Beyond switching off ...... process changes
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Problems of Sector Institutions

The Case of the Power Sector

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Sri Lankas 2006 Policy in Action: Energy Share in Electricity

18,000 16,000 14,000 Net Generation (GWh) 12,000 10,000 8,000 6,000 4,000 2,000 2010 2011 2012 2013 2014 2015 Coal Oil Non-conventional renewable Hydro

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Changing fuel mix in Power Generation

A unique window of opportunity Must be used to

Restructure prices Get the sector back into profitability

Any indications of that happening ?

Methodology established Implementation: sluggish !

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Sri Lankas Window of Opportunity

Electricity production costs are declining in real terms
The three key power plants must be built on time IPPs are retiring, capacity payments will decline (not to forget the Govt is paying loans, which CEB is not servicing until end 2013) [see picture next slide]

Better use of network assets Network losses are declining [see table in a later slide]
Good oversight by PUCSL and determined effort by licensees would be required

Expected high economic growth A new regulatory system in place

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The Evolving Cost Structure

20.00 Average cost of sales to end-users (Rs/kWh) 18.00 16.00 14.00 12.00 10.00
9.49

In constant 2010 currency-no inflation or fuel price escalations

2.49 2.71 2.88 0.45 0.79 2.67 0.96 0.85

Distribution Transmission Generation Fuel Generation capacity

2.30 1.12 2.12 1.06

8.00 6.00 4.00 2.00 -

10.54

8.64

9.15

7.04 5.59

3.20

4.03

4.01

4.53

4.65

4.62

2010

2011

2012

2013

2014

2015
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The Declining Losses to be Managed by Licensees and the Regulator

Year Sales to End-use Customers (GWh) 8,371 9,031 9,667 10,308 10,989 11,713 12,485 Sales growth Input to Transmission network (GWh) 9,754 10,503 11,185 11,903 12,612 13,375 14,206 Sri Lanka T&D Loss (% of input to transmission) 14.2% 14.0% 13.6% 13.4% 12.9% 12.4% 12.1% Policy target for Sri Lanka T&D losses 13.5%

2009 2010 2011 2012 2013 2014 2015 2016

7.9% 7.0% 6.6% 6.6% 6.6% 6.6%

12.1% 12.0%

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Transition to a Regulated Market

Generators (IPPs, SPPs, CEB)
Sell only to Transmission Licensee Based on Power Purchase Agreements (PPAs), no competitive market Existing PPAs will continue, new PPAs only based on approved plan and competitive bidding

Transmission Licensee (one)

Transmission (Wires) business Operates the Transmission System, including the dispatch Bulk Supply business: Buys from Generation, sells to distribution [no profit/loss]

Distribution Licensees (five)

CEB Region 1 CEB Region 2 CEB Region 3 CEB Region 4 Lanka Electricity Company (Pvt) Ltd.

Distribution (wires) Business Retail services (metering, meter reading, accounting, collections) Retail Business: Buys from transmission, sells to end-use customers [no endprofit/loss]

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The New Tariff Policy

All licensee financial operations are ring-fenced ringLicensees are responsible only for matters under their control
Rewarded for exceeding target (eg: greater reduction of network losses) Penalised for under performance (eg: increasing losses)

For parameters not within their control, they are transparently compensated (surcharged)
Government wants more subsidies to be given (compensated), and if the Government does not pay ?: surcharge the relevant customers The Single Buyer hits a drought (compensated, customers surcharged) It rains heavily (surcharged, benefit passed on to customers)

The long and painful history of under-pricing underelectricity in Sri Lanka would soon come to an end, under the new policy The naming and blaming game should also end
All costs and prices, licensee performance, Government performance, are to be published Clear separation of business would occur

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Generation Costs
Generation costs would be on a six-month average sixTransfers from Generation to Transmission would be on a twotwopart tariff: Capacity charge: 966 LKR/MW per month (per MW of measured demand, coincident with the system peak) Pure Energy Charge:
Total Energy cost for six-months Total energy dispatch for sixmonths LKR million GWh 38,506.8 5,514.7

Six-month average LKR/kWh energy cost

6.98

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Transmission Tariffs for Sales to Distribution

Generation costs and Transmission Costs are added
Transfers from Transmission to Distribution too would be on a two-part twotariff: Capacity charge: 1243 LKR/MW per month (per MW of measured demand, coincident with the system peak) Energy Charge:
Economic dispatch BST day (E1) 6-Month weighed average BST peak (E2) 6-Month weighed average BST off-peak (E3) 6-Month weighed average ST debt recovery Renewable energy above avoided costs 0.11 Total BST (E)

LKR/kWh

7.16

0.52

7.78

LKR/kWh

9.37

0.52

0.11

10.00

LKR/kWh

4.97

0.52

0.11

5.60

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End-use Customer Tariffs: Costs and Income

Total Summary -2011 - With existing tariffs

Customer Category

Total Sales Total Cost (GWh) (LKR million)

Total revenue (LKR million)

Total (Subsidy) or Cost of Forecast surcharge supply(LKR/kW revenue on (LKR/kWh) h) customers (LKR million)

HH 1-phase 0-30 31-60 61-90 91-180 181-600 >600 Sub Total Other LV Religious General Purpose 1 Industrial 1 Hotel 1 Street Lighting Sub Total LV BULK General Purpose 2 Industrial 2 Industrial 2 TOU Hotels 2 TOU Hotels 2 (GP) Hotels 2 (IP) Sub Total MEDIUM VOLTAGE General Purpose 3 Industrial 3 Industrial 3 TOU Hotels 3 Hotel TOU Sub Total Total

233 756 1,018 1,254 492 100 3,853 57 1,149 238 1 148 1,594 875 1,561 174 2 73 54 2,739 223 1,035 143 8 71 1,480 9,666

5,518 15,928 20,093 22,225 8,346 1,479 73,590 1,004 15,809 3,171 19 2,292 22,295 9,751 19,899 2,159 26 824 656 33,315 2,263 10,965 1,376 77 629 15,310 144,510

1,113 3,695 5,974 14,973 9,957 3,561 39,273 513 23,943 2,611 20 3,668 30,754 18,555 19,444 2,343 30 1,169 625 42,165 4,378 11,661 1,721 83 725 18,569 130,761

(4,405) (12,233) (14,119) (7,252) 1,611 2,082 (34,317) (491) 8,134 (561) 1 1,376 8,460 8,803 (455) 184 4 345 (31) 8,850 2,115 697 345 6 95 3,259 (13,749)

23.66 21.07 19.73 17.72 16.98 14.87 19.10 17.65 13.76 13.32 15.01 15.43 13.99 11.14 12.75 12.41 11.10 11.21 12.25 12.16 10.13 10.59 9.64 9.66 8.89 10.34 14.95

4.77 4.89 5.87 11.94 20.26 35.78 10.19 9.02 20.83 10.96 15.73 24.70 19.29 21.20 12.46 13.47 12.60 15.91 11.67 15.39 19.61 11.26 12.06 10.44 10.24 12.55 13.53

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Features of Customer Tariffs in 2010

Not in alignment with the principles of pricing: Electricity costs are determined by
Voltage at purchase point
Determine capacity charge and average energy charge Time of use determines the energy charge variants

A total of 27 customer categories (including six household blocks, five religious blocks) Customers subsidised
Households using up to 180 kWh/month All religious customers Small and medium industries Hotels classified as industries

All other customers pay a surcharge In addition, the Government provided an indirect subsidy by
under pricing fuel selective duty waivers for imports various other concessions

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Proposed Structural Changes to the Customer Tariff: The Road Map to Make Customers Pay what it costs
Year Households Religious Other retail (industry, general, hotel) No Reduce the gap changes between the three classes No Further reduce the changes price gap between the three classes of customer Industry (bulk) Hotel (bulk) General (bulk)

2011 No major changes

2012 Reduce blocks from 6 to 4 For 0-30 kWh customers, Govt fully implements a direct subsidy, as provided in the National Energy Policy and the Govts 10year plan 2013 Reduce blocks from 4 to 3

TOU All hotel No mandatory customers unified changes into one category All three classes of bulk customers to be unified and Time of Use (TOU) tariffs to be mandatory, Introduce a charge for reactive power

No No difference between the customer classes, except in changes terms of voltage at which service is provided. For the purpose of retaining a database, customer classification will be retained in the accounting system. TOU tariffs will be mandatory for all retail and bulk customers in industry, hotel and general purpose categories Any subsidies will be addressed outside the licensee tariffs.

2014 Retain 3 blocks

No No further changes changes Optional TOU tariff for all 3No phase customers changes Tariffs yield adequate revenue to breakeven, meet all commitments including debt assets to GOSL 2015 Abolish block tariffs. service, but excluding a return on No further changes No Optional TOU tariffs to all changes customers. Tariffs to all customers are targeted to be fully cost reflective. GOSL earns a return on assets on the sector.

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Proposed Structural Changes to the Customer Tariff: The Ultimate Target Structure
Customers Energy charge Demand Charge (LKR/kVA. month) Reactive power Charge (LKR/kVArh) Fixed Charge

(LKR/kWh) Households Other retail All day Day Peak off-peak Day Peak off-peak Day Peak off-peak 15.00 15.00 18.00 12.00 10.00 13.00 7.00 9.00 12.00 8.00

(LKR/month) 100 100

LV Bulk

1500

0.5

1000

MV Bulk

1200

0.4

2000

Tariff figures are only for illustration

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Customer Tariff Announced for January-June 2011

The reform process has begun
Customer categories down from 27 to 20 Medium and large hotels unified into one category Time of Use Tariffs mandatory for all
medium and large industries medium and large hotels

Household blocks have been retained at 6, although the Govt policy may have caused blocks to be increased Street lighting costs have been socialised (all customers jointly pay for street lighting, estimated to be a load of about 0.25 LKR/kWh)

More reforms have been planned in the upcoming revision dates

1st January 2012, etc.
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Customer Tariff Announced for January-June 2011: The Tariffs Energy Fixed Maximum Energy Fixed Maximum Customer Customer
Charge Category and Charge consumption (Rs/kWh) (Rs/month) per month
Domestic (D)

Demand Charge per month (Rs/kVA)

-

Category and consumption per month

Industry (I)

Charge Charge (Rs/kWh) (Rs/month)

Demand Charge per month (Rs/kVA) -

0-30 31-60 61-90 91-120 121-180 >180

Religious (R)

3.00 4.70 7.50 21.00 24.00 36.00

30.00 60.00 90.00 315.00 315.00 315.00

0-30 31-90 91-120 121-180 >180

1.90 2.80 6.75 7.50 9.40

30.00 60.00 180.00 180.00 240.00

I-1 I-2 Day Peak Off-peak I-3 Day Peak Off-peak

Hotel (H)

10.50 10.45 13.60 7.35 10.25 13.40 7.15 19.50 13.00 16.90 9.10 12.60 16.40 8.85

240.00

3,000.00

850.00

3,000.00

750.00

H-1 H-2 Day Peak Off-peak H-3 Day Peak Off-peak

240.00

3,000.00

850.00

3,000.00

750.00

General Purpose (GP)

GP -1 GP -2 GP -3

19.50 19.40 19.10

240.00 3,000.00 3,000.00

850.00 29 750.00

Indicative Revenue Management Mechanism

GOSL Subsidy
Shot-term debt repayment 5,600 million LKR 11,767 million LKR

Generators (CEB, IPP,SPP)

Single Buyer
Ren Energy above avoided costs 1,132 million LKR

104,635 million LKR

Bulk Supply Transactions Account

TL
7,231 million LKR 7231 million LKR

106,831 million LKR 34,280 million LKR 27,368 million LKR 17,427 million LKR 11,785 million LKR 15,971 million LKR

DL1
6,864 million LKR 41,444 million LKR

DL2
7,782 million LKR 35,150 million LKR

DL3
4,563 million LKR 21,991 million LKR

DL4
3,698 million LKR 15,482 million LKR

DL5
2,514 million LKR 18,485 30 million LKR

Renewable Energy: Best in the World, but worlds highest Feed-in tariffs !!!
Renewable Energy Feed-in Tariffs paid in Different Countries (in equivalent LKR/kWh) USA (Minnesota state) Great Britain (England+Scotland+ Wales) Canada (Ontario province) India (Tamilnadu) India (Karnataka) India (Andhara Pradesh) China (Taiwan) 8.21 9.84 8.21 29.99 10.11 18.08 India (Madhya pradesh) South Korea

Malaysia

Sri Lanka

Tanzania

Mini-hydro Wind Biomass Solar PV Agricultural & Industrial Waste Municipal Waste Waste Heat Recovery Biogas Landfill Gas Geothermal Energy

14.53 22.02 12.77 6.64 12.69 10.21 9.82 8.50 17.91 4.30

Technology-neutral tariff: 8.26

13.32 5.11 8.06 8.39 4.87 19.97 18.24 13.69 7.11 20.70 4.74 11.37 9.85 34.65 39.96 30.99 47.30

6.65 6.79 7.16 5.56 11.04 7.01 11.03 8.33 6.67 8.40 8.98 11.59 7.01 16.33 6.50 6.74 7.11 10.46 16.00 3.89 10.48 67.33 45.63 37.96

12.18 17.94 11.53 75.75

9.38 2.34

8.94 9.49

Many international publications, comparing different countries confirm that Sri 31 Lanka pays the highest prices for minihydro, wind, biomass

Germany

Thailand

Uganda

Conclusions
The transition has begun
Several more steps are required to fully implement the Tariff Methodology to licensees A five year program to reform customer tariff

The Skeptics are many

Can the sector ever be profitable ? Should the Govt ever try to make the sector not to be a burden?

It can be achieved using the unique window of opportunity available to Sri Lanka (2011-2015) (2011Wanted:
The Public Utilities Commission to remain strong and professional The licensees to cooperate and stand strong against outside interference The customers to stand strong and demand for their rights and a cost-reflective price cost32

We can do it !!!
Customer vigilance Professional support Willingness to do better

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Sri Lankas First Commercial Wind Power Plant and the First coal-fired power plant located side by side in North-west Sri Lanka

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Power Generation with grown biomass is encouraged, not significantly successful

Picture: Dendro Power Plant, Walapane, Courtesy of LTL Ltd

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