Policy measures to diversify energy sources, greater private sector role key for power sector

RAM Ratings has called for right policy measures to diversify the country’s energy sources as well as increase private sector participation in the sector.

This and several other key recommendations along with salient developments are highlighted in RAM’s energy sector update titled ‘Sri Lanka Power Sector – Firing the Rain’.

The report said, drawing parallels to many emerging economies in the world, Sri Lanka has been grappling to meet the rising demand for power. Reaping the benefits of the peace dividend, the country’s economy has been showing robust growth, in turn accelerating the demand for power.

In the interest of speedy capacity augmentation and as Sri Lanka’s large hydro power resources have already been utilised, the industry has diversified to thermal power, resulting in a gradual shift in the industry power mix.

As such, in order to meet the surging demand for power, the Government of Sri Lanka has focused on increasing installed capacity via thermal generation; however, given the long-tailed nature of these investments, the dependence on the private sector, consisting of Independent Power Producers (IPPs) is expected to grow in the short-medium term.

Over the past decade, the private sector’s contribution has continued to rise, with the sector fulfilling around 43% of the country’s power requirements during 2011, compared to less than 10% in 2000. The country’s IPP sector comprised 115 producers as at end-December 2011, with 90 players focusing on mini-hydro power.

That said, in terms of power generation, thermal sources accounted for nearly 86% of total units in 2011, given the high capacity of these plants. Despite its high cost, the rising demand and the lack of diversity in Sri Lanka’s energy resources will compel the nation to rely more on thermal power, which is expected to contribute increasingly towards satisfying the country’s power requirements going forward.

Increasing reliance on thermal sources is expected to give rise to a range of other concerns; given Sri Lanka’s lack of coal resources the country will have to rely on increasingly expensive coal imports which is likely to impinge upon the trade deficit.

As such, the importance of diversifying the country’s energy sources cannot be over emphasised.

Elsewhere, with regards to the performance of the IPP sector, RAM Ratings Lanka observes that given the poor rainfall in 2011 and the first half of 2012, hydro power producers have recorded weakening performance indicators; the situation has been further exacerbated by the near 7% reduction of tariffs (for power purchase agreements based on avoided cost basis).

Conversely, thermal power producers have benefitted from increased capacity utilisation, as the Ceylon Electricity Board (CEB) had relied more on thermal power. This emphasises the need for IPPs to diversify their energy sources.

Meanwhile, based on publicly available information, RAM Ratings Lanka observes that the financial profile of the IPPs was moderate during the year. Given the rise in fuel prices and resultant increases in working capital requirements, IPPs operating thermal powered plants had to rely on short-term borrowings, thus pushing up gearing levels. That said, the cash protection metrics of the sector remained relatively good.

As the nation grapples to address the issue of rising demand, RAM Ratings Lanka opines that the IPP sector is well poised to benefit from the demand-supply gap. The overall favourable economic prospects, increased investments in the industrial and manufacturing sectors, coupled with the government’s long-term vision of electrifying all households is expected to augur well for the IPPs, which are expected to see rising demand in the medium-term.

Conversely on a more macro scale, it is imperative that suitable policy measures are adopted to diversify the country’s energy sources as well as increase private sector participation, particularly in the Non-Conventional Renewable Energy (NCRE) segment.