What will it take to keep the lights on?

Sanjiva Weerawarana, whose software company WSO2 was recently acquired for $ 600 million, was asked by an interviewer what he wanted of Government. Keep the lights on, he said.

It’s a succinct answer that embodies much. It can be interpreted as a statement that the State should focus on providing what we cannot provide for ourselves: law and order, most infrastructure services, and even things like identity and authentication services. But for the moment, let’s take just the literal meaning: uninterrupted electricity.

I had just started work as Director General of Telecommunications, after living in the US for many years. I was talking to a CEO whose business was the provision of mission-critical telecom services to banks, among others. He described a prolonged CEB strike a few months prior to our conversation. I had promised the banks reliable connectivity, he said. Mains electricity failed. Then the batteries ran out. Then I was scrambling to find diesel for the generators. How can I do my business when electricity is out? What worth are my promises?

That was more than 25 years ago. But we all have more recent memories of 13-hour power cuts from 2022. It’s tough to function in a modern society when the Government fails to keep the lights on.

Physics requires that supply of electricity must match demand, in real time. When you turn on a light or start ironing, the right amount of electricity must be produced somewhere. It is complex, but system control centres do this all the time.

Adequate supply is the precondition. If all the supply is committed and more demand comes online, there is no alternative to load shedding (or brown outs, rare in Sri Lanka).

Adequate supply

Electricity use is correlated with economic activity. The combined effect of the contracting economy and sharp tariff increase after 10 years in 2022 saw a drop in electricity use in 2023. But it is now back to pre-tariff-increase levels. Given three consecutive quarters of growth in the GDP and the World Bank’s projection of 2.2% growth in 2024, we have to seriously consider adding generating capacity, now. Except for expensive emergency power, most generating plants take years to commission. Unless low-cost plants are approved and construction started now, we are likely to be buying expensive emergency power a few years down the road. That is why it is important to develop long-term generation plans (and more importantly, to implement them).

For various reasons, Sri Lanka has failed to build new generating plants according to plan. The 2002 rotating blackouts were a result. High tariffs for electricity compared to our competitors was another. The old procedures did not work. We hope that the new procedures for adopting and implementing long-term generation plans set out in the just passed new electricity act will do better. 

To have adequate electricity for a growing economy in the coming years, projects must start now. Continuing to argue about long-term generation plans will not yield the required generation capacity. As soon as the Act comes into force, those of us who care about these things should exert pressure to ensure things are done right. The immediate problem is that major investments are needed in wind and solar as well as in the transmission grid to obtain the power generated in new locations. Loans were taken from many sources in the past, but investment is a better option in the present circumstances. Given the country is still in selective or restricted default and the CEB failed to pay many private power producers on time, Sri Lanka is not attractive for foreign investors. Some domestic investors who were awarded rights to provide renewable energy are behind schedule or in some cases have not even commenced construction. 

Price

Many of us learned in 2022 that expensive electricity was better than no electricity. Those with generators bought expensive diesel from the black market to keep the lights on. The claim made by some that one million households and businesses were disconnected after the 2022 tariff increases appears to be based on reporting disconnections only, without looking at reconnections, many on the same day.  This does not mean that we should not strive for reasonably priced electricity. If entities with market power make supra-normal profits, customers and the economy suffer. For the most part, market forces are ineffective in the electricity sector. Therefore, price and quality are usually subject to regulation. In the past, the Minister or the Cabinet set prices. The more appropriate practice is to have an independent regulatory agency decide on price and quality based on data.  On the face, that has been the case in Sri Lanka since 2009. In a previous article (https://www.ft.lk/columns/Can-State-owned-CEB-be-effectively-regulated-unless-restructured/4-738658), I explained that what we had was the appearance of regulation, not actual regulation. For proper rate of return ratebase regulation, much more time and resources would be required than is the current practice at the Public Utility Commission of Sri Lanka (PUCSL). For certain costs to be disallowed, it would also be necessary to have the utility be owned by someone other than the state; a private entity who could feel the pain. This is the first-best solution in terms of effective regulation. 

In that article, published as the Government was beginning the drafting of a new law, I pointed to benchmarking or yardstick regulation as the pragmatic, second-best solution appropriate for our current conditions.

“Here, the performance of the regulated entity is compared with others either to serve as leverage in extracting information or to ‘name and shame.’ For example, certain cost elements needed to set prices may be withheld by the regulated entity. The regulator may announce that benchmark data will be used instead unless the regulated entity provides the information forthwith. Or the regulator may name and shame the regulated entity by showing how inefficient or negligent it is by comparing its indicators with those of comparators.”

The new law which creates separate distribution companies allows for benchmark regulation as did the 2002 law that was repealed by the first Mahinda Rajapaksa government at the behest of the JVP. Whether benchmark regulation will actually create pressure on the newly formed companies to operate more efficiently and to offer services at reasonable price and quality levels will now depend on the work of the restructuring secretariat within the Ministry and the PUCSL.

Of course, one has to hope that the 2024 Electricity Act will be spared the fate that befell the 2002 law. For this, it will be necessary for reformers to explain the rationale of the new legislation and to answer the criticisms made against the reconstitution of the integrated CEB into multiple companies and against permitting reasonable returns.