• Dry weather, oil prices, new tariff structure with CEB help 
• Rating agency warns of increased climate risks going forward 
• Longer payment cycle from CEB also poses risk

Dry weather conditions, unstable oil prices and a new power purchase structure have created a credit positive environment for mini-hydropower producers, ICRA Lanka, a subsidiary of Moody’s Investors Service, said in its latest report released yesterday.  

The report projected that the hydropower production level was likely to decline going forward, given the vagaries of Sri Lanka’s weather conditions.

Consequently, the Ceylon Electricity Board (CEB) will be compelled to increase its reliance on thermal energy and Emergency Power Purchase Agreements (PPA), leading to an increase in the unit cost of production for the CEB. 

“Moreover, given heightened US-Iran geopolitical tensions, we expect oil prices to remain volatile over the next two years and as a result, the cost of energy production for the CEB is likely to increase further. We also expect the increase in cost of thermal energy production to be reflected for the remaining PPAs that are under the Avoided Cost tariff structure, benefiting the mini-hydro producers, with augmented profit margins in the next couple of years,” it added.  

This will be credit positive for mini-hydro producers who are still having PPAs under the Avoided Cost tariff structure, the report said. 

However, ICRA Lanka has also noticed that Sri Lankan mini-hydropower producers have recently faced increased climatic risks due to global warming. This, together with policy uncertainty in relation to new mini-hydropower plants, has compelled most power producers to diversify their operations.

In addition, over the recent past, power producers have also experienced a longer payment cycle from the CEB. 

Approximately 77% (2018) of the electricity generation in the country is produced by the CEB, while the rest is supplied by private power producers by entering into PPAs. Prior to 2008, the CEB signed PPAs based on the Avoided Cost principle, wherein power generation companies were paid the equivalent unit generation cost that the CEB reported. Due to large-scale inefficiencies within the CEB, this arrangement was seen to be disadvantageous to the CEB. 

Hence, a three-tier tariff structure was then introduced in 2008. Since 2016, the Government has introduced a competitive tendering process for renewable energy projects. Although the mini-hydropower segment was initially considered to be excluded from this scheme due to the complexity of the construction of mini-hydropower plants, the decision has not yet been finalised.

PPAs are generally signed for 15- to 20-year durations, and most of the PPAs that are under an avoided cost tariff structure have expired over the recent past. Given the financial position of the CEB, it was initially considering reviewing the PPAs upon their expiry as a measure to improve its financial position. Hence, the renewals of such expired PPAs were delayed. However, these power plants continued to supply energy to the national grid at a lower tariff structure, which was generally offered for expired PPAs. 

Earlier this year, the authorities finalised a new tariff structure (fixed tariff with an escalation on an annual basis) for such PPAs. The revised tariff structure for such power plants is favourable as this is a further increase from the previous transitory tariff levels. In addition, the new tariff plan will be applicable retrospectively from 1 January 2019, allowing the power producers to recover some profits. Therefore, the CEB’s decision to renew expired PPAs is credit positive for mini-hydropower producers whose PPAs have expired in the recent past.

Six-member committee to report daily on power generation