Why SL’s electricity sector keeps failing its users

By Dhananath Fernando

Originally appeared on the Morning

The tug of war between the Ceylon Electricity Board (CEB) and the Public Utilities Commission of Sri Lanka (PUCSL) is not new to Sri Lankans – or to taxpayers. 

At one point during President Maithripala Sirisena’s tenure, a Cabinet meeting was called off until the CEB and PUCSL reached an agreement on tariff revisions. In another bizarre chapter, the CEB even organised a special pooja to invoke rain gods, hoping to avoid power cuts and tariff hikes.

Now, the conversation has returned, with the International Monetary Fund (IMF) insisting that electricity tariffs must be cost-reflective as a condition for the release of the next tranche of funding. While there is a lot of noise about tariff hikes and methodologies, the critical push for structural reform remains absent. Once again, electricity users find themselves on the receiving end, with little clarity on a long-term path to reduce costs.

Concerns have deepened with proposed amendments to the Electricity Act that threaten to roll back past reforms. The outcome? Consumers and industries may have to bear higher electricity costs, whether as tariffs, taxes, or inflation.

Understanding the basics: What drives tariff structures?

There are three core principles when it comes to setting electricity tariffs:

Electricity is a homogeneous product: One kilowatt (kW) of electricity provides the same energy, regardless of whether it comes from coal, wind, or solar. While the cost of generation varies, the energy output is identical.

The cost of electricity varies by time of use: Although electricity is a homogeneous product, its cost fluctuates based on demand. Peak-hour electricity typically costs more, as it relies on expensive and quick-response generation sources.

Electricity is hard to store: Unlike other commodities, storing electricity is extremely costly. This means supply and demand must be balanced in real time, making pricing and grid stability critical.

Cost-reflective pricing is currently the principle we follow, largely in line with IMF recommendations. But cost-reflectivity alone is not enough. If the system’s inefficiencies remain unaddressed, then reflective prices will only continue to rise. 

Previously, we ignored this reality by allowing the CEB to operate at a loss. These losses didn’t vanish; they resurfaced as taxes, inflation (when financed by money printing), or higher interest rates (when financed through debt).

Why are costs high?

One of the main reasons for persistently high electricity costs is our outdated grid infrastructure. Our failure to connect to India’s electricity grid also leaves us with missed opportunities. A grid connection with India could help us stabilise our own grid and export surplus electricity – particularly solar power – thereby reducing domestic costs through offsetting.

Worse yet, the new amendments to the Electricity Act propose rebundling generation, transmission, and distribution, undoing previous reforms that sought to separate them. Unbundling improves accountability and productivity; rebundling risks taking us backward.

What should be done: Now and long-term

Long-overdue transmission upgrades require significant capital. For that, we need a structure that welcomes private investment while ensuring strong regulatory oversight. Currently, the regulator is weak, and the CEB, as a State monopoly, easily passes cost increases onto consumers without consequence.

Electricity reform is complicated and takes time. But while we figure out long-term changes, here are a few short-term, actionable steps that could help manage the situation:

1. Unify user categories: Sri Lanka currently maintains multiple user categories – domestic, religious, Government, etc. – violating the principle of homogeneity. A single unit of electricity cannot and should not be priced differently at the same time for different consumers. Instead of offering cross-subsidised tariffs, direct cash transfers should be used to support vulnerable consumers. This will promote demand-side efficiency and encourage responsible energy use.

2. Abolish Rate 1 and adopt Time-of-Use (TOU) pricing: The Rate 1 category for bulk users must be eliminated. Instead, TOU pricing should be applied universally. Uniform pricing flattens important price signals and discourages efficient energy use. TOU pricing, on the other hand, encourages load shifting, optimises grid use, and better reflects real costs.

3. Improve cost transparency: When reporting its cost structure, the CEB must clearly separate:

• Generation costs: Disaggregated by plant, including fuel, labour, maintenance, and capital, along with justifications for deviations from least-cost dispatch principles

• Network costs: Covering transmission and distribution infrastructure

• Overheads: Including administration, billing, metering, and customer services

Similarly, losses must be broken down into:

• Technical losses: From grid, transformers, and substations

• Commercial losses: From theft, faulty meters, or billing errors

• Collection losses: From non-payment or delays

Transparency will shine a light on inefficiencies, allowing policymakers and the public to demand reform based on evidence.

Cost-reflective pricing is necessary, but not sufficient. What matters more is reducing the cost itself. And that cannot be done by regulation alone. It requires competition, productivity, and bold structural reforms. 

Until we summon the political courage to tackle these long-standing issues, the electricity sector will remain trapped in a cycle of inefficiency, passing the burden from the State to the citizen, again and again.

(Source: Advocata submission to PUCSL on electricity tariffs)

The power of know-how over industry selection

By Dhananath Fernando

Originally appeared on the Morning

In most of our export strategies, the starting point has been the Government deciding which industries should drive exports – some of these decisions are data-driven. 

Accordingly, we examine current export figures and sometimes focus on expanding existing product segments. Secondly, we target additional industries with the expectation that exports can be boosted. While both approaches seem logical at first glance, we need to understand the broader framework of how to grow exports effectively.

Most of the time, we perceive exports as industry-specific, but in reality, exports are about know-how. Know-how becomes a product, and know-how makes a product competitive. However, know-how is not just knowledge – it is sometimes tangible, existing in tools, but more often, it is intangible. 

It is akin to Lasith Malinga’s bowling action and his ability to deliver pinpoint yorkers. We can analyse Malinga’s technique, attempt to replicate his action, and even learn from his strategies through interviews or YouTube videos. Yet, even with all this information, it is extremely difficult to replicate his unique skill set. 

Malinga possesses tangible components such as his slinging action, run-up, and release style, which can be considered tools. He also has knowledge that he shares through various platforms. However, his true know-how – what makes him exceptional – remains elusive, even to himself. 

This difficulty in transferring know-how is likely why the Mumbai Indians recruited Malinga both as a player and later as a coach in the Indian Premier League. If we consider Malinga as a product, he is export-competitive and his value lies in a combination of factors, primarily his unique know-how.

When a country seeks to expand exports, the know-how ecosystem is what determines success or failure. Our apparel manufacturers, for example, possess specialised knowledge that enables them to produce garments at the lowest cost while maintaining high quality. 

Initially, their products were relatively simple, but over time, they evolved in complexity. The industry experimented with various approaches – ethical garment production, lean manufacturing, and women’s empowerment – learning from both successes and failures to refine a sustainable model.

Today, Sri Lanka’s apparel exports are not merely about physical products but also the know-how that allows us to compete globally. Know-how thrives within an ecosystem that supports industries. 

For this to develop, the Government must provide entrepreneurs and businesses with the freedom to access and test resources – what economists refer to as factor markets. Land, labour, and capital must be available with minimal restrictions on a level playing field. 

This is why licensing requirements can be detrimental to exports; they obstruct access to essential resources, thereby stalling know-how development. For instance, if land acquisition is difficult, apparel firms may struggle to operate or innovate. Similarly, excessive labour regulations can increase operational costs, making products uncompetitive and disrupting the know-how ecosystem. Such obstacles discourage exports.

Another common discussion on boosting exports revolves around diversifying the export basket. To understand how diversification occurs, we can refer to Harvard’s Center for International Development, where Prof. Ricardo Hausmann uses the analogy of monkeys and trees in a forest.

In a forest, monkeys do not leap from one end to the other; they move from branch to branch. Similarly, export diversification does not occur in giant leaps but through adjacent product categories. Existing exporters and individuals within the know-how ecosystem expand into related fields. 

For instance, if we excel in gemstone exports, an adjacent category would be jewellery. This is why Government intervention in selecting export industries with large targets is often ineffective – diversification and expansion naturally occur within adjacent categories.

In making more complex products for export, Prof. Hausmann employs an economic theory likening diversification to a Scrabble board. If we have only three letters, our word combinations are limited. However, with four letters, the number of possible words increases exponentially. 

Therefore, minimising restrictions on factor markets – such as land and labour – enables more access to ‘letters,’ allowing for greater diversification.

Additionally, some ‘letters’ contribute significantly to forming words, like the letter ‘A,’ which is more versatile than a letter like ‘Z’. Similarly, removing barriers to factor markets increases the potential for new export combinations.

In Sri Lanka, our export strategy has traditionally relied on the Government selecting industries for growth. While this approach may work to some extent, if we seek rapid export expansion – like Vietnam – we must focus on the framework rather than forcefully pushing selected industries.

In today’s global economy, no country manufactures all its products on its own. Most nations produce parts, components, and assemblies, relying on international trade to complete final products. If we fail to open our economy to trade, our export ambitions will remain unfulfilled. Trade enhances competitiveness and provides access to multiple ‘letters’ at optimal costs.

Foreign Direct Investments (FDIs) are another crucial element in this equation. FDIs bring in individuals with specialised know-how, much like acquiring a player of Malinga’s calibre. They also introduce advanced technology, enabling the creation of more ‘letters’ and exponentially increasing the potential for new products over time.

If Sri Lanka is serious about exports, we need to focus on the process and the journey. We hope that the upcoming Budget will establish key milestones to guide us in the right direction.