demand

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)

Sri Lanka’s rice dilemma

By Dhananath Fernando

Originally appeared on the Morning

High rice prices, shortages of nadu rice, and the monthly importation of around 70,000 MT of rice have once again become key topics in national discussions.

As this column has highlighted previously, Sri Lanka’s per capita rice consumption is twice the global average. Yet, paradoxically, farmers remain poor and the market remains underdeveloped despite this significant consumption. The core issue lies in the complex and flawed economic dynamics governing the rice industry.

Low productivity and farmer incentives

One primary challenge is low paddy productivity. Farmers lack incentives to improve yields due to market dynamics. When production increases and supply exceeds demand, prices drop, negating any potential income gains for farmers.

Conversely, if yields fall, prices may rise, but the total crop volume decreases, leaving farmers with the same or even lower income. This discourages efforts to boost productivity, creating a cycle of stagnation and poverty.

Mismatch in rice varieties and market demand

Sri Lanka predominantly grows short-grain rice, while global demand favours long-grain varieties such as basmati and jasmine rice. Transitioning to long-grain cultivation presents challenges related to soil conditions and high production costs.

Moreover, the current pricing structure for rice does not reflect the true cost of production. Producing one kilogramme of rice requires approximately 2,400 litres of water, a resource for which farmers are not charged. Even accounting for a modest 20 LKR cents per litre, the true cost of rice would be significantly higher.

Market dynamics and oligopoly of millers

The paddy market is dominated by a few large-scale rice millers who have the financial capacity to purchase in bulk and maintain extensive storage facilities. Small and medium-scale millers often offer better prices but lack the scale to buy large quantities.

This oligopolistic structure limits competition and contributes to high consumer prices. While the Paddy Marketing Board has some storage capacity to intervene in the market, it is insufficient compared to the resources of large millers.

Implications of rice imports

Importing rice can benefit consumers by preventing shortages and stabilising prices. However, this strategy poses risks to small and medium-scale millers, who may struggle to secure sufficient paddy for milling if imported rice dominates the market.

The Government’s plan to import and distribute rice through State-run retailers, such as Sathosa, aims to control prices but introduces its own set of challenges.

Potential for corruption and market distortions

Government-led importation efforts create opportunities for corruption. The State must invest significant funds upfront and ensure that imported rice meets quality standards. Large-scale imports also raise the risk of mismanagement and unethical practices.

Additionally, limiting imported rice sales to Government outlets like Sathosa may inadvertently encourage private retailers to purchase and resell it at higher prices, undermining efforts to keep costs low for consumers. Imposing purchase limits at Sathosa could lead to long queues and inconvenience for shoppers.

Policy considerations and long-term solutions

There is no simple solution to Sri Lanka’s rice crisis. Addressing the issue requires long-term, multifaceted strategies.

Improving rice productivity and diversifying the buyer base beyond millers through strategic investments is essential. Establishing farmer associations with adequate storage facilities could enhance competition and stabilise the market. Allowing private sector rice imports without restrictive licensing could also promote fair competition and reduce corruption risks.

However, price controls or excessive Government intervention in the market are unlikely to resolve the underlying issues of consumer affordability or farmer poverty.

Ultimately, a sustainable solution involves balancing productivity improvements, market diversification, and transparent policies to ensure fair competition and equitable outcomes for all stakeholders in Sri Lanka’s rice industry.