Governments love to pick winners. It makes them look important. They believe that being elected by a majority is an affirmation of their superior policies and quickly go about creating new industries, granting incentives and dispensing patronage. Sri Lanka’s state has found just such an opening to picking winners and basking in the resulting adulation in non-conventional renewable energy.
Electricity generation linked to large hydro projects has been part of Sri Lanka’s power grid for decades; this is so-called conventional renewable energy. These giant schemes were funded by low-interest loans and generate electricity cheaply since the cost of running them are negligible compared to the selling price of electricity.
However, Sri Lanka has almost exhausted its available large hydro capacity. So the government focus has shifted to subsidizing so-called non-conventional renewable energy (NCRE), which in Sri Lanka chiefly consists of small hydro and wind power plants. To say the state chose NCRE would be an exaggeration; it more or less stumbled onto it. A decade-long vacillation about locating a large coal power plant left the grid short of supply by the mid-1990s. During dry years – when hydro storage was quickly depleted – the electricity supply had to be discontinued to sections of customers because the grid couldn’t meet the entire demand.
Private-sector-promoted small hydro emerged during this crisis. Adding them to the chronically energystarved grid made perfect sense. Over the years their numbers and contribution to electricity generation grew. The costlier mini-hydro-generated electricity unwittingly established a policy of NCRE subsidies because their inclusion was costing the power utility more than it was charging customers. Since then,renewable energy subsidies – which are now institutionalized – have been chiefly responsible for the growth of wind and other renewable sources.
Renewable energy is so-called because it is derived from resources that are naturally replaced over the short term, enabling repetitive use. Some renewable energy is derived from the sun, like solar, and used directly for lighting and heating or indirectly for generating electricity. The wind harnessed by wind turbines is also driven by the sun’s heat, while biomass energy’s raw material is plants, which use sunlight to grow. There are other renewable energies that aren’t derived from the sun, like hydropower, wave and tidal energy and geothermal energy.
On the face of it, the government continuing to subsidize private renewable energy seems a lunatic undertaking. The tariff at which the Ceylon Electricity Board (CEB) – the government’s monopoly power transmission and distribution firm and largest generator – buys electricity from these firms is higher than it is able to charge its customers. The average selling price of a unit of electricity (a kilowatt hour) was Rs17.93 in 2013, while the average cost was marginally less at Rs17.70. For comparison, electricity here costs almost double the equivalent of Rs10 paid by Indian consumers.
When Sri Lanka’s first major coal-fired power plant at Norocholai, on the West coast, became operational, the CEB ceased buying electricity from private thermal producers. But it continues to purchase private renewable energy.
Renewable energy subsidies are controversial and a highly contested area of public policy in both rich and poor countries. In poor countries, governments have to sacrifice other critical spending like on education, health and nutrition to fund renewables. In Sri Lanka, mini hydro, wind and other renewable energy generated electricity exists because the government saw these renewables as deserving of patronage. The state agreed to fund the difference between their higher cost and the lower electricity-selling price.
Today Sri Lanka generates a tenth of its electricity from NCRE plants, almost all of them owned and run by private firms. According to the government’s most recently released tariff list, the CEB pays up to Rs23.93 for a unit of electricity produced by private NCRE plants. For older plants and ones using technology like biomass the rate can be as low as Rs1.90 a unit. The estimated cost of electricity generated at the Norocholai coal plant ranges from as low as Rs6 to as high as Rs12 per unit depending on the source. But even at its highest estimate, coal is a lot cheaper than most renewable energy. NCRE electricity tariffs based on their costs, rather than the CEB’s avoided costs, means the board pays higher prices for NCRE-generated electricity than it costs for the CEB to produce the unit burning coal.
While it’s easy to calcula
te the construction cost of a power plant, the cost of electricity is harder to assess. Costs can vary depending on the fuel used and its market price; on the cost of capital; if the plant generates electricity at peak demand; and how often it operates during the rest of the time. Energy planners use ‘levelised costs’ – the net present value of all these costs over the life of the plant. But this is a model fraught with challenges because no forecast can accurately predict the price of fossil fuel over a few years, let alone decades, and the usage of a power plant is difficult to predict. In analysing renewables there is an added challenge to using ‘levelised costs’ as the basis. Wind power can’t be guaranteed on calm days and solar power is unavailable on cloudy days and at night. As a result, other power plants have to be on standby when renewables fail. This ‘intermittency’ is the biggest detractor of renewables.
Electricity demand also follows a pattern; it peaks in the evening. NCRE like wind and solar generate power on gusty and sunny days, respectively, not necessarily when electricity is most in demand. Clearly, electricity generated during peak hours is worth more than that generated during off-peak. The cost of the conventional power reserve and the inability to dispatch renewable plants when demand is greatest isn’t included in renewable levelised cost. Sri Lanka invested in renewables decades ago with the commissioning of the Mahaweli programme(which dammed the Mahaweli river for power plants at multiple places) and, until the mid-1990s, these large hydropower plants met 95% of electricity needs here. But rising demand and dithering over where to build a big coal plant precipitated the crisis. During this fumble, the World Bank encouraged Sri Lanka to consider NCREs with private sector support. The bank provided two consultants; one analysed the scope for renewables and calculated a price for private suppliers, while the other drafted a standardised contract. The first agreement between the CEB and a private player for a one MW minihydro at Dickoya, was quickly followed by many other such deals. Standardised agreements didn’t allow for tinkering with the contract or negotiating of the price. Fifteen-year contracts were the standard on a first-come, first-served basis for mini hydro projects of up to 10MW capacity. The supplier price for each kilowatt-hour was based on the ‘avoided cost’ principle, or the cost the CEB would have incurred producing a unit of electricity if it had turned to its expensive oil-fired thermal plants.
Small NCRE promoters locate a waterfall or windy outlook and place a stake for it with the Sustainable Energy Authority (SEA), an agency established by the government in 2007 to develop indigenous renewable energy. If the party making a stake doesn’t start utilising the space within a specific period, others are allowed to claim it, according to the SEA’s Director General, Dr. Thusitha Sugathapala. “With large hydro, we’ve exhausted capacity. The potential for rooftop solar systems is small. So the private producer model is most viable,” he says.
A 2007 ministry review of the private energy producers’ price structure replaced the avoided-cost system because it had two major drawbacks. Firstly, though the tariff had been modified to reflect a moving average of the oil price rather than the spot value, it was still vulnerable to world oil prices. Secondly, it was based on the cost to the buyer – the CEB – and did not account for the cost to the seller (the renewable plant operator), which shut out the prospect of private investment in renewable technologies more costly than mini hydro, such as solar or wind.
The new tariff is based on the cost to the producer rather than the buyer. It offers both a maintenance fee and a technology-specific cost-based fee. The latter is divided into three tiers over the 20 years of the contract, with the highest price paid in the first eight years to help the producer pay back the loan; in the next seven years to derive a 20% or so return; and a nominal tariff in the last five years. Lower-cost renewables like mini-hydro are paid less than more expensive ones like wind, solar or biomass. In private renewables’ first decade in Sri Lanka, plants were almost exclusively mini-hydro. But the new tariff system encouraged other NCRE sources like wind, which began to multiply rapidly. At end-2012, of 314 megawatts (MW) of grid-connected NCRE capacity, mini-hydro accounted for 227MW while wind accounted for 74MW. Biomass plants and agricultural and industrial waste plants had 11.5 MW capacity and solar just 1.4MW. Installed wind capacity has climbed to 130MW since and generated 4% of Sri Lanka’s electricity needs in 2014. In the throes of the mid-1990s energy crisis when NCRE came to the reckoning, the other alternative to large hydro was oil-fired thermal plants. Sri Lanka began constructing more thermal plants, while also purchasing electricity from private producers of thermal energy. From 1996 onwards, the share of thermal energy in Sri Lanka’s electricity mix increased steadily from 25% to a high of 71% in 2012.
The three phases of the Norocholai coal plant – possibly Sri Lanka’s single most critical economic asset –came online in 2011, 2013 and 2014, adding a total 810MW to the grid. Coinciding with this, the CEB ceased renewing contracts with independent thermal power producers, as it no longer made sense to pay oil’s high price when coal was much cheaper. Today there are no independent thermal power producers on grid.
The CEB does its power planning based on the least-cost option principle. Its generation planning unit’s electricity master plan – which forecasts demand and proposes how it should be supplied – for the period 2013-2032 proposes adding 4,000MW of coal power capacity between 2015 and 2032, on top of Norocholai, while retiring oil-fired plants. The CEB – keen to keep the cost of electricity low –often cold-shoulders NCRE when planning future demand. However,the CEB’s monopoly status itself is an impediment.
There are alternatives to wasteful subsidies to increased portion of renewables in the energy mix. However, because the CEB is a monopoly, these may be difficult to implement. One option is to adopt a renewable energy standard,forcing utilities to find a portion of their electricity from renewable sources. Because there are no subsidies to claim, utility companies are forced to seek out the cheapest and most viable renewable sources.
Manjula Perera, who is the Chief Executive of Windforce, Sri Lanka’s largest private producer of renewable energy, with 12MW of mini-hydro capacity and 75MW of wind, justifies renewables for the long term. “The wind tariff is Rs20 in the first eight years, Rs10 in the next seven and Rs8 in the last five years,” he points out. “At Norocholai, it’s Rs12 per unit”(his estimate of Norocholai’s levelised cost). “Today’s cost is lower, but we’re looking at a twenty-year horizon,”he argues. “In eight years,the wind tariff will be lower. But the coal price, historically,has never declined. There’s no doubt it’s going to be more expensive than wind. But people are comparing today’s prices and saying renewables are expensive.”
Former CEB generation planning division engineer and now independent consultant Dr. Thilak Siyambalapitiya estimates the levelised cost of coal at Rs9.50 per unit.
Other standard bearers argue that as technology improves, renewables will be more competitive, while fossil fuel prices will continue to rise. Asoka Abeygunawardena, who heads the Energy Forum,admits all renewable energy options except mini-hydro are pricier than coal in 2015. But he highlights that solar energy prices will decrease and other renewable energy prices increase gradually while the price of coal rises rapidly to perhaps six times the price of mini-hydro,today’s cheapest renewable source. He argues it’s foolhardy to load up on coal now.
The Public Utilities Commission of Sri Lanka (PUCSL) Director General, Damitha Kumarasinghe, backs this argument and believes falling renewable costs can be used to mitigate the increasing prices of conventional energy. “As a country we need to identify resources whose prices will not increase dramatically over time. We now generate 40% of energy through our hydro plants. If we can get a further 20% from NCREs, we’ll have 60% of energy from indigenous sources. That would be a high level of energy security.”
Weaning the system off fossil fuels – of which Sri Lanka has none – is a romantic notion. However, central planning led incentives to achieve this open the process to vagaries of crony capitalism and rent seeking. Instead, consumers are best allowed to choose whether they are willing to pay a premium for electricity from NCRE sources.
There is overwhelming evidence that consumers will choose the least cost electricity versus paying a premium for renewables. That should not mean that NCRE has no role in an electricity grid.
The CEB’s energy plan envisages the renewables share of electricity –by the CEB’s own large hydro and private renewable energy producers – decreasing from their almost 40% in 2014 to 20% by 2032, while fossil fuel burning electricity generation will increase from 60% now to over 80%. This generation plan was published in October 2012 and, after a two-year gap, a new one is now in the works.
Fossil fuel dependency leaves the country vulnerable to global supply shocks and higher prices. Unless Sri Lanka discovers a commercially exploitable gas deposit off the Mannar coast, the only available indigenous energy sources will continue to be renewables.
The other problem with fossil fuel combustion is its devastating environmental impact. Coal combustion emits large amounts of carbon and sulphur dioxide. Abeygunawardena conducted a study on the economic and social costs of the Norocholai plant, concluding that when these costs are also taken into account, the cost of producing electricity at Norocholai goes up to Rs25 per unit.
The CEB does not intend to ignore renewables altogether. It expects to increase NCRE capacity by 714MW and large hydro by 231MW between now and 2032. Clearly, however,the CEB’s forecast for NCRE growth is far lower than its expectation for coal. Much of the new NCRE capacity will be added in large-capacity wind power, including the CEB’s first venture into NCRE as part of a 370MW wind park in Mannar.
The concept of wind and solar parks is gaining traction worldwide and is particularly successful when crown land suitable for an identified renewable option is released for a large project. The largest onshore wind farm is a 5,000MW one in China, where installed wind power is expected to grow to 20,000MW by 2020. Some wind parks are located offshore, because they generate a lot of noise pollution.
In the 370MW Mannar wind park, the CEB will be building a 100MW plant, while private players will take on the remaining capacity. Dr.Siyambalapitiya believes these private players need to be engaged through a bidding process.
“Standardised agreements are more suited to immature technology,” he says. “With 130MW of wind power running across about 12 investors, we can’t say it’s an immature technology now. The next phase has to go on competitive bidding.” Meanwhile, in the past year, the government has amended the electricity act to say that renewable energy in the future will go on competitive bidding.
In such a system, the government will provide the land for the NCRE project, along with the wind data measured by the government agencies. The bidding companies can use this data for calculations to propose an electricity unit price. The government will also calculate a price and, based on that, choose the best bid.
By sidelining NCRE, the CEB’s generation plan highlights the problem. At a small scale, even a poor county can afford to subsidise. But at soon as these renewables reach scale – making a meaningful contribution to energy production – the scale of the subsidies becomes so large that they are no longer viable. To overcome one aspect of this challenge – removing government patronage of specific investor-promoted projects – Dr.Siyambalapitiya recommends wind and solar projects be put on competitive bidding in a report commissioned by the government in 2013. The study funded by the Asian Development Bank (ADB) identifies the best mix of hydro, wind and solar to provide the most economically viable and appropriate energy mix for Sri Lanka, and the best models for new NCRE projects in Sri Lanka.
The report was submitted to the Ministry of Power and Energy in December 2014, but its publication is pending. The government has stopped signing new NCRE projects until the renewable energy master plan is finalised. Dr.Siyambalapitiya’s recommendations may guide the master plan.
Renewables can also lead to electricity waste when their share is too large. Electricity demand drops to its lowest in the night and overproduction then becomes a huge challenge. During night hours, oil-fired plants are switched off and large hydro plants are paused. However, the CEB is obligated to buy all the mini hydro and wind electricity generated even when it doesn’t need it, because these plants can’t be switched on and off at will. “We’re backing off coal power, which costs only Rs6 to run, and replacing it with wind. It’s the customer who pays for this,” Dr. Siyambalapitiya points out. “This is the limitation to how much more renewables the system can absorb.” “We’d like more renewable energy, but we can’t accept more because of this night limitation.”
When demand peaks during the day, the CEB runs oil-fired plants to close the gap. Dr. Siyambalapitiya believes Sri Lanka should try to fill this gap using renewables instead. The cheapest oil-fired power plant costs Rs20 a unit to run. “So anything that costs under Rs20 is a winner and that substitute should be something that’s not available in the night because we have too much electricity generated at night.”
“The obvious option is solar, if its cost is less than Rs20, which I strongly believe it is,” he says. “My estimate from a year ago is Rs17 and today I’m saying Rs14. ”In his report, Dr. Siyambalapitiya recommends solar be an option on a competitive bid system. “We’re recommending 140MW of solar by 2017.” Today there is less than 2MW of solar on the grid. “Just because we like a certain renewable energy, we can’t push it on the customer,” Dr. Siyambalapitiya adds. “If we try to push these more expensive forms of energy on the customer at a higher price, ultimately the economy will suffer because the customer will have to pay.” The ADB-funded report recommends the establishment of solar parks.
Another way to manage the grid is to focus on electricity demand management. Traditionally, the electricity supply is increased to accommodate demand peaks, but demand-side management focuses on reducing consumption at peak hours. This can be done, for example, by incentivizing industrial production to be moved to night hours. “It’s about inefficiency,” says Siyambalapitiya, “It’s not easy. It’s much easier to just build another coal plant.” The Sustainable Energy Authority believes large NCRE projects are beneficial in the long run. But it laments the policy apathy towards small renewables like net metering (connecting small home renewable systems to the grid).
ri Lanka’s dusty dry zones aren’t very solar panel friendly. Photovoltaic panels (solar panels) need to have a clean surface to operate optimally. Any dust needs to be frequently cleaned using pure water. “It is a risk, but anything is a risk,” says Kumarasinghe of the PUCSL. “You can’t go for 100% renewables, but you should have a balanced mix. We need to decide how much energy we can generate through renewables for an acceptable level of energy security.”
The former government had a 20% NCRE goal by 2020. The new government has even loftier ambitions. The new Power and Energy Minister Champika Ranawaka is a green energy champion. Stakeholders believe anything beyond 30% would be utopian because renewables are unstable. When supply falls short of demand, electricity needs to be drawn into the system, and when it exceeds demand, the excess needs to be moved out. Perera believes Germany can run on 80% renewables today only because it’s connected to the European electricity grid. He opines that for Sri Lanka to aspire for a greater renewable share its grid will have to be connected to the Indian one.
Dr. Siyambalapitiya forecasts that NCRE will be up to 20% by 2021, with some compromise on the cost. He says anything beyond a 20% share will impose a stiff burden on consumers. “There’s so much wind running now that it’s the dominant determinant of the price of the renewables pool.” The renewable energy average now is Rs18. “My price is a Rs12 forecast for the long term,” he predicts. “Even if we come to that, we shut down a Rs6 plant (his estimate of Norochalai’s operating cost per unit) and run these at Rs12.”
There are countries and regions that have reached or are aiming for much larger shares of renewable-generated electricity. Djibouti, Scotland and Tuvalu have goals to generate 100% of their electricity from renewables by 2020. About 20 million Germans today live in so-called 100% renewable energy regions.
Dr. Siyambalapitiya says that all strong power systems in the world have a certain amount of coal power built in, with renewables doing the topping up. The coal price is low and coal-fired plants, unlike renewables, are very solid and resilient. Bio Energy Association President Parakrama Jayasinghe believes it’s a matter of time before energy consumption comes full circle. “Fossil fuels are a recent phenomenon used by humans for maybe 200 years now. We didn’t have it before and soon won’t need it again.” He says Sri Lanka got caught up in this ‘fossil fuel blip’ in 1996. “Without any kind of vision, without considering the future or the fact that we don’t have any fossil fuels, we went that way.”
Even the fossil fuel skeptic Jayasinghe, however, agrees about the impossibility of relying entirely on renewables for electricity right now, saying Sri Lanka needs a balance with coal, with substantially more renewables on the grid than it now has.