VIDULLANKA ON RENEWABLES, BENCHMARKING PERFORMANCE, AND GROWING ITS GLOBAL FOOTPRINT

Besides its impact on the government’s budget, a decision to implement cost-reflective tariffs on electricity is also expected to improve the investment climate for the sector. To meet Sri Lanka’s growing electricity demand and a target of 70% installed power capacity in renewables the electricity sector will require capital for which it will have to depend to a greater degree on the private sector.

Vidullanka is a pioneer private sector investor in Sri Lanka’s electricity sector. When the market growth was slow and challenging it invested overseas too. Today over half of Vidullanka’s revenue is earned by its overseas operations. Vidullanka co-founder and Chief Executive, Riyaz Sangani, says that with the recently announced reforms, the sector is poised for a new spurt of growth. Excerpts of a discussion follow.

What is the outlook for the renewable sector like?

The recent electricity tariff hike takes prices to a high level, I would even say it is unbearable for many consumers and industries. But the good news is that the tariff will be reviewed every six months. So during the next revision in June or July, the electricity tariff is likely to be reduced, mainly due to the cost reductions as a result of the appreciating rupee. Oil prices too have declined 10-15%.

What’s not so visible is that the CEB tariff is based on a certain forecast demand of 47 gigawatt hours a day. But during the last two months, demand has averaged 43 to 44-gigawatt hours a day. There have been days when it fell below 39 gigawatt hours on weekends. When the demand is lower than forecast diesel consumption for power generation is lower. Diesel-powered generators are the highest cost source of grid power. So when generation costs fall the tariff too can decline.

But in the long run, the rupee may weaken, world oil prices can rise and higher demand too may return when the hotel sector sees more demand and the industrial sector begins to fill its idle capacity. When demand picks up more oil-based electricity will have to be generated. In the long term with more renewables in the mix Sri Lanka can generate far cheaper electricity than through thermal sources.

It’s a simple rule; divide the diesel price by four to obtain the kilowatt-hour price (unit price) of electricity from diesel. If diesel costs Rs400 a litre, the fuel cost for diesel-generated electricity is around Rs100, whereas renewables are much cheaper. However, around 2016-17, several bottlenecks prevented greater renewable energy investment, due to some bureaucrats misrepresenting the Electricity Act, and a disregard for the spirit in which the Act was formulated. I think we lost a golden opportunity by not procuring more renewable electricity from private sector players, like we did from 1997 onwards. when private sector investment in electricity generation started. Today the approximate cost of private renewables procured before 2016 is around Rs15 a unit. Had we developed more of those projects in that era, consumers would benefit from far lower costs of electricity. But that’s now water under the bridge.

Investments in renewables, even today, will generate far cheaper power. Despite high interest rates and a weak currency, renewable energy can be supplied far below the cost of Diesel or Furnace oil generated power. Besides, Sri Lanka will have a 20-year fixed tariff with renewable energy power purchase agreements. Whereas just the ‘pass-through’ fuel costs for generating a unit of diesel power is around Rs100 now.

Crucially we will have greater energy security. If global fuel prices rise we would be far better shielded from the fallout and also more immune to rupee depreciation.

The cost of Rs100 a unit for diesel-generated power excludes the capacity charge, right?

Yes, but the capacity charge is not very high, perhaps around Rs5 a unit.

In thermal power generation, there is a capacity charge, and the cost of fuel is a pass-through. So the cost of a unit of thermal power fluctuates based on fuel cost. Fuel cost in turn depends on the world market prices and the exchange rate. Investors in thermal power plants make money on the capacity charge. In renewables, there is no capacity charge, as there is no fuel cost, so it is one fixed price for 20 years. CEB has introduced a feed-in tariff with several tiers allowing investors to propose projects. So the price is set on a feed-in tariff in contrast to a tender where bids are won on the lowest price.

How do you make the case for more renewables in Sri Lanka?

Renewables are growing all over the world for two reasons. Cost is the first and the other is sustainability. Renewable energy is part of the UN’s SDG (sustainable development goals).

Today, depending on the weather, between 15 to 20% of Sri Lanka’s daily electricity demand is supplied by the non-conventional renewable energy sector. But this contribution is not reflected in CEB’s daily generation report published on their website as there is failure to connect all power plants to the system control.

So these are some of the opportunities in the sector. What are the challenges in the sector?

The biggest challenge is CEB’s non-payment to the renewable energy sector and as a result, no new investor wants to enter. With the electricity tariff increase, we’re hoping they will sort this out so that the investments the sector so badly needs will be made.

The other challenge is the attitude of some CEB engineers towards renewables. It’s changing over time and now the CEB says they can, without changes to the present grid, take another 2500 megawatts of energy by 2026. So that’s a significant development. But things move very slowly in the power sector. It’s taking a long time to finalise things. To be fair, one reason for slow development is due to some developers holding on to licences waiting for costs to decrease or with the intention of selling them. Authorities should take stern action on this.

Sri Lanka’s energy demand will naturally increase as the level of wealth in the country increases. To increase the share of renewables in the grid, doesn’t look like Sri Lanka will have to tap more non-conventional renewable energy, to scale?

For sure. To scale renewables, we have to add technology like offshore wind plants as Europe has done at scale. On-shore wind plants are challenged by land availability but in areas like Mannar and Pooneryn, it’s possible to have large wind power plants.

For scaling solar power, acquiring land is a challenge for ground-mounted plants but we have the alternative of floating solar.

Besides attitudes, to plan for a power grid where 70% of energy will be contributed by renewable sources, what else needs to change for us to achieve this?

All this time the CEB was receiving subsidized fuel. When they compare costs with renewables, they conclude that thermal power is cheaper. But somebody was paying the cost of those subsidies. Now that all subsidies have been withdrawn they realise that thermal power is too costly. So there has been a fair shift of attitude towards the need for more renewable sources of power. Now CEB itself has unveiled a strategic plan for 70% renewable energy by 2030. It’s a comprehensive one where they’ve listed all the major planned projects that need investment.

But there is always a bit of an anti-private sector attitude at the CEB, like in many government offices. That attitude needs to change. We have to look for a win-win. If the private sector can provide electricity at Rs50 a unit which can then replace a source that costs Rs100, they should go ahead. But they want to push that down to, say Rs25, then it slows the whole process down. A good case in point here is the “Suryabala Sangramaya” roof top solar program initiated in 2017. It gave a feed in tariff of Rs22 for the first eight years and then Rs15 for the next 12 years. That pricing offered an incentive to investors and this led to the initial target of 100 MW capacity being installed in just one year, when it was envisaged it would take two years to hit the number. Attitudes need to change, investors need a return that is competitive against other available investment options. However, things have changed over the last several months. There’s a lot of pressure from the top level of the government too to get to this 70% renewable energy.

Now we are going overseas to build projects. These days we are building two mini-hydro projects for the government of guyana. That’s not our investment, but we work as an EPC (engineering, procurement and construction) contractor

I suppose if the CEB was not one company, but several companies, then their attitudes about the benefits of competition may change

A monopoly by definition is inefficient, any student of economics will tell you so. When you create competition, prices will fall and consumers will be the biggest beneficiaries. For instance, electricity distribution is now done by the CEB and LECO, but they plan to have five companies in the future instead of two. Another benefit of that is you will have the data to benchmark performance. Now you cannot challenge the guy on performance because you don’t have the data to show that someone with similar resources is doing much better. Especially when the data is public, performance improvements will usually follow.

Similarly in power generation too if they establish several companies to handle it, consumers will benefit from the efficiency it creates. I made this point at a recent forum organized by the energy regulator too; that we need to publicize CEB performance data so that people can compare and benchmark performance with utilities from elsewhere in the world. So that we can compare the cost per unit of electricity or the number of staff per unit of energy generated etc.

When the public sees the evidence they will demand efficiency and accountability. At the moment a lot of the data is under wraps. We must do something about bringing all this data into the open.

Vidullanka is a sizable player in Sri Lanka and you are also in Uganda. How do you grow from there?

Our prime business is developing renewable energy projects. We started in Sri Lanka and we will not give up our work here. If the challenges here ease, then our growth here will be faster. We now have25 years of experience and we have built a good engineering team who have developed a cost-effective model for project development. We can capitalise on this.

In the Ugandan investments, which were done under a programme overlooked by several European countries, we were the company that completed the project within the shortest time and with the lowest cost per megawatt. Alongside us, there were a couple of Sri Lankan companies that performed well. And all of us, employed construction companies from Sri Lanka which specialised in the construction of mini hydropower projects. These construction companies also benefited from our overseas expansion.

Now we are going overseas to build projects. These days we are building two mini-hydro projects for the government of Guyana. That’s not our investment, but we work as an EPC (engineering, procurement and construction) contractor. Also using that experience we are helping a company in Rwanda, which has five mini hydro projects, to improve their operational efficiency. All this brings foreign currency revenue to Sri lanka.

Today a lot of companies in the sector have difficulties due to payment delays by the CEB, but at Vidullanka over half of our revenue comes from overseas. So we have a bit of a cushion. The global market is massive and we are slowly growing our share. We are now in Uganda and looking at projects in Zambia and Malawi too. Africa has been easy because they have less experience; an opportunity for us as we have the experience, and they need energy. We are also looking for projects in Pakistan, Indonesia and elsewhere overseas. Energy storage and charging stations are also among the things we are looking at to diversify revenue streams