Mobilizing Renewable Energy to Overcome the Energy and Financial Crisis: The Need for a Credible Renewable Electricity Tariff Anil Cabraal, Ph.D.nil Cabraal Article.pdf

Mobilizing Renewable Energy to Overcome the Energy and Financial Crisis: Page 1 | 9
The Need for a Credible Renewable Electricity Tariff, Anil Cabraal, Ph.D.
Mobilizing Renewable Energy to Overcome the Energy and Financial Crisis:
The Need for a Credible Renewable Electricity Tariff
Anil Cabraal, Ph.D.
Much has changed in the past decade, and more so in the past year. Internationally, wind and solar
technology costs have declined. Oil and coal prices have risen and become more volatile with supply
security compromised. Meanwhile Sri Lanka’s financial condition has worsened. In Sri Lanka, Non-
conventional Renewable Energy (NCRE) electricity has become more competitive in many aspects
against oil- and coal-powered electricity. NCRE includes mini-hydro, wind, solar, biomass, and others
that use renewable energy for power generation.
Despite the potential for NCRE in Sri Lanka, the tariff offered by CEB for NCRE electricity under the
small power purchase program, has remained unchanged since 2012 depressing the financial
viability of such projects. A Cabinet-appointed Committee proposed a new NCRE tariff regime in
December 2021. The proposed 2021 NCRE tariff is lower than the 2012 tariff, despite exchange rate
and other factors deteriorating. NCRE which is no longer financially viable in 2022 at the prevailing
2012 tariff, will be worse off if the 2021 tariff is adopted. It is against the CEB and national interest,
to offer unjustifiably low tariffs for NCRE, thereby depressing NCRE generation and increasing the
use of more costly electricity from imported fuels.
This paper highlights the importance of revising the NCRE tariffs to reflect conditions today. It
proposes NCRE tariffs based on more realistic 2022 assumptions. It shows that NCRE electricity, at
those tariffs, is financially competitive against oil and coal-fired power generation. It is imperative
that the Tariff Committee be reconvened and with advice from sector specialists in both renewable
energy and finance, revise the tariffs to reflect today’s reality.
NCRE tariffs, revised appropriately, could trigger significant near-term investment in NCRE by
unlocking investments in over 1,300 NCRE projects comprising 4,000 MW that the CEB has blocked
since 2017. By doing so, the CEB and Sri Lanka can reap considerable financial benefits in offsetting
diesel fuel purchases, thereby saving scarce foreign exchange.
The Need for NCRE Tariff Revision
The PUCSL approved the 2012 NCRE cost-reflective tariff as applicable for 2012-2013. However,
the CEB has offered this tariff, unchanged, for new NCRE projects for the past ten years. This has
depressed private sector NCRE investment which are no longer financially viable under this tariff
regime. To rectify the problem, a Cabinet Memorandum dated 24/04/2021 and a subsequent
Cabinet Decision dated 17/05/2021 instructed a Tariff Committee to update the NCRE tariff to
reflect current technology and market conditions. The Committee submitted the NCRE tariff
report in December 2021 to the State Minister for Solar Power, Wind and Hydro Power
Generation Projects Development.a
The NCRE tariff applies to projects up to 10 MW capacity, that supply electricity to CEB under a
Small Power Purchase (SPP) Program. Today, there are 1,200 MW of NCRE plants owned and
operated by Sri Lankan companies, supplying 13 percent of the electricity, of which about half are
under the Program.

Meanwhile, the CEB had blocked 1,374 NCRE projects since 2017. The Auditor General, W.P.C.
Wickramaratne in a 08/02/2022 report stated, “The operation of 1,374 projects with 4,014.85
MW submitted for network agreement and licenses, temporary approvals were granted by the
Sustainable Energy Authority from January 1, 2017, to December 31, 2019, which was approved
by the Project Approval Committee (PAC). But these had to be stopped as the CEB had rejected
the signing of the agreements due to entering competitive bidding.”b Had they been operating;
they would have received the low 2012 tariff with significant savings to CEB, offset some of the
generation shortfall and reduced fuel imports.
If NCRE investments are to be encouraged, which is even more necessary during these challenging
times, the NCRE tariff must be revised to reflect today’s reality. This note provides a comparison
of the prevailing 2012 tariff, the new tariff drafted by the Tariff Committee in 2021 and proposes
a 2022 tariff reflecting realistic 2022 technical and financial conditions.
Table 1 shows a comparison of the author’s calculated 2022 tariff compared to prevailing 2012
tariff and the proposed 2021 tariff for four NCRE technologies – mini-hydro, solar, wind and
biomass (dendro, sustainably harvested fuelwood). The required tariff for financially viability
under 2022 conditions ranges from Rs. 34.83/kWh for wind to Rs.48.85/kWh for biomass
(dendro). It is not surprising that the tariff calculated in 2022 is higher than that calculated in
2021 given the massive economic shock Sri Lanka has had to endure. The Tariff Committee 2021
tariff is less than the prevailing 2012 tariff. If the proposed 2021 tariff is approved for use in 2022,
it could spell the end of substantial NCRE investments under the SPP Program. As an example,
even if return-on-equity is zero, the mini-hydro tariff would only drop to Rs.21.78/kWh which is
higher than the proposed 2021 tariff.
Table 1 Comparison of Indicative NCRE 2022 Tariff with 2012 Tariff Approved by PUCSL
Technology
Flat NCRE Tariff (Current Rs/kWh)
Prevailing
2012 Tariff
Committee Proposed
2021 Tariff
Required 2022 Tariff
Calculated by Author
Mini hydro 16.70 14.15 35.56
Solar 25.09 15.67 35.54
Wind 20.62 16.96 34.83
Biomass Dendro 25.09 21.85 48.85
Principal factors influencing the proposed 2022 NCRE tariff
The proposed 2022 tariffs were calculated by the author using the PUCSL/CEB 2012 tariff
methodology.c The calculation reflects the 2022 conditions for technology costs and performance,
and financial parameters. Some of the assumptions that principally influence the differences in
the calculated 2022 tariff and the 2021 Tariff Committee tariff are in Table 2, with all assumptions
given in Annex 1. The principal reasons for the need of higher tariff than the proposed 2021 tariffs
are discussed below.

Table 2 Comparison of Key Assumptions
Technology
Investment Cost *
Capacity Factor
Millions of LKR [USD] per MW
2021 Tariff
Committee
2022 Author
Estimate
2021 Tariff
Committee
2022 Author
Estimate #
Mini hydro 300 [1.48] 426 [1.33] 40% 35%
Solar 161 [0.79] 231 [0.72] 21% 20%
Wind 290 [1.43] 341 [1.07] 35% 30%
Biomass Dendro 300 [1.50] 540 [1.69]
80% at
1.6 kg/kWh
80% at
1.7 kg/kWh
* Without Interest During Construction
# See Annex 1 for details
Other Assumptions 2021 Tariff Committee 2022 Author Estimate
Exchange rate (Rupees/USD) 203 320
Loan interest rate 9.45% 18%
Equity return 15% 22%
Biomass use (kg/kWh) 1.6 1.7
Year 1 fuelwood price (LKR/kg) 6.66 12.00
(1) The rupee has depreciated sharply, making investment costlier in rupee terms, as 70-80% of
NCRE investment is in foreign equipment, materials, and services. The impact of rupee
depreciation is clearly seen in Figure 1, where the prevailing 2012, Tariff Committee’s proposed
2021 and the author’s calculated 2022 tariffs are compared in US cents per kWh. The 2022 tariffs
are less than the prevailing 2012 tariffs (in US dollar terms), due to the investment cost reductions
that NCRE technologies have enjoyed. In US dollars, the calculated 2022 wind tariffs show a 33%
decline, mini hydro 15%, solar 44% and biomass dendro 23%, compared to 2012 tariffs.
Figure 1 Comparison of 2012, 2021 and 2022 NCRE Tariffs in US Cents/kWh
16.2
13.1
19.8 19.8
7.0
7.7
8.4
10.8
10.9 11.1 11.1
15.3
0.0
5.0
10.0
15.0
20.0
25.0
Wind Mini Hydro Solar Biomass Dendro
NCRE
Cost
Reflective
Tariff
(US
cents
per
kWh)
Comparison of Prevailing 2012 Tariff, Tariff Committee 2021 Tariff ,
Calculated 2022 Tariffs for NCRE
Prevailing 2012 Tariff at Rs.127/USD Tariff Committee 2021 Tariff at Rs.203/USD
Calculated 2022 Tariff at Rs.320/USD

(2) Credit has become more expensive. Even the author’s assumption of 18% interest rate may
be too low. The one-year T-Bill rate is now more than 25%.
(3) Fuelwood prices have risen sharply. This increase is due to oil and LPG shortages and price
increases of these fuels. The Tariff Committee assumption of no change in biomass fuel price from
2012 to 2021 at Rs.6.66/kg in current rupees, is unrealistic. The Tariff Committee has also
assumed that the fuelwood needed per kWh in 2021 (1.6 kg/kWh) is less than 2012 (1.84
kg/kWh).
(4) The escalation factors used by the Tariff Committee must be realistic. A more rational
approach is needed to determine suitable escalation rates and deserves further study:
• The Committee assumed the escalation rate for Operations and Maintenance (O&M) as the
average of the CCPI and LKR/USD rates of change for the three preceding years. In the 2012
tariff, O&M escalation was set at 2/3 this value based on a five-year moving average. While
the 2021 assumption is an improvement, in these volatile times, even a three-year moving
average will make the rate too slow.
• Unlike for large Independent Power Producers (IPPs such as West Coast, Sojitz, ACE), where
fuel cost is passed through, the fuelwood price risk is borne by the biomass plant. The
Committee assumed that the fuelwood price escalation is half the previous year’s increase in
CCPI for new projects. Under the 2012 tariff, it is half the five-year moving average. While the
2021 proposal is an improvement, it does not adequately cover the fuel price risk. The
Committee justified the linkage to CCPI claiming that fuelwood supply is labour intensive.
More likely, fuelwood price change is more closely correlated with furnace oil and LPG prices
in addition to labour and transport costs.
• The Tariff Committee assumes a fixed loan interest rate (2021 Average Weighted Prime
Lending Rate + 3%), for the 6-year loan term. Domestic banks do not normally offer such fixed
rate loans for longer term debt. A European Investment Bank credit line did offer fixed 8%
interest rupee debt for NCRE investments, but that facility is no longer available.d Updating
the cost of financing (annually) could help mitigate this risk and could also result in lower
tariffs if interest rate drops, as they have in the past.
A different approach to determining escalation rates is needed. In India, for example, the
escalation rates are set for the first year. The Central Electricity Regulatory Commission has the
right to review and change the escalation rates in future years, based on normative experience
rather than a fixed formula as in Sri Lanka.e This permits the risk to be mitigated when
extraordinary conditions are encountered, such as now.
Urgent actions needed as existing biomass power plants are facing bankruptcy threat
The existing biomass power plants (37 MW) are presently facing an existential threat to their
financial survival due to the sharp rise in fuelwood prices (about Rs.12/kg for sustainably
harvested chipped fuelwood in 2022). Unless mitigatory actions are taken immediately to offer
a higher price for biomass-powered electricity from existing plants, these plants may be forced to
cease operations and Sri Lanka may lose access to these 37 MW. It may also discourage new
investments in biomass power plants. In the meantime, oil-fired IPPs as noted above, can pass
through the fuel cost to CEB and avoid the fuel price risk. (Full disclosure: The author is a minority
shareholder with less than 10% equity share in a 4.2 MW biomass power plant).

Is NCRE investment in 2022 worthwhile at these higher tariffs?
Figure 2 helps answer this question. It compares the flat (“levelized”) electricity cost from NCRE
against electricity cost from coal and oil under a range of conditions. It also shows the “Base Case”
electricity cost from NCRE and fossil-fuelled plants. The answer is a yes. Oil-fired generation is
more expensive than NCRE electricity even from efficient combined cycle plants.
Figure 2 Comparison of Cost of Electricity from NCRE, Coal and Oil
Lower bound cost for coal electricity (at $100 per ton of coal), is lower than the upper bound for
NCRE electricity, but higher than their lower bound costs. Coal-fired power generation will be
more expensive than the most expensive NCRE electricity (biomass dendro), when coal price is
more than US$164 per ton, delivered. For comparison, Australian FOB coal price was US$197 per
ton in January 2022,f and in March 2022, Sri Lanka bought coal from the Singapore unit of Russian
coal trader SUEK AG for US$283 per ton.g Since the Norochchalai coal plant is essential at the
present for energy security, the need to purchase even very expensive coal is understandable.
The results are not surprising. NCRE recurring investments are only marginally affected by
currency depreciation. However, imported oil and coal fuel which must be purchased every year,
are affected by currency depreciation. For example, Dubai Fateh crude oil was about Rs.14,000
per barrel in 2012, Rs.15,000 in 2021 and rising to Rs.36,000 in early 2022. Australian coal FOB
price was about Rs.11,000 per ton in 2012, Rs.17,000 in 2021 and rising to Rs.63,000 in early
2022.
As an acknowledgement of market realities, the comparison uses more favourable financing
terms for CEB-owned coal and oil power investments, than for private sector NCRE or emergency

diesel investments. It assumes that coal and oil power plant investments can get 12-year USD
financing at 6% interest, compared to NCRE plants that get 6-year rupee financing at 18%
interest. An 8% return-on-equity for coal and combined cycle oil plants is assumed, while it is
22% for private sector NCRE and emergency diesel investment. International oil and coal prices
remained unchanged in nominal USD terms, though in LKR it is escalated at the currency
depreciation rate. Assumptions are in Annex 1.
What are the savings to CEB and to Sri Lanka from unblocking NCRE Investments?
Today there are 4,000 MW of NCRE projects awaiting CEB approval since 2017. If the tariffs can
be revised and investments in these projects realized, the savings can be considerable to CEB by
avoiding paying for diesel fuel and to the country from reduced diesel fuel imports. However, the
2021 recommended tariffs will not catalyse any NCRE investments.
As an example, if 800 MW (or 20% of the blocked projects), are implemented, they could supply
about 1,800 GWh of electricity annually, based on historical NCRE performance. For comparison,
in 2020, Oil thermal IPPs supplied 2,717 GWh of electricity to CEB and CEB oil thermals generated
1,462 GWh.h Therefore 1,800 GWh of NCRE electricity could be accommodated by displacing
more expensive oil thermal generation.
The 800 MW of NCRE generation could offset about 400 million litres of diesel fuel annually. The
net financial savings to CEB is Rs.37 billion per year (assumes paying flat 2022 tariff for NCRE,
while avoiding paying for diesel fuel at US$883/MT (40,000 MT diesel fuel procurement in April
2022).i The saving to Sri Lanka for avoiding import of diesel fuel is about US$313 million
for the year from these 800 MW of NCRE investments. The NCRE investment required is
about US$1,000 million, or a simple payback of about 3 years in diesel fuel import savings.
As Mr. Manjula Perera, CEO of Windforce Ltd., representing the renewable energy community,
stated in a recent presentation: “If the Power Ministry, CEB, SEA [Sri Lanka Sustainable Energy
Authority], and PUCSL work hand in hand and get the necessary policies in place, adding 1,000MW’s
from NCRE within the next 2 years by local RE developers will not be a challenge “.j
What must the Government and CEB do?
Given the very significant benefits that can accrue from investments in NCRE, it is recommended
that the Government direct the CEB, PUCSL and SLSEA to immediately undertake the following:
• Update the NCRE cost-reflective tariffs to 2022 conditions. Technology and project
finance specialists should be invited as advisors to help revise the tariff to 2022.
• PUCSL must approve the tariff as soon as possible and CEB must adopted it. The CEB and
PUCSL must commit to updating the tariffs at least every 2 years.
• CEB must commit to unblocking the over 1,000 NCRE projects that were submitted to
them in 2017-2019 and invite other NCRE proposals.
• SLSEA should invite companies to revise the feasibility studies and update their NCRE
applications, and companies must respond quickly. SLSEA should, without delay and with
no additional fees, review and approve the compliant proposals.
• CEB must issue letters of intent and sign PPAs without delay for compliant NCRE
proposals.

• CEB must commit to providing other support and necessary infrastructure upgrades
required to connect these NCRE facilities to the CEB grid.
• SLSEA with assistance from the Ministry of Finance, could seek support from commercial
banks and international financiers to mobilize financing for these projects.
In conclusion, successfully accomplishing these actions, will permit the NCRE technologies and
the private sector to contribute to achieving the Government's goal of 70% RE generation by 2030
and, more importantly, to helping Sri Lanka overcome its near-term energy-sector and balance of
payment challenges.
27 April 2022
Disclaimer: The views, data and other assumptions, analyses, results interpretations, and
opinions expressed in the text belong solely to the author, and not necessarily to any other group
or individual, including those cited in the article.
The author is former Lead Energy Specialist at the World Bank with specialization in renewable
energy project development and financing in Asian and African countries, including in Sri Lanka.
Annex 1 Assumptions Used in 2022 Comparative Analysis
Financial Assumptions Units NCRE Fossil Fuel
Fixed Interest Rate 18% LKR 6% in USD
Loan Term Years 6 12
Return on Equity 22% in LKR
8% in USD (Coal, Diesel CC)
22% in LKR (Emergency Diesel)
Debt Equity Ratio 60:40 60:40
Weighted Average Cost of Capital 19.6%
9.1% Oil and Diesel CC
14.5% Emergency Diesel
Exchange Rate Year 1 LKR/USD 320 320
LKR Depreciation vs US$, after
2022
per Annum 4% 4%
VAT on Electricity Sales 0% 8%

Base Case Assumptions for Comparative Analysis of Levelized Cost of Electricity
Assumptions Mini Hydro Wind Solar Biomass Dendro
Coal High
Efficiency
Diesel
Combined
Cycle
Emergency
Diesel
(Internal
Combustion)
Parameters Units
Capital Cost *
Millions Rs/MW 426 341 231 540 636 323 345
Millions USD/MW 1.33 1.07 0.72 1.69 1.99 1.01 1.08
Capital Cost with IDC *
Millions Rs/MW 480 384 256 608 730 366 367
Millions Rs/MW 1.50 1.20 0.80 1.90 2.28 1.14 1.15
Specific Fuel Consumption kg/kWh 0 0 0 1.70 0.38 0.19 0.21
Fuel Price 0 0 0 Rs.12 per kg US$150/ton US$650/MT US$650/MT
Fuel Price Escalation Rate 4.6% in LKR 0% in USD 0% in USD 0% in USD
Plant Load/Capacity Factor # kW 35.0% 30.0% 20.0% 90.0% 85.0% 84.4% 79%
Output Degradation Per Year 0.0% 0.0% 0.40% 0.0% 0.0% 0.0% 0%
Transmission Loss from HV to
MV 0.0% 0.0% 0.00% 0.0% 1.57% 1.57% 1.57%
Net Output kW 100.0% 100.0% 100.0% 90.0% 90.0% 94.0% 90%
Fixed O&M Cost
Share of Capital
Cost
2% (years 1-8)
3% of
capex
3% of
capex
3% (years 1-15)
3% (years 9-
20)
4% (years 16-
20)
Millions Rs/
MW/Year
17.3 7.6 3.8
Variable O&M Rs/MWh - 1,885 733 1,694
O&M Escalation Rate 4.81% 4.81% 4.81% 4.81% 4.81% 4.81% 4.81%
Economic Life Year 20 20 20 20 30 30 20
# Capacity factors: Mini hydro based on median value in 2015 which was a good rainfall year. Wind based on median capacity factor experienced in 2016.
Biomass based on actual plant experience. Solar based on Trincomalee site with average output of single axis tracked module (22%) and fixed module 10 deg tilt)
(NREL System Advisor Model)k
*Diesel and coal power plant investment costs from the 2021 CEB Long Term Generation Expansion Plan 2022-2041 inflated 3.2% in US dollar terms to 2022.
NCRE investment costs from Windforce Ltd. and Mirigama Dendro Power Ltd.l

References
a Hemantha Samarakoon (State Secretary, Chairman), et al. “New Renewable Energy (NRE)
purchase Tariff for Year 2021”, Unsigned Letter Report to Hon. State Minister Ministry of Solar
Power, Wind and Hydro Power Generation Projects Development, December 27, 2021.
b Reported by Nirmala Kannangara. “Why does CEB shun renewable energy projects?” Daily
Mirror, March 25, 2022. https://www.dailymirror.lk/opinion/Why-does-CEB-shun-
renewable-energy-projects/231-233767.
c PUCSL, “Decision on Non-Conventional Renewable Energy Purchase Tariffs 2012-2013 “,
October 5, 2013. https://web.pucsl.gov.lk/english/wp-content/uploads/2012/12/Decision-
on-NCRE-Purchase-Tariffs-2012-2013-Web-Vesion.pdf
d DFCC Bank, “EIB Considers DFCC Bank A Preferred Partner Says Andrew McDowell, Vice
President, European Investment Bank”, March 31, 2017 https://www.dfcc.lk/media/eib-
considers-dfcc-bank-a-preferred-partner-says-andrew-mcdowell-vice-president-european-
investment-bank/
e Central Electricity Regulatory Commission of India, “Terms and Conditions for Tariff
Determination from Renewable Energy Sources Regulations, 2020 “, Order No. RA-
14026(11)/4/2020-CERC, 23 June 2020. https://cercind.gov.in/2020/regulation/159_reg.pdf
f Indexmundi, “Coal, Australian thermal coal Monthly Price - US Dollars per Metric Ton”,
https://www.indexmundi.com/commodities/?commodity=coal-australian
g Sudarshan Varadhan and Uditha Jayasinghe. “Sri Lanka buys coal from Russia's SUEK at a
discount” Reuters, March 30, 2022. https://www.reuters.com/world/asia-pacific/exclusive-
sri-lanka-buys-coal-russias-suek-discount-sources-say-2022-03-30/
h CEB, “2020 Statistical Digest”. https://ceb.lk/front_img/img_reports/1626946210CEB-
Statistical_Digest-Form-2020-Web_Version.pdf
i Reuters, “Sri Lanka pays for fuel imports as crisis leaves pumps dry”, February 23, 2022,
https://timesofindia.indiatimes.com/business/international-business/sri-lanka-pays-for-
fuel-imports-as-crisis-leaves-pumps-dry-causes-power-cuts/articleshow/89778566.cms
j Manjula Perera (CEO Windforce (pvt) Ltd.), “Renewable Energy, The only solution to Sri Lanka’s
Energy Crisis”, Media Briefing, January 24, 2022.
k PUCSL, Generation Performance Reports for First Half 2015 and 2016”.
https://www.pucsl.gov.lk/wp-content/uploads/2019/02/Gen-Performance_2015-First-
Half.pdf and https://www.pucsl.gov.lk/wp-content/uploads/2019/02/GenPerformance-
2016_Draft.pdf
l Ceylon Electricity Board, “Long Term Generation Expansion Plan 2022-2041”, Final Report,
October 2021. https://ceb.lk/front_img/img_reports/1636539187LTGEP_2022-
2041_Web_compressed.pdf

Mobilizing Renewable Energy to Overcome the Energy and Financial Crisis: The Need for a Credible Renewable Electricity Tariff Anil Cabraal, Ph.D.nil Cabraal Article.pdf

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