CEB losses increase by 240 percent but Cabinet approves expensive private power deals

The Cabinet has approved the extension of expensive power purchase agreements (PPAs) with three independent power producers (IPPs) amidst reports that the Ceylon Electricity Board (CEB) has recorded a 240 percent increase in losses last year when compared with 2016.

Electricity from IPPs is typically expensive. While it should be relied upon only in emergencies, prolonged delays in introducing new low-cost, long-term power plants has led to dependence on IPPs to bridge the gap.

In 2017, the CEB sold more power than in the previous year. However, its revenue increased by only around two percent while its operational costs spiked to Rs 272,962 million from Rs 231,147 million in 2016. “This significant increase in operational costs resulted in the CEB incurring losses amounting to Rs 49,231 million, which is a 240 percent increase from Rs 14,499 million in 2016,” the Public Enterprises Department’s annual report states.

In March this year, the Cabinet approved the extension of the CEB’s agreements with three “retired” IPPs whose contracts ended this year. They are Ace Power (Pvt) Embilipitiya (100mw); Heladanavi Ltd (100mw); and Ace Power Generation Matara (Pvt) Ltd (20mw). These are the same plants that the Cabinet in 2016 granted approval for the CEB to buy outright. But the purchases have not materialised even more than two years after the decision, thereby necessitating several extensions of costly PPAs to meet energy shortfalls.

“It could be observed that circumstances have once again driven the CEB to keep on further relying on extensions to the PPAs of retired IPPs even after a lapse of two years from the Cabinet decision dated March 23, 2016, to purchase its power plants, since the same has not yet materialised,” The CEB’s Deputy General Manager (Energy Purchases) Sujeewa Abeywickrama has protested in a separate letter to the Assistant General Manager (Transmission).

Only Ace Embilipitiya has so far signed the PPA extension. It recently invoiced the CEB for Rs 840 million –Rs 700 million for energy and Rs 140 million for capital cost–for generating a months’ worth of emergency power. But the payment is being delayed over differences within the utility over the legality of the PPA extension.

While the Cabinet approved the three-year contract, the Act mandates that the Public Utilities Commission of Sri Lanka (PUCSL) must also sanction it; and that selection of a power producer shall be on the basis of “technically acceptable tenders”. PUCSL permission has not been granted and no tenders were called.

So the CEB’s Energy Purchases branch refused to pay and sought legal opinion on whether the April 5 agreement between the CEB and Ace Power Embilipitiya is lawful in terms of the Sri Lanka Electricity Act. A letter signed by three senior officials states that there is no argument the utility must uphold the agreement to pay for power bought under the PPA. But it expresses concern that the contract, which was signed “subject to approval of the PUCSL”, is yet to be legalised in terms of the Electricity Act No 20 of 2009.

Ace Power Embilipitiya was instructed to obtain PUCSL’s concurrence or a no objection letter to the CEB entering into a PPA with the company pending the issuance of a three-year generation licence. Neither was produced. The Energy Purchases branch has in the past settled payments under a few short-term PPAs signed on emergency basis. In those cases, however, the PUCSL had issued “no objection” letters–something that hasn’t been done in this instance.

Mr Abeywickrama has also highlighted several disadvantages to the CEB extending the PPAs of IPPs after their retirement. For instance, procurement of power through extensions to the terms of PPAs of the retired IPPs is “unsolicited in nature” and it cannot be determined whether the tariffs are competitive. The Electricity Act states that power procurement should be carried out through competitive bidding. Therefore, extensions to the PPAs of retired IPPs are not in line with the law.

The DGM also points out that the Cabinet has emphasised the necessity of following a suitable methodology most beneficial to the CEB in the extension of such PPAs. Mr Abeywickrama withheld payment–the invoice has not yet been settled–but he was subsequently served an interdiction notice on a separate matter. He has told the CEB Engineers’ Union, of which he is a member, that the inquiry into charges against him was not properly conducted; and that the utility’s Chairman “wants to replace my post by another DGM in order to make some disputed payments as he wishes”.

The CEB is again in conflict with the independent regulator over this issue. Its Chairman W.B. Ganegala has written to his counterpart in the PUCSL saying the Ministry of Power and Energy has already obtained Cabinet approval to extend all three PPAs for another three years.
“In such circumstances, please be informed that we are compelled to extend the PPA of Ace Embilipitiya for the period of another three years to maintain uninterrupted power supply in the country, subject to the approval of the PUCSL,” he states. The PUCSL rejected the extension on the basis that teh CEB has not followed tender procedure.

The matter is now with the CEB’s legal department. “…the legality of payments for the invoices submitted by the above Company under the said PPA of 3 year term is not clear and, as officers entrusted with making payments to IPPs by CEB, we are burdened with the risk of being subjected to undue repercussions in the context of the above uncertainty,” Mr Abeywickrama has written to the AGM (Transmission).

In 2017, the CEB recorded a direct generation cost of Rs 184.60 billion compared with Rs 152 billion the previous year–an increase of 21 percent. In the absence of implementing a cost reflective pricing mechanism, the CEB managed its liquidity requirements through borrowing from State banks, the Department of Public Enterprises reveals.

(Source: The Sunday times)