Pending Reforms Pose Continued Challenges for Renewable Energy Projects

25 March, 2024

International Affairs

Sri Lanka is actively pursuing its renewable energy potential and is eagerly seeking significant investments from India and other countries in this sector. However, during last week’s Business forum ‘Energising India-Sri Lanka Ties through Cooperation in Renewable Energy,’ several stumbling blocks were highlighted by RE investors in Sri Lanka, which the Energy Minister also acknowledged. At the forum held on 11 March, Dr. Narendra de Silva, General Manager of Ceylon Electricity Board (CEB), shed light on these obstacles and outlined potential paths forward. Alongside, Sri Lanka’s Minister for Power and Energy, Kanchana Wijesekera, emphasised the nation’s vast renewable energy potential and extended invitations to Indian companies to explore investment opportunities in this burgeoning sector. Further, he did not mince his words on the monopoly in the energy sector, signalling a desire for greater competition and innovation.

On 14 March, Sagar Adani, Executive Director of Adani Green Energy, and Anil Sardana, MD and CEO of Adani Energy Solutions, met officials at the Ministry of Power and Energy regarding Adani’s renewable energy project. The Adani Green Energy team was in Sri Lanka to participate in negotiations and discussions concerning the power purchase agreement for the Mannar and Pooneryn 484 MW Wind Energy Project. Their projects are also dragging which aim to contribute 250 MW in Mannar and 234 MW in Pooneryn to the National Grid.

CEB Engineers claim Adani tariffs are high

The CEB Engineers’ Association is currently raising concerns about the tariff proposed by Adani, which is not being well-received by the CEB Engineers. One major issue highlighted by the association is that Adani has not yet obtained all necessary approvals, including the Environmental Impact Assessment (EIA). Speaking to Ceylon Today, the association expressed disagreement with Adani’s proposed price for the next 25 years. Despite ongoing negotiations with the Cabinet Appointed Negotiating Committee (CANC), the CEB will only be able to sign the Purchase Agreement once the approvals are in place. Specifically, for the 500 MW project (234 MW in Mannar and 250 MW in Pooneryn), the EIA has not been approved, and CANC approval is still pending. Additionally, the EIA for the Mannar power plant remains open for public comments. The association also highlighted that India itself has not achieved 100% electrification, adding another layer of concern to the project’s feasibility.

However, the CEB engineers acknowledge that Sri Lanka has the option to procure electricity through the India-Sri Lanka connectivity. Yet, they express concerns that once this connection is established, there might be little incentive for Sri Lanka (CEB) to continue constructing its own power plants. This could lead to a high dependency on electricity imports from India, posing a significant risk to Sri Lanka’s energy security. They emphasise the importance of maintaining a bi-directional trade tie-line with India, rather than solely relying on imports. The Engineers’ Association also highlights the potential benefits of connecting the entire South Asian region’s network, enabling regional trading involving countries like Bangladesh, Nepal, Bhutan and Afghanistan.

Regarding Adani’s renewable energy projects in Sri Lanka, the CEB has expressed reluctance to agree to an additional USD 2.8 billion in costs. They emphasise that reducing electricity costs is a priority, which would not be achievable with the USD 9.97 cents tariff proposed by Adani. The CEB highlights that over 10 other potential investors are willing to invest at around USD 5 cents, including companies from China, Turkey, Australia and Denmark, who could offer more favourable terms. The engineers argue that such deals leave them with little bargaining power. The USD 9.07 cents tariff proposed by Adani for the 500 MW wind farm is a particular concern, especially considering that recent tenders for 20 MW plants have offered significantly lower tariffs.

Indian energy experts say CEB’s claims are unfair and false

However, the Indian energy experts argue that many of the matters are different from what the CEB is claiming and it is a false argument and that Adani’s tariff is not 10 cts. It is below 8.90 cts and the CEB’s wind plant is not at 4 cts. It is 8.90 cts. (29 LKR/kWh as per PUCSL submission by CEB). Also, with the Adani tariffs being lower than that of CEB’s wind tariffs, there will be savings and not extra payments. In fact, when compared with higher fuel/oil cost tariffs of ~14 cts, there will be an annual savings of at least USD 60 million per annum. They said the Mannar (250 MW) – EIA closed for public comments on 6 March 2024. Now the public comments are being compiled and thereafter the technical committee of CEA will prepare the mitigation plan. This is as per the CEA process.

The Indian experts further added that even if the countries make the India-SL tie line, in the event of the sale of Electricity from SL to India, there will be an issue of SL people mentioning that their resources are not being utilised in the country and being sold to India. So this is an endless argument. If with an open mind, the people allow the investments in power projects in the country, automatically the Energy Security issue will be resolved.

The Indian experts also say both Pooneryn and Mannar are not one package as claimed by the CEB. They said there were two RFPs issued separately – Mannar (250 MW) and Pooneryn (234 MW). Also, only the tariff is single for both projects Mannar and Pooneryn. In fact, the tariff agreed for Mannar is applied to Pooneryn despite Pooneryn having lower wind resources as compared to that of Mannar.

Below is the status in-depth on the project by Adani:

=Provisional Approval (PA) from SLSEA – granted for both Mannar and Pooneryn.

= Letter of Intent (LOI) by CEB to purchase electricity – granted for both Mannar and Pooneryn.

= Letter of Approval (LOA) by BOI for making the Investment – granted for both Mannar and Pooneryn.

= Statutory NOCs/Consents from relevant government dept – granted for both Mannar and Pooneryn.

= Environmental Clearance (EC) from CEA – granted for Pooneryn.

= Environmental Clearance (EC) from CEA – awaited for Mannar. The public consultation period ended only on 6 March 2024. Now, the technical team of CEA will compile the concerns and prepare a mitigation plan and thereafter grant the EC to the Mannar project.

= Energy Permit (EP) by SLSEA – granted for Pooneryn. For Mannar, once the EC is obtained it will be granted immediately.

= Land acquisition – completed by SLSEA for Pooneryn and will be leased to Adani Pooneryn project once the valuation is finalised by the Ministry of Lands. For Mannar, the land acquisition process is underway by SLSEA and is expected to be completed by March end.

= Price negotiations completed – awaiting approval of CANC.

In the process of pricing, it has been said the Price has been further negotiated. It is cheaper than the existing wind prices in the Country. Below is the comparison of prevailing wind tariffs in the Country:

= New Variable Methodology (Wind) – 41.97 LKR/kWh (tweet by KW)

= FIT (Wind) – 33.45 LKR/kWh. (Published by CEB)

= Tender to IPP (Wind) in Mannar – 33.35 LKR/kWh. (LOI copies available)

= CEB’s 103 MW Wind in Mannar – 29 LKR/kWh (Recent submission by CEB to PUCSL)

= Adani’s Mannar and Pooneryn (Wind) – less than 29 LKR/kWh (Recent negotiations)

= Since Adani’s wind price is the lowest in the Country, there should be no question about not agreeing to it

Also, the terms and conditions of the Indian experts explain thus: The Mannar (250 MW) and Pooneryn (234 MW) projects will be implemented with an investment of about USD 750 million. This will be 100% FDI, as per BOI LOA and funded 70% by Foreign Lenders and 30% by Equity. Therefore, the terms under the Agreements are in line with those expected by International /Foreign Lenders like USDFCC, Multilaterals, etc., for raising foreign debt. No term is bad. It is simply to de-risk the conditions under the contract

The question would also be, if anybody else has the appetite for implementing such large-scale RE projects in the Country, then why aren’t they participating?, this could be an argument for the CEB. Why aren’t they proposing projects rather than delaying the existing projects? It essentially shows that they are not interested in any investments but rather derailing the projects coming on the ground in the Country. There are many other Wind and Solar sites available in the Country, so why aren’t they proposing to implement there?

The Indian experts added that with Adani’s projects, the country will be saving USD 60+ million by displacing higher-cost fuel-based tariffs. There will be no extra USD 2.8 billion payment. The experts also claimed that the Electricity costs need to be reduced and one way is to integrate more RE and displace the high oil/coal-based tariff. And actually, their pricing is not more than USD 9.97 cts but it is below USD 8.90 cts.

It was also highlighted that Sri Lanka’s credit rating by Moody’s is ‘Ca’ and S&P is ‘SD.’ These credit ratings denote a very high risk associated with any lending or investment in a country. The ‘Ca’ rating reflects lower creditworthiness and suggests increased uncertainty and potential for higher financial risk. The equity risk premium of 22.15% is calculated up to July 2023 for Sri Lanka by Prof. Aswath Damodaran. Against this 22.15%, what Adani is seeking is only a 5% risk premium.

On the claim by the CEB that the FIT is wrong, the Indian experts opined that many projects are operating on the FIT mechanism. So, obviously if FIT is wrong then why isn’t the CEB raising any issue in these cases and the recent November 2023 tender details wherein the tariffs discovered are in the range of 7 – 10 cts/kWh.

CEB General Manager Dr. Narendra de Silva explained the Sri Lankan perspective at the forum

Dr. Narendra de Silva, General Manager of the CEB, provided insight into Sri Lanka’s power supply perspective and current context. As of now, Sri Lanka has 1,480 MW of hydroelectric power and 1,987 MW of thermal power. The system forecast indicates that by 2030, Sri Lanka aims to have 4,000 MW of power capacity, which is projected to increase to 7,000 MW by 2040.

An intriguing aspect is that by 2026, solar energy is expected to become the predominant and most widely accepted energy source for Sri Lanka’s power supply. The island has abundant resources for both wind and solar energy, with the growth predominantly driven by these renewable sources.

To realise this plan, Sri Lanka is planning to significantly increase its solar and wind energy capacities. Dr. de Silva mentioned that they are considering approximately 3,805 MW of solar energy and 1,475 MW of wind energy, totalling 4,000 MW of solar and 1,500 MW of wind power. Additionally, they are exploring the possibility of constructing 700 MW of pumped storage plants and 1,100 MW of battery storage. This includes a battery capacity of 4,000 MW hours, calculated with a four-hour discharge time. Dr. de Silva emphasised that this comprehensive plan reflects the scale of investment Sri Lanka is aiming for in the renewable energy sector.

He stated that the country is targeting a USD 9.4 billion investment in acquiring infrastructure. Additionally, there is a plan for a USD 1.86 million investment for the network block. The next crucial question to address is, “Do we have enough potential?” As we all know, Sri Lanka possesses substantial solar potential, and regarding resources, there is no doubt. The real challenge lies in articulating the multitude of projects and attracting or bringing in the necessary volume of investments to Sri Lanka.

He further explained that according to statistics, the population distribution and forest coverage tend to balance each other out, as is typically the case in any country. Areas devoid of population and forest cover often harbour rich biodiversity, necessitating the protection of both forest coverage and wildlife. However, the challenge arises when considering land acquisition for renewable energy projects while ensuring the preservation of biodiversity.

Analysing the transmission plan, it becomes apparent that the development of wind and solar energy can be divided according to geographical regions. The East emerges as a promising solar platform, while the South exhibits mild wind conditions but is suitable for solar energy generation. However, a significant challenge lies in the transmission network infrastructure, particularly in areas lacking adequate coverage. Therefore, substantial development in transmission infrastructure is essential to harness the full potential of renewable energy sources.

Dr. de Silva noted that in the past, Sri Lanka had been relinquishing its transmission network, primarily for renewable power purposes, without considering the acquisition of scattered resources. This highlights the need for a strategic approach to transmission network development to accommodate the growing demand for renewable energy in the country.

The planning perspective is now shifting to emphasise the need for proactive reinforcement. This reinforcement must occur well in advance of any renewable energy admission programme. It is crucial to ensure that renewable investors have confidence in accessing the grid. Developers should not be left waiting for grid connectivity while developing their resources. Grid reinforcement must be prioritised to achieve our renewable energy targets.

Taking a closer look at the Mannar zone, which comprises the Northern sector split into two zones, we find that the Mannar zone is predominantly suitable for wind energy, while the other zone accommodates both wind and solar energy. The Southern zone, on the other hand, is primarily suited for solar energy generation.

To tap into these resources effectively, substantial investments are required, particularly targeting the Eastern and Northern ends of Sri Lanka. This strategic approach will pave the way for the successful acquisition and utilisation of renewable energy sources in the country.

From an investment perspective, there are fundamental questions to address regarding utility scheme reforms. What prompted these reforms, and what were the major driving factors behind them? A deeper analysis reveals that utility reforms stem from the distinct nature of capital involved in generation, transformation and distribution. Each aspect of capital possesses unique characteristics, necessitating different management structures. This realisation has led countries worldwide, over the past 50 years, to separate their integrated utilities into distinct entities.

Similar challenges exist in Sri Lanka concerning renewable energy development projects. These projects encompass various components such as generation, last mile transmission and deep grid development. Combining these activities with renewable projects poses significant challenges for investors. It appears nearly impossible for an investor to undertake all aspects of such projects alone.

To address this issue, one proposed solution involves segregating the grid component and incorporating it within a separate entity. This entity would be responsible for grid development, enabling investors to focus solely on renewable energy aspects. By establishing such a company, investors could collectively contribute funds towards grid development while also guaranteeing investment returns. This approach offers a viable solution to the challenges associated with financing and executing renewable energy projects in Sri Lanka.

This concept lies at the heart of the present new Act, which aims to establish a transmission company with open access, facilitating seamless integration of required facilities alongside investor participation. The Act plays a pivotal role in liberating the transmission market, a crucial step for successful renewable energy admission. Without the practical liberation of this market, the feasibility of admitting solar energy plants remains uncertain. This highlights the need for simultaneous development of both the network and funding, presenting unique challenges.

Legislative reforms, embodied in the Act, are key to addressing these challenges. We are pleased to report that new reforms are underway, with the draft nearing completion. The objective is to establish a liberated transmission market, simplifying transmission agreements to encourage developer participation. Lengthy debates, dialogues and complicated negotiations associated with transmission agreements will be streamlined, reducing unnecessary complexities.

Further, the Act simplifies procedures for small-scale projects, offering a standardised power purchase agreement, connection process and tariffs. This streamlined approach facilitates investor engagement. Additionally, the Government is implementing competitive bidding for projects, enhancing transparency and efficiency. The rooftop solar segment also benefits from simplified consumer agreements, contributing to a more straightforward process.

He further emphasised that when discussing the potential of RE with the resources available in the country, we are only tapping into approximately 10% of these resources. The critical question then arises: what should be done with the remaining 90%, which could potentially hold significant value?

The answer, he explained, lies in Indo-Sri Lanka connectivity. Without this connectivity, the untapped 90% of resources remain dormant and hold no practical value. It is unlikely that anyone would invest in developing these resources without the necessary interconnectivity. However, once this interconnectivity is established, it will catalyse a thriving business environment.

The challenge lies in ensuring that the 10% of resources currently being developed are done so in a manner that facilitates the development of the remaining 90%. This necessitates creating a bidding economy, financial infrastructure and legal context conducive to unlocking the full potential of these resources. Failing to do so may result in unnecessary impediments and blockages that hinder the realisation of the country’s renewable energy ambitions. Thus, it is imperative to align the development strategies for the 10% with the broader goal of harnessing the untapped 90% of resources effectively.

Minister of Energy says there is a monopoly in the energy sector of Sri Lanka

But while many shortcomings were pointed out at the business forum, Minister of Power and Energy Kanchana Wijesekera said they observe a monopoly in the approval processes and in the realm of development, where only a few developers dominate when it comes to energy projects. “We see that there is a monopoly when it comes to approvals and when it comes to development also there are monopolies in the developers as well. Our competitive bidding process is also sometimes structured in a way to cater to a few developers.”

He said the competitive bidding process, at times, seems tailored to favour these select developers, a trend that has persisted for some time. “Even technical evaluation committees and other project committees sometimes structure projects in a manner that excludes other potential investors,” he explained. Quoting an example, the Minister stressed that there was a project where the technical evaluation committee stipulated that investors must have experience in Sri Lanka’s wind development, specifically with at least a 5 MW wind power plant. “This restriction limited the bidding pool to just two or three developers,” he said.