Govt. told to opt for least cost power generation mix to prevent shock tariff hikes

• CMA Chair cautions another tariff hike will spell disaster for economy already beset by inflation 
• Wants authorities to get their costing and pricing right while resorting to least cost generation mix  
• Calls for mandatory cost audits to ensure people pay for least cost power 
• Wants unbundling of CEB to be expedited to rid power sector of political interferences 
• Some economists call for temporary subsidising of tariffs to support economy recover from current depths  

At a time when the entire country is up in arms against the proposed monster power tariff hike in less than five months into the first one in August, Sri Lanka’s national management accounting body, the Institute of Certified Management Accountants (CMA) of Sri Lanka, urged the authorities to get their house in order, without just burdening the user with their enormous inefficiencies and wastage, which have gripped the sector for decades. 

Weighing in on the matter, which sparked outrage across all sectors of society, CMA Sri Lanka President Prof. Lakshman R. Watawala urged the authorities to resort to better costing and pricing of electricity while transitioning to a least cost power generation mix to prevent shock tariff hikes. 

As part of the other reforms to restructure the power sector, he proposed to fast-track the unbundling of the Ceylon Electricity Board (CEB) between the generation, transmission and distribution divisions, invite public-private partnerships to each of these sectors and list them on the Colombo Stock Exchange to rid these companies from undue government interferences. 

The officials at the Power and Energy Ministry and CEB, ignoring the calls to withhold another round of tariff hikes, on Tuesday proposed to increase electricity tariffs by about 65 percent from January next year, to avoid hours-long power cuts in the new year.  

The government earlier delivered a 75 percent average tariff hike on August 10, which sent ripples through households and corporate balance sheets. 

Prof. Watawala said that even the August tariff hike was too excessive and another similar-sized tariff hike could spell disaster on households and broader economy. 

“the government has announced another (tariff) increase from 2023 and this will be a major burden on the consumer and a disaster for economic development,”he said.

Some economic analysts opine that the government should now bear the narrowed losses of the power sector in the interim, without entirely killing the economy further, as it will be a worthwhile trade-off authorities could make until they work towards finding the least cost energy mix by gradually cutting reliance on expensive thermal energy.  

“Being pragmatic means to decide between if you are going to repeatedly strangle the entire economy, just to bring the CEB losses to zero or instead, you help the economy to recover while tolerating some modest losses at the CEB for a brief period because the latter helps you with more tax revenues to cover the losses since you allow the economy to function,” said an economic analyst on condition of anonymity.     

Prof. Watawala meanwhile reminded that the August tariff hike was necessitated by the sharp fall in the value of the rupee against the dollar, which sent the prices of every imported good by at least twice and the equally large surge in energy and commodities prices in the global market, particularly after Russia invaded Ukraine.

Hence, he said further tariff hikes could be avoided, if the officials start working on “the right mix of generation and bring in efficiency in the supply chain, least cost generation, saving of foreign exchange and cost reductions by use of hydro and renewables”. 

“It is also seen and heard that due to the delays in purchasing and supply chain that the cheaper coal power may not be available in 2023 and hence, the more expensive fuel will have to be used to cover up and this additional expenditure is going to be passed onto the consumer and hence, the sudden price increase,” he noted. 

“If this is the case, then it is a very exceptional matter and needs immediate corrective action without consumers being penalised in these difficult times,” he added. 

Prof. Watawala, for years, has been calling to engage qualified management and financial accountants by these loss-making state institutions to get their costing and pricing decisions right but to no avail. 

He urged the officials to carry out mandatory cost audits via the help of a cost auditor, who could be a member of CMA Sri Lanka, to ensure what the people are paying is the least cost and any inefficiencies and waste are properly reported. 

“The cost audit will be based on the cost accounting records and is different from a financial audit and is compulsory in many South Asian countries. The cost audit is a mandatory requirement in India for the electricity sector and enables this sector to be competitive, efficient and productive,” he noted.