Energy price formula in the offing

Electricity and fuel prices in Sri Lanka will soon be determined based on a fully cost-reflective pricing formula as the worrisome performance of the staterun Ceylon Electricity Board (CEB) and Ceylon Petroleum Corporation (CPC) has been a main concern at the economic health check carried out by the International Monetary Fund (IMF).

“What we suggest is an ‘Automatic Price Adjustment Formula’ to reflect the true cost of generating a unit of energy in both electricity and fuel. We are happy to see Sri Lanka committed toward bringing these reforms and the authorities are currently carrying out internal discussions towards this end. I believe a pricing formula would be in place over the course of this year,” said the IMF staff mission Chief John Nelmes.

When Mirror Business queried the practicality of adopting a ‘fully’ cost-reflective pricing mechanism in the context of a politically challenging environment, Nelmes responded positively and quipped, “If you (Sri Lanka) are benefitting as a country by engaging in the global economy, I do not see any reason why you should not anticipate shocks and equally share them as they come in.”

It was not long ago the Central Bank Governor called for energy price revisions to bring CPC & CEB to at least to breakeven level by end 2013 in order to ensure viability and eliminate the imbalances being created in the banking sector. In the immediate aftermath, the Treasury Secretary also echoed the same sentiments but ruled out a full market-reflective pricing formula as it would lead to market uncertainty and fluctuations.

Nelmes further urged the government not to delay the adjustments while cautioning of a disruptive state of economic affairs if the authorities waited for losses to build up in these State Owned Enterprises (SOEs).

“The reality, the international oil prices fluctuate and there are countries that are flexible enough to adopt these fluctuations,” he said.

In 2011, the CPC & CEB made .losses of Rs.94 billion and Rs.25.5 billion jacking up the combined loss to a staggering Rs.119.5 billion from a combined loss of Rs.22 billion the year before. The expected losses for 2012 are significantly higher as the energy sector went through major challenges last year with the most significant being the drought which led to the generation of thermal power using expensive fuel.

“We see a lot of merit in raising the energy prices on an incremental basis (equally reducing prices) based on market movements, because the public will always be foreknown of the fact and therefore any price adjustment will not come as a shock. This I believe is a more stable policy than ad hoc adjustments which comes in spades,” Nelmes remarked.

As an alternative solution, he proposed the authorities to adopt cheap sources of production as a more long-term approach in order to tackle the looming energy crisis intensified by dwindling fossil fuels.