Cost-reflective electricity tariffs unlikely ahead of next year elections: Fitch

Fitch Ratings does not expect the government to adopt a cost-reflective tariff structure for electricity ahead of elections in next year despite its precarious
financial position.

“We do not expect the government to adopt a tariff structure for electricity that reflects the cost of production and distribution ahead of elections in 2020,” Fitch said.
According to Fitch, Ceylon Electricity Board’s (CEB) average tariff, which has not been revised since 2013, is around 10-15 percent below the average cost of
supplying electricity.

“The government has introduced cost-reflective pricing formulas for other essential goods, such as fuel and liquefied petroleum gas, but there is no indication that this will be adopted for electricity,” the rating agency said.

Meanwhile, Fitch has revised down the outlook on CEB to ‘Negative’ from ‘Stable’, equalising with that of the Sri Lankan sovereign rating, and has affirmed the rating
at  AA+(lka).

Fitch last week revised down Sri Lanka’s rating outlook to ‘Negative’ from ‘Stable’ over the sweeping tax cuts announced by the newly elected government.

Fitch said it did not expect CEB’s linkages with its parent, the Sri Lankan government, to weaken, as the provision of electricity at subsidised rates can be carried out only by a state entity such as CEB, because private companies would not be willing to bear losses.

Fitch assesses CEB’s Standalone Credit Profile to be much weaker than its support-driven rating and believes providing a notch-specific standalone credit view of CEB is difficult due to poor margin visibility and the need for continued state support to sustain operations. CEB continues to make operating losses because tariffs are lower than its average generation, distribution and transmission costs - which compel the company to borrow to sustain its
day-to-day operation.

The balance sheet is further weakened by large investment in new generation capacity and network upgrades, which are funded primarily through borrowings.

CEB’s operating EBITDAR was Rs.17 billion in 2018, but free cash flow was negative Rs.66 billion due to high interest costs, working capital outflows and capex.

The regulator expects electricity demand to increase by about six percent a year in the next five years, which will require significant capacity expansion if the industry is to make up for the existing supply shortage.

Hydro power, which accounts for around 41 percent of domestic power generation, has been volatile due to unfavourable weather patterns. This has pushed CEB to look for alternative supplies, such as natural gas and renewable energy sources.

CEB, which is tasked with improving the country’s power infrastructure, will bear bulk of these investments, which management estimates at around US$1.7 billion over 2019-2022.