Fitch doubtful new govt. would adopt cost-reflective tariff structure for electricity

Fitch Ratings is of the view that the new government will not adopt a cost-reflective tariff structure for electricity ahead of the key elections scheduled for next year.

According to the rating agency, Ceylon Electricity Board’s (CEB) current average tariff, which has not been revised since 2013, is around 10 to 15 percent below the average cost of supplying a unit of electricity.

The 100 percent State-owned CEB is the sole electricity provider in Sri Lanka.  “The government has succeeded in introducing cost-reflective pricing formulas for other essential goods, such as fuel and liquefied petroleum gas, but there is no indication whether this will be adopted for electricity,” Fitch stated.

The International Monetary Fund (IMF) has continuously highlighted the need to reform Sri Lanka’s electricity sector and the importance of introducing a cost-reflective price formula on electricity tariffs to cut the massive losses incurred by the CEB. 

“Advancing SOE reforms in the electricity sector will also be critical to reduce fiscal risks,” the IMF said in its latest review on the ongoing extended fund facility arrangement
with Sri Lanka.

According to Fitch, CEB posted an EBITDAR of Rs.17 billion in 2018, but its free cash flow (FCF) generation was a negative Rs.66 billion amid high
interest costs, working capital outflows and capex. 

“We expect CEB’s EBITDAR to remain weak in the medium term, especially in the absence of an increase in tariffs and rising generation costs. 

“Similarly we expect FCF generation to remain negative over the medium term due to its aggressive expansion plans, which will lead to higher debt levels and further weakening in its balance sheet.”

The country’s electricity sector regulator expects electricity demand in Sri Lanka to increase by about 6 percent per year in the next five years, which will require significant capacity expansions if the industry is to make up for the existing supply shortage.

 
Hydro power, which accounts for around 41 percent of country’s power generation, has been highly volatile in the past few years due to unfavourable weather patterns.

 This pushed CEB to look for alternative sources, such as natural gas and other renewable energy sources. CEB, which is tasked with improving the country’s power infrastructure, will have to bear bulk of these investments, which the management estimates to be around US$ 1.7 billion over 2019-2022.

Fitch has rated CEB at ‘AA+(lka)’ with a Stable outlook at the same level as the sovereign (B/Stable) due to its strong linkages with its parent.