India eyes Sri Lanka’s Energy Sector

It is undeniable that India and Sri Lanka enjoy a strong and expanding economic and commercial relationship, which has grown significantly over the years. The entry into the India-Sri Lanka Free Trade Agreement (ISFTA) in 2000 contributed immensely towards the expansion of trade between the two countries. Economic ties between the two nations also include a flourishing development partnership that covers areas such as infrastructure, connectivity, transportation, housing, health, livelihood and rehabilitation, education, and industrial development. 

In this context, an energy independent Sri Lanka is in India’s interest. As the island attempts to overcome its current crises and looks to the future, it is clear that increased investment in the industry remains a solid basis upon which the future can be strategized. However, the India’s approach to Sri Lanka’s energy sector has always become controversial as Sri Lanka follows an ad hoc policy when it comes agreements on power and energy.  

India alleged to have encroached Sri Lanka's Energy Sector 

Highlighting that about 80 percent of total primary energy production in South Asia is generated from fossil fuels, which are mainly imported, the World Bank has said that “regional cooperation and integration can help accelerate the diversification of electricity supply resources across South Asia while enabling a greater role for renewable energy resources.” South Asia has significant untapped hydropower potential, and the countries must accelerate the deployment of solar and wind resources,” 

Yet, such cooperation has proven to be challenging due to the animosity amongst South Asian countries. Since India has a history of interfering in Sri Lanka's internal affairs, many Sri Lankans view it with distrust. Moreover, despite its financial challenges, Sri Lanka has kept on selling energy assets to foreign private companies, particularly those from India. 

India already has a significant investment in Sri Lanka's energy industry and a strategic interest in Trincomalee. Indian aspirations for ownership holdings in the Ceylon Petroleum Corporation and the Ceylon Electricity Board are causing a stir in Colombo's political circles, effectively ending Sri Lanka's energy independence. Unease was greatly increased in Sri Lanka as a result of the little-known fact that Sri Lanka had promised to construct the energy architecture in Trincomalee only with Indian approval. 

Furthermore, the Indian Oil Corporation's subsidiary Lanka IOC (LIOC) PLC operates more than 200 retail locations in Sri Lanka. In addition, it houses 14 oil tanks in the Trincomalee oil tank farm, which is leased to the LIOC starting in 2021 for 50 years. According to the agreement, Ceylon Petroleum Company (CPC), a state-owned oil importer and distributor, received 24 oil tanks, while Trinco Petroleum Terminals Ltd., a joint venture between LIOC and CPC, will manage the remaining 61 oil tanks. In this context, critics of the agreement are of the view that Indian investments in key Sri Lankan areas could pose a significant danger to the country's national security. 

Meanwhile, India was Sri Lanka's primary supporter during the 2022 financial crisis, contributing nearly $4 billion. Sri Lanka was kept afloat by Indian loans. It is unsurprising that New Delhi is working to advance Indian interests in Sri Lanka given the harsh criticism the Indian government has received for this extravagance from its domestic rivals. The Modi administration's close ally Gautam Adani made multiple investments in vital businesses in Sri Lanka last year. 

As such, successive governments in Sri Lanka have promised to boost renewables, but the country produces precious little from its sources of green energy sources. Sri Lanka spent close to $1.2 billion to import fuel to produce electricity in 2021. Hundreds of millions of dollars would have been spent for the same purpose in 2022, although the number should have dropped in 2022 due to dwindling reserves and power cuts. 

At the same time, it is alleged that the Gotabaya Rajapaksa government revoked tenders won by a Chinese company to develop renewable energy in the country under Indian pressure. This had dented Sri Lanka’s relationship with China. Given Sri Lanka’s proximity to India and the latter’s paranoia over China, it is obvious that Sri Lanka will not be able to develop renewable energy infrastructure in the country’s North, which has ideal conditions for solar and wind power production, without Indian approval. 

In this context, the recent visit of India’s External Affairs Minister S Jaishankar to Sri Lanka became the talk of the town as he reiterated Indian interest in Sri Lanka’s renewable energy industry. 

During the visit, he said “Energy security is today one of Sri Lanka’s most serious challenges. A search for solutions must necessarily encompass the larger region. Only then will Sri Lanka get the full benefit of scale. This country has enormous renewable energy potential that can become a sustainable source of revenue. It has the capability as well for Trincomalee to emerge as an energy hub. In its support for Sri Lanka, India is prepared to be a reliable partner on such initiatives. We have today agreed in-principle on a renewable energy framework that would take this cooperation forward,” 

This is why India’s strategic interest in Sri Lanka’s energy sector, particularly in renewable energy, has always been controversial. 

Oil exploitation 

Sri Lanka last year signed a deal with the local unit of Indian Oil Corp (IOC.NS), Lanka IOC, to lease 75 oil tanks, as the island moved closer to securing a $500 million fuel credit line from India. The signing of the deal came ahead of Chinese Foreign Minister Wang Yi's visit to Colombo during the same period, with China also vying for clout in Sri Lanka. 

According to the new pact, Trinco Petroleum Terminal Pvt. Ltd, Lanka IOC's joint venture with Ceylon Petroleum Corporation (CPC), will build 61 oil farms while Lanka IOC will have 14 tanks on a 50-year lease. CPC will employ the 24 additional tanks. Accordingly, the lease agreement that the two nations entered into in 2003 will be null and void as a result of this deal, which will also provide the tank farm a new system of governance. 

Prior to said agreement, Lanka IOC was operating 15 of the 99 storage tanks in the eastern port of Trincomalee. To expand its ability to store petroleum, the Sri Lankan government had considered developing the remaining land. 

Indian Prime Minister Narendra Modi during a visit to Sri Lanka in 2019 mentioned that the project could help the island become a regional petroleum hub. 
Since 1987, successive governments in India and Sri Lanka have been attempting to divide up ownership and development of the World War II era tank farm at Trincomalee, a strategically important harbour off the island's scenic east coast. 

In 2022, it is made clear by the Sri Lankan Government that Indian Oil Subsidiary Lanka IOC would be given 49% stake in the joint development of the Trincomalee Oil Tank farm, with Ceylon Petroleum Corporation keeping 51%. Sri Lanka is said to have obtained a credit line from India to buy petroleum. However, the Opposition parties have a raised serious concerns in this regard.
 

Power Generation Project 

As a victory for New Delhi after the project was taken away from a Chinese business, India has agreed to create three Sri Lankan wind farms on islets between the two countries. An Asian Development Bank loan was secured for a $12 million project to build wind turbines on three small islands in the Palk Strait, which separates southern India from Sri Lanka. The project was granted to a Chinese company in 2019. 

However, Chinese ambassador in Sri Lanka, Qi Zhenhong, expressed Beijing's disappointment over the project's cancellation and cautioned it would send the negative signal to potential foreign investors. 

An Adani project in Sri Lanka is yet again at the centre of controversy, after a top official of the Ceylon Electricity Board (CEB) told a parliamentary panel that a renewable energy project in the island’s northern Mannar district was given to the Adani Group after Indian Prime Minister Narendra Modi “pressured” President Gotabaya Rajapaksa.

This is not the first time that Sri Lankans have questioned the Adani Group’s entry into the island’s energy sector, or brought up Mr. Modi’s name in this regard. Following an agreement between the Group and the CEB in March 2022, to execute renewable energy projects in the northern Mannar and Pooneryn districts, Sri Lanka’s main opposition party Samagi Jana Balawegaya (SJB or United People’s Force) said the Indian businessman was making a “backdoor entry”, and accused Mr. Gotabaya of “pampering” Mr. Modi’s “notorious friends”.  

The energy project is the second major venture in Sri Lanka involving the Adani Group after it bagged a strategic port terminal deal in Colombo.

Meanwhile, India’s Adani Green Energy Ltd, recently received the Board of Investment of Sri Lanka approval to set up two wind power plants in Mannar and Pooneryn in the Northern Province at a total investment would be USD 442 million. According to BOI officials, the construction of the proposed renewable energy projects is due to be completed in December next year. 

In this context, environmental scientists and social activists have expressed concern about the engagement of Adani Green Energy in developing wind power in Sri Lanka citing that since the Mannar wind power project was the most-cost effective energy power plant in Sri Lanka, it is doubtful whether such private developers will adhere to the safeguards similar to the ADB. 

Adani Group spark political row in India

India's political opposition stalled the functioning of parliament recently, demanding an impartial probe into financial fraud allegations against the Adani Group.   

The US-based investment short-selling firm Hindenburg Research recently released a scathing report outlining allegations of accounting fraud and market manipulation at Adani Group. 

The massive industrial conglomerate is considered to have close ties with India's ruling Bharatiya Janata Party (BJP) government and Prime Minister Narendra Modi.  

Lawmakers have called for investigations into Adani's financial dealings and the potential impact of its projects on the environment and local communities.

However, Adani has always vehemently denied the suggestion that he received favourable treatment from Modi or anyone else, arguing that his company has always won business through fair and transparent bidding.

Power Interconnection 

Sri Lanka and India are slated to sign a pact to link their power grids and start negotiations on an upgraded trade agreement within two months, a Sri Lankan diplomat said on Wednesday, as the island nation seeks a way out of its worst economic crisis in decades. India has donated almost $4 billion in assistance to its southern neighbour since the crisis hit early last year, but Sri Lanka is now looking to expand commerce and investments as it works to finalize a $2.9 billion loan from the International Monetary Fund. 

As the two nations' grid-linking negotiations were reopened last year, it is predicted that the project's memorandum of agreement would be finalized within two months, followed by a feasibility study. The initiative has made little headway thus far since it was first put forth more than ten years ago. However, Sri Lanka wanted to put the transmission line in place within two to three years so that India could purchase the renewable energy generated on the island. 

In conclusion, it is noteworthy that Sri Lanka is in dire need of an energy policy that will introduce a degree of transparency into its dealings with foreign powers. Also, Sri Lanka needs long-term technical cooperation, which whilst boosting India-Sri Lanka relations, would act as a catalyst for the island nation to achieve its true potential.