Arunika Herath

Developments in the Energy Sector in Sri Lanka 12/28/2023 Arunika Herath Contents Executive Summary....................................................................................................................................... 2 The overview of the power sector in Sri Lanka and key sources of energy .................................................. 2 Competitive landscape of the energy sector ................................................................................................. 4 Reason for recent power disruptions in the country.................................................................................... 5 Views on upcoming key energy projects of the country .............................................................................. 5 Potential economic and social impact of these developments .................................................................... 6 Mechanisms that can be introduced to improve these developments ....................................................... 7 The view of the recent developments in government reforms process for the energy sector .................. 7 The views on the growth potential for an entity looking to invest in the energy sector ............................. 7 Conclusion ..................................................................................................................................................... 8 References ................................................................................................................................................... 8 1 Executive Summary As a rising economic power in South Asia and a county headed toward middle-income status with global competitiveness, Sri Lanka is aggressively developing its energy industry to meet growing power demands and foster sustainable development. This report presents a thorough examination of Sri Lanka's power landscape, encompassing crucial energy resources, the competitive environment, recent power interruptions, upcoming energy initiatives, potential economic and societal ramifications, apprehensions regarding these initiatives, avenues for enhancement, and recent governmental policy reforms. The overview of the power sector in Sri Lanka and key sources of energy Energy sector is a rapidly growing industry in the world. Usually there are 2 types of energy sources. Renewable energy derived from the replenishable sources while the no renewable energy derived from the sources that do not replenish at the same speed at which it is used. In generally infrastructure of the oil and gas industry can be classified into 3 sectors as follows. 2 In the Sri Lankan context the power sector has evolved over the years, witnessing a transition from traditional energy sources to a more diversified and sustainable mix. Currently, the main sources of energy include hydroelectric power, thermal power, and a growing focus on renewable energy sources like solar and wind power. The country's commitment to achieving a balance between economic growth and environmental sustainability is evident in its efforts to increase the share of renewable energy in the overall energy mix. The installed capacity of Sri Lanka's power sector has been steadily increasing to meet the growing demand for electricity. The demand is driven by economic growth, urbanization, and increased industrial activities. However, challenges such as transmission losses and an aging infrastructure contribute to occasional power shortages. 3 The Asian Development Bank (ADB) published a report in 2017 laying out a pathway for Sri Lanka's power system to achieve a 100% renewable power sector by 2050. Solar photovoltaics (PV) and wind power plants accounted for about 92% of the power capacities in 2050, and were supported with biomass and hydropower. Nowadays Sri Lankan energy industry faces many challenges as follows. Competitive landscape of the energy sector In Sri Lanka, the energy sector is primarily controlled by state-owned entities, with the Ceylon Electricity Board (CEB) serving as a key player in both power generation and distribution. However, there is a growing presence of private sector involvement , especially in the renewable energy sector where numerous local and international companies are entering the market Sri Lanka has implemented reforms aimed at fostering private investment and promoting competition. The Public Utilities Commission of Sri Lanka (PUCSL) plays a pivotal role in overseeing fair competition and effectively regulating the sector. 4 Reason for recent power disruptions in the country Sri Lanka has faced recent power disruptions, leading to public inconvenience and economic setbacks during 2022. Given the scarcity of foreign exchange, high inflation and rising energy cost in Sri Lanka, the ongoing military conflict between Ukraine and Russia aggravates the Sri Lankan economic crisis in 2022. According to the International Energy Agency, Russia is the largest oil exporter of natural gas fuels to the European economy and the US. However, because of the Ukraine crisis, Europe imposed trade sanctions on Russia which affected its fuel supply to the world. The Countries affected by the sanctions turned to the Middle East for supplies, the supply of which the Middle East now monopolise. Hence, the increase in fuel demands has resulted in a price increase. Due to the shortage in the foreign exchange the government could not purchase the fuel.That is the main reason for the power disruptions. Additionally the nationwide blackouts occurred, due to a transmission technical failure at the Kerawalapitiya Grid-Substation. Though the country is now accustomed to blackouts and routine power cuts, these are a reflection of the government's inability to install new plants and diversify out of hydro and fossil fuels. Adequate maintenance, financial stability, and efficient management are critical areas that need attention to mitigate future disruptions. Power disruptions have a direct impact on the economy, affecting businesses, productivity, and overall economic growth. Investors and businesses are likely to be cautious in an environment where power reliability is a concern. Views on upcoming key energy projects of the country In a move to accelerate the implementation of renewable energy projects and meet ambitious national climate targets, the Sri Lankan government has announced a new streamlined approval process in this month. Sri Lanka is actively investing in solar and wind energy projects to diversify its energy sources and reduce dependency on fossil fuels. Several solar and wind power plants are in the pipeline, promising a more sustainable and environmentally friendly energy future. The Bandaranaike International Airport (BIA), Sri Lanka’s main airport, has started a 100 kilowatt solar power pilot project on the roof of its passenger terminal building and by end 2024 hopes to inc rease renewable energy production to 10% of its total energy consumption. It has been expected 5 that 125 new projects will be commenced by the 2024 and 2,000 megawatts (MW) of electricity, generated through renewable energy sources, will be added to the national grid by 2024. 1,000 MW per annum need to be added to meet 70% renewable energy by 2030. The LNG power plants are a significant step towards cleaner energy generation. These projects are expected to enhance energy security and contribute to the reduction of greenhouse gas emissions. Potential economic and social impact of these developments Economic: The development of renewable energy projects is expected to have positive economic impacts. Job creation, technological advancements, and reduced dependence on imported fossil fuels can contribute to economic growth and sustainability. Social: Improved access to electricity and a cleaner environment can positively affect the quality of life for Sri Lankans. However, it is crucial to ensure that these benefits are distributed equitably across the population. Major concerns surrounding these projects • Environmental Concerns Even though renewable energy projects offer environmental benefits, they are not without challenges. Issues such as land use conflicts, wildlife impact, and waste management must be carefully addressed to ensure sustainable development. • 6 Financial Viability The financial viability of these projects, especially for private investors, is a significant concern. Government support through incentives, subsidies, or favorable financing terms can play a crucial role in attracting investment. Mechanisms that can be introduced to improve these developments • • • • • Encouraging the development of a diverse energy mix, including renewable sources such as solar, wind, hydro, and biomass, to reduce dependence on a single energy source and enhance energy security. Provide incentives and attract private and foreign investments for the development of renewable energy projects. This can include tax benefits, subsidies, and favorable regulatory frameworks. Implement energy efficiency programs in industries, transportation, and residential sectors to reduce overall energy consumption. Encouraging private sector participation through transparent policies, streamlined approval processes, and providing a conducive business environment can attract investment and foster healthy competition. Facilitating concessionary funding lines through collaboration with international financial institutions can alleviate financial burdens on both the government and private investors, making projects more economically viable The view of the recent developments in government reforms process for the energy sector. The Sri Lankan government has undertaken reforms to create an enabling environment for sustainable energy development. Policy measures such as tariff adjustments, grid modernization, and renewable energy targets demonstrate a commitment to the sector's growth. Continuous regulatory reforms promote healthy competition and a more investor-friendly environment. Examples of these reforms include transparent tariff fixing and enhanced licensing processes. The views on the growth potential for an entity looking to invest in the energy sector There is a growing trend towards renewable energy sources, driven by environmental concerns and government initiatives. Investing in wind, solar, hydro, and other renewable technologies could offer long-term growth potential. 7 Government policies and regulations play a crucial role in the energy sector. Incentives for renewable energy, carbon reduction targets, and other regulatory measures can significantly impact the growth of different energy sources. Economic trends and conditions can impact energy consumption and investment. A strong and growing economy generally correlates with increased energy demand. The energy sector is heavily influenced by geopolitical factors, including geopolitical tensions, sanctions, and global energy market dynamics. Political stability in key energy-producing regions is essential for long-term investment. Energy markets can be volatile due to factors such as geopolitical events, natural disasters, and fluctuations in commodity prices. Investors should be prepared for market uncertainties. Investors should be aware of potential risks such as regulatory uncertainties, political stability, and project execution challenges. Mitigation measures include thorough due diligence, engaging with local stakeholders, and seeking government support. Conclusion In summary, the advancements observed in Sri Lanka's energy sector signify a transition towards greater sustainability and resilience. Despite persistent challenges like power interruptions and environmental issues, the government's dedication to implementing reforms and the promising investment opportunities in the energy sector enhance its appeal for sustainable development. Striking a balance among economic, social, and environmental factors will be crucial for achieving a successful and inclusive energy transition in Sri Lanka. References https://www.sciencedirect.com/science/article/pii/S-X https://www.defence.lk/upload/doc/Dilmini_Abeyrathne_Energy_Crisis_Concerns.pdf https://www.lankabusinessonline.com/sri-lanka-streamlines-renewable-energy-project-approvalprocess/ https://economynext.com/solar-power-project-at-sri-lanka-airport-141276/ https://www.themorning.lk/articles/196450 8