Rising cost of energy and Sri Lanka's dilemma

It was only a few months ago that the Ceylon Electricity Board (CEB) raised tariffs by a significant amount following the Government's increase in petrol and Liquid Petroleum Gas (LPG) that is used by many for cooking.

These indicate the financial stress borne by the people. In the capital intensive industrial sector, fuel is in demand to keep the wheels in motion. The transport sector comprising ships, aircraft, trains, buses, lorries and cars depend on the refined fuel to pursue their activities.

Two of the fastest growing economies - China and India have been increasing fuel consumption rapidly promoting higher prices which are causing issues to countries such as Sri Lanka.

Meanwhile, the CEB and the Ceylon Petroleum Corporation are losing billions of rupees mainly due to high cost of inputs. This is the current scenario of Sri Lanka's energy sector.

"While the commitment of the Government to improve the infrastructure base of the country is commendable, financially viable institutions, effective regulations, proper pricing and precise targets are essential to maintain sustainability of services provided.

In this context, the recent fuel price adjustments followed by electricity tariffs and transport fare adjustments are steps in the right direction".(Central Bank Annual Report 20111)

The other day at the monthly lecture series of the Centre for Banking studies, Secretary to the Ministry of Power and Energy, Dr R H S Samaratunga, gave a comprehensive view of the country's energy sector and the issues faced by the Government and the public.

Fuel costs are on the increase and the demand for fuel is rising. The refinery set up in 1969 cannot increase output without incurring significant capital expenditure.

It could process only Iranian light type crude, imported mostly from Iran and limited amounts from Saudi Arabia. Any other crude oil from other origins are yet not acceptable at the Sapugaskanda refinery.

What's clearly emerging now is modernising the refinery is an absolute necessity to cater to rising demand.

A decade ago, the larger part of fuel oil, the entirety of kerosene, approximately 40 percent of diesel and 66 percent of petrol were supplied by the refinery. Added to refinery capacity constraints another major blow is the new US sanction against Sri Lanka's key source of supply Iran, this situation is likely to worsen Sri Lanka's financial burden.

Meanwhile, the second phase of the Norochcholai power plant fuelled by coal power and the Uma Oya along with the Upper Kotmale is likely to enhance capacity.

The Coal power plant in Trincomalee is expected to join the National Grid by 2016.

Increasing demand with the growing economic conditions, poses a dilemma to the authorities.

According to Dr Samaratunga in view of the increasing challenges, the only way out is to evaluate necessities of incorporating new technology to the refinery process to circumvent issues of a similar nature in the future.

In the mid seventies, the then government took a bold step in reducing the Mahaweli project to five years from the originally planned 25 years and that delivered substantial economic benefits. That apart an interest free grant too was obtained from the former UK Prime Minister, Margaret Thatcher to build the Victoria dam.

Perhaps a move of that nature may be needed to enhance the depleted refinery.

The Government is also pursuing renewable energy sources and a solar energy project in Hambantota is timely action.

Given the potential benefits of importing crude and delivering refined petrol through an upgraded refinery could deliver significant economic benefits that could relieve the debt ridden CEB and CPC that are heavily dependent on tax payers contributions.

The Government is also pursuing oil exploration activities with the licensee Cairn India Limited that owns a block in the Mannar basin.