Friday, March 13, 2020

Mini-hydro projects to gain immensely from the new fixed tariff


Mini-hydro developer profitability in Sri Lanka will increase amid environmental risks due to a new tariff structure that approved in January, a rating agency ICRA Lanka said. Power and energy minister Mahinda Amaraweera had called for the implementation of a fixed rate for renewable energy supply in January 2020.

Until 2008, the State-owned power provider and regulator, the Ceylon Electricity Board (CEB), had signed Power Purchase Agreements (PPAs) on the avoided cost principle, charging the CEB's equal unit generation cost to private producers.
Nevertheless, this system seen as disadvantageous to the state as the CEB had significant inefficiencies, ICRA said. A three-tier tariff system was implemented in 2008 but was reformed once again with the implementation of competitive bidding in 2016.
Mini-hydros initially considered to be exempt from bidding because of the difficulty of power plant building, but that decision not finalised, ICRA said. Moreover, ICRA said the extension of PPAs at a fixed rate effective from January 2019 would improve profitability.
Most of the avoided costs had expired from 15-20 years of PPAs signed before 2008, generating power at a nominal rate, but extending the new rates back to January 2019 would boost profits, ICRA said. CEB had proposed an earlier review of the PPAs, but the move postponed.
Mini-hydro plants produce about 6-8 per cent of energy from Sri Lanka. Profits, however, fluctuate because of environmental threats. Mini-hydro companies had a favourable fourth quarter due to rain in 2019, but given the uncertainty in the country's weather conditions, the ability to operate power plants at an optimal level reduced, ICRA said.
With the revival of economic growth, the rating agency also said power demand would grow by 5-6 per cent over the next two years, increasing demand for private power producers. Furthermore, for the few remaining old-style costs avoided PPAs, income will grow for the next two years due to rising costs of thermal power generation at the back of tensions between the US and Iran, ICRA said.
The positive developments for mini-hydro developers, however, are being shadowed by overdue CEB payments, ICRA said. According to the Minister, CEB made 85 billion loss rupees for 2019 and expected to face more losses of 120 billion rupees by 2020. Sri Lanka obtained high thermal power on an emergency basis since the state had not commissioned new power plants since 2014.
OSL Take: The development program carried out by the government of Sri Lanka, covering all critical economic sectors islandwide, has resulted in the expansion of business/investment opportunities in the country. However, the most significant number of business/investment opportunities have come forward in Sri Lanka’s power and energy sector.
Opportunities in the power industry include wind and solar power plants, LNG power plants, auto-diesel power plants (liquid natural gas) plants, mini-hydropower plants, domestic solar systems, wind power, and power wires.
 VBS/AT/20200313/Z_TB2


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