I have been following World Bank Group’s Massive Open Online Course (MOOC) “Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs)” and have been challenged to draw up a finance and investment strategy for a developing economy of my choosing. With the election season (presidential election in 2019 and parliamentary elections in 2020) drawing closer, I felt that I could focus on Sri Lanka and particularly on its development challenge in meeting its intended Nationally Determined Contribution of reducing GHG emissions in the energy sector by 20% against the Business As Usual scenario and recommend an investment strategy from the point of view of a Government Official. I hope this article will spur further discussion on the options and avenues available for the country in financing the desired transition on the energy profile and serve to inform decision makers on the best course of action.
Sri Lanka has made major strides in its development journey with 100% of the population having access to electricity by the end of 2016 and approximately 83% of all adults having a bank account, with 18.6 bank branches for each 100,000 people in the population as at March 2018. These growth statistics could be taken to mean that the country is managing its energy and financial sectors well, however, a closer look will reveal that behind these respectable numbers are structural weaknesses in domestic resource mobilization and national financing strategy, which impede private sector investment in energy infrastructure and cause inefficiency in the system leading to higher costs for tax payers and higher energy cost for industry (posing a challenge to national competitiveness).
Ceylon Electricity Board (CEB), a state-owned enterprise, controls all major functions of electricity generation, transmission, distribution and retailing in Sri Lanka. In attempting to make energy affordable for low-income households, a differentiated tariff regime is in place where the rates for low-energy consuming households are subsidized and some of this subsidy is recovered though higher rates to high-energy consuming households. Whilst subsidized electricity has helped to provide a better quality of life and led to positive externalities, the losses to the Government from this subsidization and reliance on expensive power generation has had to be met through increased taxation (with proportion of indirect taxes being approximately 80%). Therefore, even though low-income households spend less, directly for electricity, as a result of high proportion of indirect taxes, they are footing the heavy losses of the State Owned Utilities (eg: CEB reporting a LKR 23bn loss in Q1 2019).
This distortion in pricing of electricity and the extent of national grid coverage is also limiting renewable energy uptake and possibility of community-based micro-grid systems. In Kenya, with the coverage of the national grid being limited and with mobile money having a rapid uptake, off-grid solutions such as M-Kopa that employs “pay-as-you-go” solar model has seen great success. Similar off-grid solutions are also gathering great momentum in India, with the cost of renewable energy generation becoming cheaper than traditional fossil fuel sources. In Sri Lanka, with over 70% of the population having a mobile connection as at 2017 and with mobile money services such as Frimi and Genie available, “pay-as-you-go” rooftop solar investments are not attractive to many in the bottom of the pyramid because electricity is subsidized.
For high-energy consuming households in Sri Lanka, however, rooftop solar is attractive proposition with payback being between 5 to 8 years. As a result, there is high conversion to solar in this segment (177 MegaWatts (MW) of rooftop solar installed as at April 2019) . This would be a positive development in the country’s ambition on climate action, however, it does not bode well for the CEB, the utility provider, for whom this would mean a loss of revenue, because it is losing the client segment that is paying high tariffs. This would exacerbate the losses further and affect Government’s debt sustainability.
If renewables could provide consistent power, this solar rooftop adoption would not have been an issue. However, with the renewable energy generated being intermittent and with peak demand occurring at night time, CEB, the utility provider, has had to rely on large hydro and thermal power plants to provide the base-load. It also has to pay for peaker plants operated by Independent Power Producers and even buy expensive emergency power, when installed capacity falls short to provide the peak energy demand. The high energy consumers who have taken up rooftop solar systems park the excess power they generate during day to the grid and draw power from grid at night. Therefore, Government has to still incur the costs of maintaining the base-load and buy peak hour supply for night time energy demand.
Therefore, the need of the hour in scaling up renewable energy uptake is to invest in energy storage systems, where the excess energy generated during day can be made use of at night and in bad weather conditions. The Government has identified pumped storage hydropower plant (3 x 200MW in Maha Oya) to come online by 2028 and 125Mw of Battery Capacity Facilities to be set up where timelines have not yet been declared to address this issue. It has also planned for new investments in 1800Mw of solar , 850Mw of wind, 200Mw of Biomass, and 100Mw of Waste to Energy (6 plants).
The investment size for the pumped storage hydropower project is expected to be USD 621mn (USD 1,063/Kw). Delaying the set-up of pumped storage to 2028 will significantly affect amount of renewable energy that could be grid connected and renewable investments that could be scaled up. Government currently plans to invest in 4 new coal power plants due to issues in debt sustainability and grid reliability (noting that coal power is cheaper option and stabilizes the grid), however, if energy storage solutions are integrated to the grid making renewable energy investments feasible and if the inefficient subsidies are gradually replaced by alternate incentives facilitating self sustaining community micro-grids (loan schemes, roof rental for solar companies in working with low-income households, and making P2P energy trading possible through electricity auctions on micro-grids), Government will be able to ensure clean energy supply without having to spend public money on coal power plants, by crowding in private investment. This author came across a proof of concept developed by a group of students from University of Jaffna in having a mobile app for P2P energy trading in Sri Lanka during Sri Lanka’s first fintech hackathon. However, current regulatory set-up does not allow for such electricity trading within community micro-grids as sale of electricity is controlled. Therefore, a serious review on incentives for public engagement in support of the renewable energy drive needs to be undertaken and the enabling environment created.
With regards to funding the energy storage solutions and renewable energy investments (over USD 56 billion is needed between 2017 – 2050 to meet 100% renewable energy generation by Sri Lanka power sector), Government need not be restricted to public finance in financing these large investments. It could and it should crowd in private investment for these sustainable energy infrastructure, rather than place extra burden on the tax payer. It could resort to financing internationally, as the Cost of Funds in Sri Lanka is high. Sri Lanka is yet to issue a Green or Sustainable Bond. As in Fiji, the Government can raise a sovereign green bond or work with Sri Lanka Banks’ Association’s Sustainable Banking Initiative to get local banks to lead on issuing Green Bonds and working with MDBs such as IFC, FMO, etc to support this process. Additionally, Government could tap directly and through partnerships vertical funds such as Global Environmental Facility and Green Climate Fund, where there is additionality and market is not ready to accept the risk return profile of the investments. Recently launched Central Bank of Sri Lanka led Roadmap for Sustainable Finance in Sri Lanka identifies the need to build capacity and integrate financial sector to support the real economy through new solutions such as Green Bonds and there is interest by banks to engage in blended financing. Government should fast track the implementation of this roadmap on sustainable finance and I recommend that the Government work with IFC and Sri Lanka Banks’ Association’s Sustainable Banking Initiative to launch Sri Lanka’s first Green Bond to immediately fund the Pumped Storage (also referred to as Pumped Hydro Energy Storage [PHES] or Pump Water Storage Power Plants [PWSPP]) and Battery Solutions and relevant upgrades to the national grid to transition to a smart grid. London Stock Exchange Group has also expressed support to Sri Lanka and Colombo Stock Exchange. Therefore, these support networks must be leveraged.
Government has been successful in soliciting concessional finance from China, Japan and India for energy infrastructure (government to government loans and grants). Beyond this, the Government could also encourage FDI and public-private partnership for investments. Support from MIGA could be elicited to give international investors the confidence to infuse capital to the country.
In conclusion, Government would need to implement concerted effort to on the one side improve domestic resource mobilization and on the other hand, expand its sources of sustainable finance in the energy sector. Like the energy profile, the country also needs to diversify its investment streams and not excessively rely on Government funding for green energy infrastructure. An investment opportunity of over USD 56 billion exists and a healthy mix of international, domestic, public and private and debt and equity investment streams need to be explored. A first step in this journey could be a 10 year US$800mn syndicated green bond using SLBA Sustainable Banking Initiative platform, where use of proceeds will be for renewable energy storage solutions.