VZCZCXRO8067
RR RUEHBI RUEHLMC
DE RUEHLM #0638/01 1841136
ZNR UUUUU ZZH
R 021136Z JUL 08
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 8356
INFO RUEHKA/AMEMBASSY DHAKA 0979
RUEHIL/AMEMBASSY ISLAMABAD 7968
RUEHKT/AMEMBASSY KATHMANDU 6140
RUEHNE/AMEMBASSY NEW DELHI 2138
RUEHKP/AMCONSUL KARACHI 2363
RUEHCG/AMCONSUL CHENNAI 8574
RUEHBI/AMCONSUL MUMBAI 6019
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 03 COLOMBO 000638 
 
 
SIPDIS 
 
STATE FOR SCA/INS, SCA/RA, AND EEB/ESC 
 
E.O 12958: N/A 
TAGS: ECON ENRG EINV KCOR KMCA PGOV CE
SUBJECT: SRI LANKA: POWER SECTOR BADLY NEEDS REFORM, 
BUT GOVERNMENT LACKS THE WILL 
 
¶1. Summary:  The state owned Ceylon Electricity Board (CEB) is the 
primary provider of electricity to Sri Lanka.  The company is 
plagued with inefficiencies and a spiraling debt.  Sri Lanka is 
dependent on petroleum products to produce 60 percent of its 
electricity.  The price of production is sky rocketing as the price 
of crude oil has surpassed US $140 per barrel.  Despite having some 
of the highest prices of energy in the region, CEB continues to sell 
electricity below cost.  CEB needs to diversify into less expensive 
sources of electricity to meet rising demand and bring down costs. 
The most promising options are coal and wind power along with an 
underwater transmission line that would allow India and Sri Lanka to 
share electricity.  Although there is a general acceptance of need 
for change, powerful trade unions have prevented reform legislation 
from passing parliament.  End summary. 
 
ELECTRICITY GENERATION 
----------------------- 
 
¶2. Sri Lanka has only two utilities in the power sector, the state 
owned Ceylon Electricity Board (CEB) and the primarily state owned 
Lanka Electric Company (LECO).  CEB serves approximately 90 percent 
of all consumer accounts and LECO the remaining 10 percent.  All of 
LECO's consumers are located in the western coastal townships 
between Negombo and Galle. 
 
¶3. In 2007, total installed power generation capacity was 2,443 MW. 
The two primary sources of electricity generation are thermal and 
hydro.  Thermal made up 60 percent and hydro 40 percent of 
electricity generated.  Most thermal electricity is produced by 
Independent Power Producers (IPPs) and sold to CEB, at unfavorable 
rates for the state owned enterprise, before being distributed to 
consumers.  Thermal power is dependent on diesel and is one of the 
most expensive and inefficient ways to produce electricity.  Costs 
are increasing rapidly as the price of fuel continues to rise. 
Thirty percent of all imported fuel is used to generate electricity. 
 While hydro power is generally more efficient than thermal power, 
it is limited by severe droughts.  Sri Lanka has already developed 
almost all of its economically feasible hydropower potential.  There 
are other sources of electricity, such as wind and solar power; 
however, currently their contributions are only marginal to the 
nation's power supply. 
 
GROWING DEMAND 
--------------- 
¶4. National electrification has improved drastically within the last 
two decades.  In 1986 merely 10.9 percent of the population had 
access to electric grid; by 2005, 76.7 percent had access.  The 
current level is significantly higher than other South Asian 
countries.  The government has found it difficult to provide 
electricity to many of the more remote and poorer villages.  In 
2002, the Eastern province Monaragala had one of the highest poverty 
rates at 32.4 percent and only 32.2 percent of households had 
electricity.  The government also struggles to provide electricity 
to the northern region, which is largely controlled by the ethnic 
separatist Liberation Tigers of Tamil Eelam (LTTE).  CEB continues 
to provide electricity to government-controlled Jaffna and the 
surrounding area using electricity not connected to the national 
grid, despite costs far outweighing revenue.  While the current 
government has a stated goal to provide electricity to all who want 
it, CEB has set a target to provide electricity for 95 percent of 
all households by 2016. 
 
¶5. Demand for electricity grew by an average of 6.7 percent from 
1991-2000, slightly above the rate of GDP growth during the same 
period.  Recently, demand for electricity decelerated because of 
increasing cost for tariffs. However, as the market adjusts to the 
new costs for energy demand is likely to return to a 7-8 percent 
growth rate.  It is questionable whether CEB will be able to meet 
this demand.  CEB has warned the public to cut unnecessary use of 
electricity and that the failure to reduce power consumption by at 
least 10 percent by July 2008 could cause disruptions of service. 
 
NEW SOURCES OF PRODUCTION 
-------------------------- 
 
¶6. Sri Lanka must look to new sources of energy to meet growing 
demand.  Sri Lanka is counting on coal both to increase electricity 
production and to reduce costs.  The first coal power plant is 
currently under constructio in Norochcholai, funded by a Chinese 
government oan and built by a Chinese firm.  The initial $450 
 
COLOMBO 00000638  002 OF 003 
 
 
million project is scheduled to add 300 MW to the national grid in 
2011; the plan is to later expand this plant so it eventually 
generates 900 MW of power.  Another coal power plant of 500 MW in 
Trincomalee that will be jointly owned by Indian and Sri Lankan 
firms is planned for 2013. 
 
¶7. The Government of Sri Lanka (GSL) is relying on the private 
sector and development agencies to develop alternative sources of 
energy.  Currently wind power is the only significant source of 
alternative energy, besides hydro, but only produces 3 MW of 
electricity annually.  The government has issued 40 more permits for 
wind power projects that could potentially add 34 MW to the national 
grid; however, almost all of these projects have been delayed for 
lack of funding.  The World Bank and other international 
organizations have funded projects that use wind, solar and hydro 
power off the national grid to provide electricity to areas where it 
was previously unavailable.  Micro hydro plants are particularly 
well suited for Sri Lanka and are able to provide electricity to 
rural communities at affordable costs.  In 2007 there were 5,869 
households that received energy off the grid from a cumulative 
capacity 1,432 kW. 
 
SRI LANKA-INDIA TRANSMISSION LINE 
---------------------------------- 
 
¶8. India and Sri Lanka are exploring the possibility of an undersea 
power transmission line between the two countries, as an alternative 
way for Sri Lanka to meet its energy demand.  Such a link would 
enable Indian producers to sell their excess power to Sri Lanka at 
higher rates than in India.  The link would also potentially enable 
Sri Lanka to sell power to India to meet the latter's peak demand 
periods.  India has sent a draft proposal to the GSL for the two 
sides to split the cost of a $3 million feasibility study on an 
underwater transmission line.  The GSL hopes to sign the proposal by 
August.  If the feasibility study goes well, the World Bank's 
International Development Agency has shown interest in funding the 
project. 
 
EXPENSIVE TARIFFS 
------------------ 
 
¶9. The GSL restricts how much CEB is allowed to charge and how often 
prices can be adjusted.  In the past, CEB had been unable to 
increase tariffs to offset rising capital and operational costs.  In 
2007, the average tariff was RS 10.56 per kWh (approximately $0.10 
per kWh), while the average cost to CEB was RS 14.79 per kWh.  In 
order to curb further losses and to better reflect costs, in March 
of 2008 CEB increased prices by 40 percent.  Despite the significant 
price hike, CEB is still losing an approximate average of RS 1.5 per 
kWh produced. 
 
¶10. There is a complex system for determining tariffs.  Prices for 
consumers are determined by the amount of energy used and are 
assessed both by fixed and per unit charges.  There are separate 
price categories for different types of consumers.  Generally prices 
are cheaper for domestic consumers and religious purposes and more 
expensive for businesses. 
 
¶11. Despite tariffs in Sri Lanka not keeping up with costs, 
commercial and industrial tariffs were among the highest in South 
Asia in 2007.  The price hike of March 2008 made tariffs even less 
competitive in comparison to other countries in the region. 
Observers worry high prices for electricity will deter investors, 
causing firms to look to other locations with more attractive 
rates. 
 
DETERIORATING FINANCIAL SITUATION 
---------------------------------- 
¶12. CEB is in a financial crisis.  In 2007 its operating losses 
equaled RS 21 billion ($195 million).  It had a total short term 
debt of RS 55 billion ($510 million) and a long term debt of RS 89 
billion ($825 million) by end of 2007.  CEB does not have a plan to 
reduce its debt in the foreseeable future and, as it is still losing 
money, its debt will only increase.  Since CEB is a state owned 
enterprise, taxpayers will absorb the burden of this debt.  The 
incentive for administrators to increase efficiency and ensure that 
CEB is solvent is diminished by the belief that the state and in 
turn the public will answer for their liabilities. 
 
POWERFUL TRADE UNIONS PREVENT REFORM 
 
COLOMBO 00000638  003 OF 003 
 
 
------------------------------------- 
 
¶13. Powerful trade unions have blocked reforms that would improve 
the efficiency of CEB.  Recently, the government attempted on two 
occasions to bring a bill to parliament that would break CEB into 
different sectors.  Each time Marxist party-led unions, consisting 
of minor CEB staff, threatened to strike, forcing the bill to be 
tabled.  The Asian Development Bank has offered a loan for power 
sector reform, but it is contingent on passage of this bill. 
 
¶14. Ceylon Electricity Board Engineer's Union (CEBEU) is the most 
powerful union in CEB; it is the only union that could unilaterally 
create mass blackouts.  The CEBEU has suggested some modifications 
to the proposed electricity bill, but does not have serious issues 
with it. 
 
¶15. Despite the opposition's concern, it is unlikely that CEB will 
be privatized under the current administration.  President Mahinda 
Rajapaksa promised on numerous occasions not to privatize CEB and 
that any reforms will need to be approved by all stake holders, 
including the unions. 
 
COMMENT 
-------- 
 
¶16. The government needs to take bold action to ensure that 
production levels meet demand that is projected to grow by 7-8 
percent in the coming years.  The coal plant currently being built 
in Norochcholai and talks of a joint power transmission line are 
positive steps.  Dependence on thermal power that uses fossil fuels 
must be reduced, in order to stem rising costs.  In March 2008 the 
government increased electricity tariffs by 40 percent to better 
reflect the cost of production.  While that was a positive sign that 
CEB is trying to stem its losses, the increased tariffs have added 
to what already were some of the highest prices for electricity in 
the region.  This is likely to have a detrimental impact on 
investment and further inflation pressure.  CEB needs to be 
restructured in order to increase efficiency and the reform bill 
currently being debated in parliament would be a good start.  The 
GSL has always had difficulty imposing reform against the wishes of 
intransigent unions, but now the primary obstacle to reform is the 
government itself, with its preference for large state run 
enterprises, however inefficient and unprofitable.