ECONOMYNEXT – Sri Lanka is planning to overhaul the country’s electricity pricing methodology regulatory officials said where a ‘clawback’ clause had undermined cost-reflective tariff and made it impossible to project prices within a reasonable range for businesses.
Sri Lanka’s regulator cut electricity prices by 20 percent in January, falling foul of an International Monetary Fund requirement to match costs with prices as part of efforts prevent a second sovereign default.
The upcoming IMF review cannot be completed unless the CEB stops losses.
This week the regulator raised tariffs by 15 percent, reversing part of the 20 percent cut. Businesses find it impossible to predict costs, especially with such wild fluctuations which are not found in other countries.
Despite recent exchange rate stability provided by the central bank (depreciating the rupee has been the key reason for utility losses and unravelling of public finances in the past) Sri Lanka’s electricity prices are still extremely volatile.
Better Mechanism
PUCSL officials said they also agreed that prices should not fluctuate widely as had happed recently.
“We know how fluctuating prices can damage businesses,” PUCSL Chief P L Chandralal told reporters.
“We also want to bring stability in pricing to our tariff mechanism in the future. It will take some time. Now we have started a discussion. We want to have a better mechanism.”
The regulator was also looking and reducing discriminatory pricing between different types of businesses.
Similar pricing chaos was seen 2024. Under the mechanism the regulator cuts prices requested by the utility by large margins and is forced to raise the again when it runs losses.
Though other countries also have quarterly or half yearly pricing including Singapore and Vietnam there are no chaotic reductions and increases like in Sri Lanka.
Continuing the same price or small changes do not require regulatory approval or protracted public consultations in better managed countries.
EVN, Vietnam’s power utility in May raised prices by 4.8 percent, as the currency weakened, under the rule of allowing changes up to 5 percent without higher approval.
Clawback and Crisis Chaos
A key problem is the pricing methodology which requires the regulator to ‘clawback’ past profits, which tend to go up due in part due to better rainfall which increases generation from legacy large hydro plants owned by the power utility which are fully depreciated.
Excessive profits from rainfall can be used to reduce loans taken to cover losses (not for asset acquisition) which will then reduce interest costs and the benefit will come to the profit and loss account over the longer term.
After short term loans are repaid, there will be actual cash in banks which will bring interest to increase profits and reduce overall costs.
The cash be distributed or carried forward in a reserve to be used against low rainfall in the immediate half year, if the regulator insists that there should be no profits for the CEB.
Director General Damitha Kumarasinghe said part of the current problem stemmed from the turbulent pricing during the economic crisis.
Sri Lanka’s rupee collapsed from 180 to 360 to the US dollar in 2022, after the central bank printed money to push up the cost of living (inflation target) and growth (potential output), on top of earlier collapses from 131 to 184 from 2015 to 2020 following rate cuts in 2015 and 2018.
In 2023 the rupee was allowed to appreciate from 360 to 300 amid deflationary policy, bringing down costs of all businesses across the board in the country, in addition falling coal prices from US monetary tightening to the CEB.
Before the crisis, electricity prices were last raised when the rupee collapsed from 113 to 130 in 2012 following rate cuts from 2011. Prices were hiked under an IMF program, reversing some of the cuts made after coal plants were commissioned.
IMF Program
In 2025 the regulator cut prices under the problematic methodology, even as the CEB sought to keep tariffs unchanged with another IMF program being in place.
In the last tariff decision in January, which led to chaotic pricing which had to be reversed, the CEB projected revenues of 229 billion rupees, and asked to maintain tariffs.
The regulator claimed revenues would be 242 billion rupees, which was higher, but not very.
The CEB said costs would be 268 billion rupees and the regulator 249 billion rupees.
The regulator also wanted to claw back earlier profits of 51 billion rupees, and ordered a 20 percent cut.
The IMF immediately said tariff were not cost reflective and a revision would be needed, which turned out to be correct. The IMF stance shows that it is possible to forecast costs and revenues within a reasonable level of uncertainty.
Published accounts for the first three months of the CEB showed revenues were only 93.9 billion rupees and direct costs were 112 billion rupees before admin costs and interest. Usually the first quarter has some of the driest weather.
IMF said it cannot pass the next review of Sri Lanka bailout, unless prices matched costs. The failure to raise energy prices had contributed to economic crises in the past dating back to the 2001.
In June revision allowed revenue and allowed costs of around 28 rupees a unit match, according to PUCSL officials which in theory should make tariffs cost reflective.
However, agencies that fund the CEB including Asian Development Bank wants strong finances at the utility to give funds to strengthen the grid to accommodate renewable power.
Sri Lanka will have to spend billions of dollars to build ‘smart grid’ and also set up batteries, pump storage units, to carry daytime energy to the night and flywheels or other technology to improve inertia.
Commercial borrowings for investments – especially if distribution is not privatized – will also be difficult without profits.
In the June tariff decision allowed costs were 279.2 billion rupees, but allowed revenues was only 267 billion rupees, on the basis that there was an 11.8 billion rupee excess on the bulk supply tariff account, despite recent losses.
Though depreciation is allowed – which in theory should pay for capital costs financed by loans – the break-even doctrine dooms the CEB into financing all capital expenditure purely by loans.
If a firm is expected to run at only break-even levels, its entire capital expenditure has to be 100 percent financed by loans, in a country with a bad credit rating, without any internally generated equity to reduce leverage.
In Sri Lanka even leasing companies are not allowed by the central bank to 100 percent credit to customers to buy a vehicle. (Colombo/June12/2025)
