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    Sri Lanka Utilities Network Analysis


    December 1, 2021 - Fitch Solutions Sector Intelligence

     

      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Sri Lanka Utilities Network Analysis

      • 01 Dec 2021
      • Sri Lanka
      • Logistics Risk

      Key View: The power and telecoms sectors are the key attractions of Sri Lanka's utilities network. Energy prices are generally low, providing a boost to the logistics sector, as supply chains are reliant on the road network. In addition, broadband technologies are developing well and offer an attractive prospect for outsourcing. However, the supply of fuel, particularly crude, is vulnerable to shocks due to an over dependence on imports from one source, the UAE. Fuel price volatility and reliability risks are likely to reduce Sri Lanka's competitiveness as a location for energy-intensive industries. Although droughts have resulted in water shortages and blackouts, due to the country's reliance on hydropower for electricity generation, an increase water infrastructure will minimise these risks. Looking ahead, Sri Lanka is aiming to reduce its reliance on hydropower and is developing stronger gas-fired and renewable power capabilities, which will help to mitigate reliability risks. As a result, the country ranks in first position out of eight South Asian states and 43rd out of 201 states globally for the Utilities Network pillar, with a score of 61.9 out of 100.

      Low Energy Prices Tested By Reliability Issues
      South Asia - Utilities Network

      Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Logistics Risk Index

      Latest Utilities Network Analysis

      • Energy policy in Sri Lanka remains uncertain. The Ceylon Electricity Board (CEB) and Public Utilities Commission of Sri Lanka have sent out mixed messages regarding the country's power development plans, particularly when it comes to coal. Based on the latest draft of the Long Term Generation Expansion Plan 2020-2039, CEB has still proposed for 2.1GW of coal-fired plants and 2.7GW of gas-fired plants to be built. The draft is subject to cabinet approval.
      • Our Power team believe that smaller-scale and mini hydro facilities will be the main driver of hydropower expansion, as the potential for any large-scale hydropower projects have been almost fully exploited at present. The only large-scale hydropower plant left in the pipeline is the 120MW Uma Oya project, which we expect to come online in 2021. As such, we expect Sri Lanka to see a net hydropower capacity increase of approximately 258MW from end 2020 to 2030, which will account for approximately 37% of the total power mix. .
      • 5G will unlikely make an impact in Sri Lanka in the medium term and even toward the long term, given that 4G networks are still at their infancy, and the market still remains extremely price conscious and have yet to show much appetite for higher-value, premium services. By the end of 2030, 5G connections are only expected to constitute close to 51% of the market, with the remaining subscribers utilising 4G services. Under 2% of the market is forecast to be comprised of 2G users at the end of 2030. As such, business prospects for in high-tech sectors requiring fast internet speeds will remain slim over the medium-to-long term.
      Utilities Costs And Availability

      The poor reliability of Sri Lanka's utilities sector is a key risk for investors, leading to the disruption of business activities and heightened costs. Nevertheless, these costs are mitigated by the relatively low cost of fuel (especially as the country's supply chains are so reliant on road freight), electricity and broadband internet tariffs. Sri Lanka's power generation mix will undergo a significant shift over the coming decade, as the government continues to focus on reducing the country's reliance on hydropower. While once coal was the feedstock of choice, growing environmental opposition has seen an increasing emphasis on gas-fired power and renewable energy development. As new infrastructure capacity enhancements slowly come online, we can expect utility costs to remain competitive regionally. Sri Lanka therefore scores 68.4 out of 100 for Cost of Utilities, ranking it second out of eight countries in South Asia and 33rd globally.

      Businesses in the IT and services sectors will benefit from the good level of internet connectivity available in Sri Lanka. The country's ambitions to establish itself as a business process outsourcing (BPO) hub will be aided by its good connectivity and improving availability of broadband connections compared with other states in the region. Sri Lanka also aims to establish itself as a regional manufacturing hub, but this is hindered by the poor supply of water to the industrial sector, with the country's large agricultural sector dominating water consumption. Shortages have also hit the water sector in recent years, resulting in disruption to agricultural and industrial production. As Sri Lanka experiences droughts annually, the country has had to increase its thermal generation to cover the shortfall in hydropower generation, but blackouts and transmission and distribution losses remain. Due to these factors, Sri Lanka scores 55.3 out of 100 for Availability of Utilities, ranking second regionally and 74th globally.

      Electricity

      Demand for electricity is expected to increase over the next decade, underpinned by Sri Lanka’s expanding economy and growth in the manufacturing sector. The role of thermal power generation in Sri Lanka's electricity mix will increase over the next 10 years. While the uncertain policy environment will deter some investors, it is expected that a handful of gas power projects will be built over the next decade, as government and local opposition to coal increases.

      Sri Lanka - Electricity Risks
      Source
      Energy mix (2020 forecasts): hydropower (34.4%), coal (35.2%), oil (25.8%), non-hydropower renewables (4.6%)
      • Electricity generation in Sri Lanka is dominated by hydropower and coal, which generate the majority of energy used.
      • Growth in power generation is expected to be driven by a rise in gas-fired power and a stronger output from non-hydro renewables.
      • The share of gas in the power mix is expected to rise to nearly 20% by 2029.
      Availability
      100% of the population has access to electricity
      • Access to electricity in Sri Lanka is the highest in the region, out of the five states for which data was available.
      • Sri Lanka has achieved around 99% electrification, a significant milestone, particularly when compared to other economies in South Asia, such as India (82%) and Nepal (77%).
      • Electricity is evenly distributed throughout Sri Lanka, with equal electrification rates in both rural and urban locations, allowing businesses flexibility regarding location in terms of power access.
      Reliability
      7.8% of total output is lost through transmission and distribution losses. 4.1 power outages a month, on average. 3.0% of sales value lost due to power outages.
      • Sri Lanka's reliance on hydropower exposes consumers to outage risks, as droughts during the dry season can affect electricity supply, as was the case in 2017, which saw the country's worst drought in 40 years.
      • The electricity transmission network consists principally of 132kV facilities, with a 220kV backbone connecting major inland hydroelectric generation to the capital region. Thanks partly to the projected rise in net generation, growth of which slightly exceeds the underlying demand trend, Sri Lanka is capable of developing a modest power supply surplus over the longer term.
      • A gradual decline in the percentage of transmission and distribution losses will help strengthen the market.
      Cost
      USD0.07 per kilowatt hour (KWh)
      • Electricity in Sri Lanka is cheap relative to the country's regional competitors, increasing its appeal as a destination for energy-intensive industries. The cost of electricity is USD0.07/KWh, comparing favourably to the regional average of USD0.10/KWh.
      • Electricity costs are cheaper than in Bangladesh, India and Pakistan, which are Sri Lanka's main competitors for investment, especially in the power-hungry manufacturing sector, giving the country an advantage over these regional peers as an investment destination.
      • The Public Utility Commission announced that it would begin to revise electricity tariffs every six months starting in April 2017, allowing producers to charge rates in line with market developments.
      Other risks
      • Social frictions will persist between communities on opposing sides of the former conflict and remain a threat, with the potential to cause utilities disruptions.
      Planned projects
      • Overview: Gas and non-hydro renewables will support Sri Lanka's power sector expansion efforts over the next decade, as the country diversifies away from drought-prone hydropower generation.
      • Solar power: Sri Lanka is expected to develop 28 small solar power projects in its north-central and eastern regions over 2020-2021. The proposal was approved by the Cabinet of Ministers in March 2019. The tariff for power generated from these projects has been set at LKR12.84-15.93 (~USD0.072-0.089) per kWh. The power plants, each with a capacity of one megawatt, will be built in Anuradhapura, Vavunathiva, Mahawa, Pannala and Valachchena.
      • Hydropower: The Broadlands Hydropower plant by the Kelani River in Sabaragamuwa is under construction and slated for completion in 2021. In April 2020 the USD82mn project was reported to be 70% complete.
      Source: International Energy Agency, National sources, Fitch Solutions
      Low Electricity Prices Beneficial To Manufacturing Businesses
      South Asia - Electricity Costs, USD per KWh (2018)

      Source: National sources, Fitch Solutions

      Fuel

      Sri Lanka does not produce oil domestically and is entirely reliant on imports to meet its oil needs. The country imports both crude and refined oil products from the UAE, Singapore and India, among others. That said, Sri Lanka has been trying to diversify its power generation mix away from expensive oil-fired power generation, focusing instead on liquified natural gas.

      Sri Lanka - Fuel Risks
      Source
      No domestic reserves - imports
      • Sri Lanka does not produce oil domestically and is therefore entirely reliant on imports to meet its oil needs.
      • It imports both crude and refined oil products from the UAE, Singapore and India.
      • Sri Lanka is trying to diversify away from expensive oil-fired generation and instead focus on liquid natural gas.
      Availability
      Refined petroleum net exports: -76,880b/d
      • Sri Lanka has only one oil refinery, Ceylon Petroleum Corp's Sapugaskanda in Colombo, which refines around 30% of the total fuel consumed domestically.
      • The country plans to upgrade the refinery and double its capacity, which will boost output and reduce the need to import refined fuels.
      Reliability
      • The supply of petroleum products comes from a fairly diverse set of sources; however, Sri Lanka imports all of its crude from the UAE, which raises risks of supply shocks should supply from that country be disrupted in any way.
      • This affects the security of supply and availability of fuel domestically, presenting risks for the continuity of business operations.
      Cost
      USD0.58 per diesel litre
      • Sri Lanka's fuel price, currently USD0.58 per diesel litre, is the lowest figure regionally.
      • The low price can be explained by previous government-issued fuel subsidies, but prices may rise in the wake of energy subsidies reform.
      Other risks
      • Social frictions will persist between communities on opposing sides of the former conflict and will remain a threat, with the potential to cause utilities disruptions.
      Planned projects
      • Overview: Investments in Sri Lanka's ports, with a goal of turning the island nation into a shipping hub along the Belt and Road, will spur interest among both Chinese and non-Chinese companies in developing energy facilities such as refineries and LNG terminals.
      • Refinery plant: Construction of the Hambantota refinery plant began in July 2019 and is slated for completion in 2023. With an estimated capacity of 200,000 barrels per day, the plant is expected to service both domestic and international markets with refined fuel. Hambantota lies just 20km from key shipping corridors between Europe, the Middle East and Asia that carry, among other goods, nearly 65% of the global oil trade.
      Source: EIA, Fitch Solutions
      Low Fuel Costs A Boon For Road-Based Supply Chains
      South Asia - Cost Of Fuel, USD per diesel litre

      Source: National sources, Fitch Solutions

      Telecommunications

      Sri Lanka offers high internet penetration by regional standards, with an estimated 35 broadband subscribers per 100 inhabitants, the highest penetration rate out of all South Asian states. Vitally, it offers stronger internet penetration rates compared to its major regional competitors, India and

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