Accelerating Investments in Renewable Energy in Sri Lanka - Drivers, Risks, and Opportunities

Overview

This report captures the findings of CEEW-CEF’s analysis of the drivers, risks, and opportunities associated with accelerating renewable energy (RE) investments in Sri Lanka. It highlights Sri Lanka’s energy transition and examines major challenges constraining RE investments in the country. Sri Lanka is an emerging economy with a per-capita electricity consumption that is considerably below the world average. However, the country is expected to undergo a rapid rise in energy consumption in the next few years. The report also offers recommendations informed by the energy transitions of other emerging economies to address the challenges. It is part of a series of similar assessments of India, Indonesia, and South Africa.

Generation costs of solar and wind compare favourably with those of fuel oil

Note: Generation costs for solar and wind refer to the latest competitive auction–determined tariffs and not to average values.

Source:The World Bank (2019), Ministry of Power and Renewable Energy Government of Sri Lanka (2017), CEEW-CEF market intelligence

Key findings and highlights

• Sri Lanka is striving to boost its energy security by reducing its reliance on imported fossil fuels (coal and fuel oil) for electricity generation. 
• The president’s National Policy Framework envisions growing the contribution of large hydro and renewables to 80 per cent of electricity generation by 2030.
• Three schemes currently support rooftop solar deployment in Sri Lanka:

- Net-metering scheme 

- Net-accounting scheme 

- Net-plus scheme 

• Renewables, especially solar and wind, are a means to reduce generation costs.
• Soon, an emerging daytime peak in demand for power is expected; solar energy has a generation profile that overlaps with this emerging demand profile and can cater to this shift.
• Large hydro accounts for the largest share of installed capacity and generation in Sri Lanka, thus it is susceptible to variation in rainfall.
•  An increase in RE deployment could lower Sri Lanka’s reliance on imported fuel-oil and thus help manage the country’s account deficit.

Competitive auctions facilitated sharp declines in Sri Lanka’s solar and wind tariffs

Sources: Public Utilities Commission of Sri Lanka (2010), Public Utilities Commission of Sri Lanka (2012), Ceylon Electricity Board (2016b), and Ministry of Power and Renewable Energy, Government of Sri Lanka (2017)

• Most of Sri Lanka’s present installed RE capacity has been developed by domestic equity investors supported by debt capital flows from domestic banks.
• Factors impacting the bankability of projects include:

- currency risk 

- off-taker risk 

- change in law risk 

- small project sizes

• Some challenges associated with long-term domestic debt financing are asset-liability mismatches and single borrower exposure limits
• Limited availability of land and delays in securing the permits to acquire property are barriers to setting up large utility-scale projects
• Supporting transmission infrastructure needs to be developed before capacity can be deployed. However, there have already been delays in developing this infrastructure.
• The applicable tariffs under the Net-accounting and Net-plus schemes are appealing for rooftop solar system owners, but the applicable tariffs are based on an outdated picture of rooftop solar PV economics.
• Current rooftop solar deployment in Sri Lanka follows the capital expenditure model, which has several drawbacks and places the burden of upfront capital expenditure on the consumer.

Key recommendations

Accelerating RE investments in Sri Lanka

• Create bankable contractual structures that reallocate risks currently borne by equity investors to actors better equipped to bear those risks.
• Mitigate land and transmission infrastructure risks
• Increase the size of projects, as RE parks allow the aggregation of lands to support larger project sizes
• Mitigate currency risk by adopting the Common Risk Mitigation Mechanism (CRMM)
• Announce a predictable tendering schedule
• Install distributed RE generation in the existing distribution network
• Rationalise the tariffs under the Net-accounting and Net-plus schemes
• Consider new modes of deployment to expand rooftop solar penetration beyond the limited set of customers, who can bear the upfront costs and access suitable roof spaces
• Establish domestic organisations that offer catalytic finance solutions for clean energy

Enabling clean-energy specific cooperation between India and Sri Lanka

• Consider new business models such as community solar, on-bill financing and solar partner models to increase the penetration of rooftop solar in both residential and non-residential segments
• Enable the interconnection of transmission grids in Sri Lanka and India