ICRA Lanka rating agency views recent developments in the local hydro power sector to be credit positive.
“We based our assessment on three factors, (1) availability of sufficient water flows (run off river flow) due to favorable weather conditions that prevailed last year, (2) the Ceylon Electricity Board’s (CEB’s) decision to renew Power Purchase Agreements (PPAs) with hydro power producers with expired contracts, and (3) likely increase in Avoided Cost tariff structure due to volatility in oil prices.
“However, ICRA Lanka has noticed that the power producers have recently experienced a longer payment cycle from the CEB and therefore, this remain as a concern”.
The Power sector is a critical sector in the economy and it was worth over Rs. 291 billion in 2018 and one third of the electricity generation was consumed by the industrial sector.
“Going forward, with the revival of economic activities, we expect the demand for power to grow by 5 - 6% over the next two years, thereby aiding private power producers to benefit from the surging demand.”
The Hydro power segment, (including the major hydropower plants) in the country, is the second largest contributor to the total installed power generation capacity in Sri Lanka (43% in 2018). Privately owned mini-hydro plants (which are less than 10 MW capacities each) account for about 6 - 8% (366 MW in 2018) of the total installed capacity. In the 4Q of 2019, Sri Lanka’s hydropower generation was at a higher level due to favorable weather conditions that prevailed in the country. This is a credit positive for the mini-hydro producers as they would benefit from the increased power generations (in the absence of the deemed hydrology clauses in their PPAs with the CEB).
“However, going forward, given the vagaries of the weather conditions of Sri Lanka, the ability for these mini-hydro power producers to operate at optimum level will be subdued.”
In Sri Lanka, the state-run Ceylon Electricity Board (CEB) controls the electricity sector-value chain and is authorized to decide new tariff structures and identify/implement new sources of power generations based on its long-term generation plan. Since 2016, the government has introduced competitive tendering process for renewable energy projects. Although, mini-hydro power segment was initially considered to be excluded from this scheme due to the complexity of the construction of mini hydropower plants, the decision has not been finalized yet.
Since Hydropower production level is likely to decline CEB will be compelled to increase the reliance on thermal energy and Emergency PPAs, leading to increase in unit cost of production for the CEB.
“Moreover, given the heightened US-Iran geopolitical tensions, we expect the oil prices to remain volatile over the next two years and as a result, the cost of energy production for the CEB is likely to increase further”.
“We also expect the increase in cost of thermal energy production to be reflected for the remaining PPAs that are under the Avoided Cost tariff structure, benefiting the mini-hydro producers, with augmented profit margins in the next couple of years”.
This will be a credit positive for mini hydro producers, who are still having PPAs under the Avoided Cost tariff structure.
However, ICRA Lanka has also noticed Sri Lankan mini-hydropower producers have recently faced increased climatic risks due to global warming.
This together with policy uncertainty in relation to the new mini-hydropower plants (as mentioned above), have compelled most power producers to diversify their operations. In addition, over the recent past, the power producers have also experienced a longer payment cycle from the CEB ICRA Lanka will continue to monitor the impact on the power producers from these new developments.
0 comments: