70001 3ULYDWH 6HFWRU 6PDOOVFDOH *ULGFRQQHFWHG 5HQHZDEOH 3RZHU *HQHUDWLRQ LQ 6UL /DQND A review of the experience of the past decade 1996 to 2006 Prepared for: Project Director, RERED Project World Bank January 2008 DFCC Consulting (Private) Limited i Private Sector, Small-scale, Grid-connected Renewable Power Generation in Sri Lanka: $ UHYLHZ RI WKH H[SHULHQFH RI WKH SDVW GHFDGH Purpose and Scope The first modern small hydro power (SHP) project was commissioned in Sri Lanka on 30 April 1996 by Mr. Premasiri Sumanasekera of Hydro Tech Lanka (Private) Limited in Dick Oya, Nawalapititya. Exactly a decade later, 47 projects, totaling 89.73 MW, were selling power to Ceylon Electricity Board (CEB). In 2005, 48 privately owned projects, having capacities less than 10 MW, generated 277 GWh and supplied over 3% of the nation’s demand, records the Central Bank of Sri Lanka (CBSL). The SHP experience in Sri Lanka has been an exemplary success and has been hailed by many experts as a commendable development model for similar private sector, small scale, grid- connected renewable energy industries in emerging economies. The notable progress of the SHP industry has paved the way for the development of other private sector, small-scale, grid- connected renewable energy technologies in Sri Lanka. Moreover, policy-makers are now considering private investor participation in the construction of larger scale indigenous energy projects, which has hitherto been the sole domain of public sector enterprises. The objective of this report, therefore, is to provide a comprehensive analysis of the development of the renewable power generation sector in the country over a period of ten years, from 1996 to 2006, as a reference for the design of future policy and market interventions in Sri Lanka and other countries1. This analysis aims to assist stakeholders to assess the potential for growth in terms of energy contribution from indigenous renewable resources, private sector investment and rural infrastructure development. The report also serves to reveal the conflicting priorities of stakeholders, which impact the development of indigenous energy resources, and thereby create a platform for constructive debate towards realizing a sustainable and optimal outcome for the country. 1 The research for this report was completed in the fourth quarter of 2006 and, as such, all analyses are based on information made available to the consultants during this period. ii Contents Page Section 1 Executive Summary and Report Organization Executive Summary 1 Report Organization 2 Section 2 Non-Conventional Renewable Energy Technologies – An Overview Strengthening Sri Lanka’s Power Sector 3 Institutional Framework for Non-Conventional Renewable Energy Development 8 Section 3 Sri Lanka’s Small Hydro Power Experience Sri Lanka’s Small Hydro Power Experience 13 Characteristics of the Small Hydro Power Industry in Sri Lanka 15 Key Drivers of Development 25 Critical Success Factors 35 Section 4 Exploiting Sri Lanka’s Wind Power Potential Exploiting Sri Lanka’s Wind Power Potential 45 Resource Development Initiatives 47 Key Market Drivers 49 Section 5 The Future of Bio-Power in Sri Lanka The Future of Bio-Power in Sri Lanka 54 Lessons from Walapone 59 Rapid Deployment of Bio-Power 61 Section 6 Externalities of Development 69 References 72 Acknowledgements 74 Annexure: [1] 2005 in Summary [2] A Snapshot of Recent Developments [3] Tariff Setting Methodologies iii Listing Charts Page Section 2 2.1 Growth of GDP and Electricity Sales 1985-2004 3 2.2 Average Tariff and Cost of Electricity 4 2.3 Energy Mix 1995-2015 5 2.4 Incremental Growth of NRE Projects 7 2.5 Cumulative Growth of NRE Capacity 8 Section 3 3.1 Cumulative Number of Commissioned SHP Projects 14 3.2 Cumulative Installed Capacity of Commissioned SHP Projects 14 3.3 Analysis of Capacity of SHP Projects 15 3.4 Efficiency Factor of SHP Plants Analyzed by Grid Sub-Station 16 3.5 Efficiency Factor of SHP Plants Analyzed by Location 17 3.6 Percentage Deviation between Planned and Actual Plant Efficiency 19 3.7 Sample Actual Cost per MW Analyzed by Commissioned Capacity 20 3.8 Sample Actual Cost per MW Analyzed by Capacity 22 3.9 Time Taken to Convert LoIs into SPPAs 23 3.10 Time Taken to Commission Projects with SPPAs 23 3.11 Time Taken to Complete Construction of Projects 24 3.12 Analysis of Complaints Lodged with Grid Connected Small Power Developers Association 24 3.13 Annual Tariff versus Capacity 1996-2005 28 3.14 Annual Tariff versus Project Total 1996-2005 29 3.15 Annual Tariff versus Launched Projects 29 iv Listing Figures Page Section 2 2.1 Key Institutions for NRE Development 11 Section 3 3.1 Geographic Distribution of Approved RERED Projects as at 30 September 2006 31 Section 4 4.1 Wind Energy Resource Atlas of Sri Lanka 46 Section 5 5.1 Dendro Power Potential in Sri Lanka 64 Tables Section 2 2.1 Energy Strategy of the Government of Sri Lanka 5 2.2 Cumulative Commissioned Capacity of Small Scale, Grid-Connected Renewable Energy Technologies in Sri Lanka 1996-2006 7 Section 3 3.1 SHP Industry at a Glance 13 3.2 Efficiency Factor of SHP Plants 2001-2005 16 3.3 Sample Actual Cost per MW of Commissioned Projects 19 3.4 Price and Cost – 2005 Index 1999=100 20 3.5 Cost per MW of Projects under Construction Analyzed by Capacity 21 3.6 ESD and RERED Project Financing versus Commercial Lending 32 3.7 Financing based on Commercial Banks’ Weighted Average Deposit Rate (AWDR) versus Prime Lending Rate (PLR) 33 3.8 Grid Sub-Station Capacity Augmentation 40 Section 5 5.1 Targets for Dendro Power 57 5.2 Targets for Fuel-Wood Plantation 58 5.3 Grid-Connected Bio-Power Projects in Sri Lanka 58 Section 6 6.1 Quantifiable Benefits of NRE Power Generation 67 v Abbreviations and Acronyms AWDR Weighted Average Deposit Rate BEASL Bio-Energy Association of Sri Lanka CBSL Central Bank of Sri Lanka CEA Central Environmental Authority CEB Ceylon Electricity Board CHP Combined Heat and Power CTC Ceylon Tobacco Company Limited ECF Energy Conservation Fund ESD Energy Services Delivery GCSPDA Grid Connected Small Power Developers Association GoSL Government of Sri Lanka IPP Independent Power Producer LoI Letter of Intent LTL Lanka Transformers Limited MoPE Ministry of Power and Energy NCED National Council for Economic Development NRE Non-Conventional Renewable Energy NRS National Reference Station PCI Participating Credit Institution PUCSL Public Utilities Commission of Sri Lanka REC Renewable Energy Cluster RERED Renewable Energy for Rural Economic Development SEA Sustainable Energy Authority SHP Small Hydro Power SLEF Sri Lanka Energy Fund SLR Sri Lankan Rupee SPPA Standardised Power Purchase Agreement TERI The Energy and Resources Institute USA United States of America USAID United States Agency for International Development USD United States Dollar WER Wind Energy Resource WASP Wien Automatic System Planning Package Section One Executive Summary and Report Organization  Executive Summary S E C Sri Lanka’s demand for electricity is projected to grow at 8% per T annum. This means that the electricity generating capacity has to I be augmented by about 200 MW every year. To meet national demand till 2015, the Government of Sri Lanka (GoSL) is O finalizing an energy policy and strategy that introduces coal and N non-conventional renewable energy as the third and fourth fuel options respectively. The strategy targets 10% of the electricity O requirement in 2015 to be supplied from non-conventional N renewable energy sources, currently identified as small hydro, E wind and bio-power. The institutional framework required to implement these targets has also been determined. Since its inception in 1996, the modern SHP industry has commissioned over 100 MW of privately owned, small-scale (less than 10 MW), grid-connected projects. The total potential is estimated at 400 MW. This study has conducted detailed analyses of the capacity, efficiency, investment and project life cycle of SHP plants. A straightforward application process, a standardised power purchase agreement with the utility, a viable and guaranteed tariff, tax and duty incentives, and concessionary financing arrangements have been the cornerstones of this industry’s success. The potential estimated in Sri Lanka for wind and bio-power, too, is vast. The bio-power industry targets the installation of 100 MW by 2010, while over 24,000 MW of good to excellent wind resource potential has been identified. However, to fully exploit these resources, all three technologies have to overcome many obstacles, with the assistance of GoSL and the country’s sole utility, CEB. Issues common to all are the absence of a renewable energy policy, a sustainable tariff setting methodology, creative project financing options, a technology specific standardized power purchase agreement and a streamlined approval process. The utility’s planning, absorption and evacuation limitations too have an adverse effect on the growth of these industries. Indigenous, non-conventional renewable energy generation has a significant positive impact on the economy, society and environment of Sri Lanka: the country’s energy security improves with the diversification of the energy mix; local private sector investment is mobilized to develop the nation’s infrastructure; policy makers are encouraged to steer the country towards sustainable development, by balancing economic progress with the conservation of the environment; and rural communities are empowered by the provision of basic infrastructure facilities. These reasons compel the Government to accord due priority to  realize, without delay, the small hydro, wind and bio-power resource potential Sri Lanka has been endowed with. Report Organization S E C The Report commences by describing the national policy and T strategies pertaining to non-conventional renewable energy I technologies in Section 2, with a brief introduction to the O performance of the power sector in Sri Lanka. The N subsequent three sections deal with three alternative sources of power in Sri Lanka, namely small hydro, biomass and wind power. A section is devoted to each technology to identify its T particular potential, barriers and strategies for growth. Section W 6, the final chapter, concludes the Report by establishing the O economic, social and environmental significance of non- conventional renewable energy generation in Sri Lanka. Section Two Non-Conventional Renewable Energy Industry An Overview  Strengthening Sri Lanka’s Power Sector S E Sri Lanka is an island nation with a population of 19.7 million. By C the end of 2005, 74.9% of the approximately 4.6 million T households in the country had access to electricity; the annual per I capita electricity consumption averaged 348 kWh per person; and O the total demand for electricity amounted to 7,254 GWh N generated from 2,407 MW of installed capacity. T Historically, there exists a positive co-relation between the W growth of the economy and the demand for electricity, as O depicted in Chart 2.1. In 2005, the Real Gross Domestic Product grew by an estimated 6%, while the sale of electricity increased by 8.8%. Analysis of past demand yields an average growth of 8% for the electricity sector. This means that to meet the growing demand, the electricity generating capacity has to be augmented by about 200 MW per annum (CEB 2005, p. 1-2). Chart 2.1 Growth of GDP and Electricity Sales 1985-2004 Source: Ceylon Electricity Board, Long Term Generation Expansion Plan 2006-2020 Though amounting to 50% of the installed capacity, hydro power plants contributed only 36% of the total generation in 2005, and thermal plants were responsible for a little over 60% of the electricity generated. As recently as in 1991, more than 90% of the required power for the country was generated from hydro electricity. Today, however, power generation in Sri Lanka relies mainly on imported diesel based thermal sources, with relatively high costs of generation. Large diesel imports are also a substantial drain on the foreign exchange reserves of the country.  Strengthening Sri Lanka’s Power Sector S E C The average consumer tariff in 2005 was SLR 7.70 per unit, a T high tariff compared with Sri Lanka’s competitor countries2. I The average cost of production was SLR 10.35 per unit. O Thus, the resulting net operating loss of CEB increased by N 49% in 2005 due to ‘the compounded effect of higher oil prices and heavy reliance on thermal power generation’ (CBSL 2006, p. 44). T W Chart 2.2 O Source: Central Bank Annual Report, 2005 According to CBSL (2006, p. 45), “the long-term sustainability of the electricity sector is being threatened by delays in implementing new low cost power plants, the non- implementation of necessary reforms and the delay in addressing high system lossesâ€?. As a primary measure in response to these challenges, the Ministry of Power and Energy (MoPE) has drafted a policy framework for the energy sector in Sri Lanka. “The National Energy Policy and Strategies of Sri Lankaâ€? as it is known was expected to be ratified by GoSL by the end of 2006. The elements of this policy include: ensuring energy security by diversifying and rationalizing the energy mix; developing indigenous resources to optimal levels to minimize dependence on non-indigenous resources; and resolving related economic, environmental and social constraints. In a bid to move from the present two-energy resource (hydropower and oil) status to a multiple resource status, coal and non-conventional renewable energy (NRE) are recognized as the third and fourth fuel options respectively (MoPE 2006, p. 13-14). 2 According to CBSL (2005, p.63), the average electricity tariff rates applicable to the industrial sector in US Cents in selected countries were: Sri Lanka 7.00-7.50, Indonesia 1.52-3.90, Malaysia 2.63-10.52, Singapore 4.23-6.78, Thailand 2.89-7.01 and the Philipines 3.30-10.68.  Strengthening Sri Lanka’s Power Sector S E Table 2.1 C Energy Strategy of the Government of Sri Lanka T Percentage Share of Total Generation I Year Hydro Oil Coal NRE Comments O Power Minimum N 1995 94% 6% 0% 0% Actual 2000 45% 54% 0% 1% Actual T Actual. Moratorium on power W plants burning oil or similarly O 2005 36% 61% 0% 3% priced oil/gas products becomes effective in 2006. Progressive diversification into 2010 42% 31% 20% 7% coal and NRE. Moratorium in place. Moratorium on power plants 2015 28% 8% 54% 10% burning oil or similarly priced oil/gas products may be lifted. Source: National Energy Policy and Strategies of Sri Lanka, Final Draft, 2006 This decision is reflected in Table 2.1, which summarizes the policy initiative by GoSL to address the issues faced by the power sector. Chart 2.3 illustrates the actual and expected transformation of the energy mix in the two decades leading to 2015. GoSL expects to reduce the cost of electricity generation by developing indigenous renewable energy resources and commissioning large-scale coal power plants, while imposing a moratorium on costly oil based power generation. Chart 2.3 Energy Mix 1995-2015 18,000 NRE 16,000 14,000 Generation GWh 12,000 Coal 10,000 8,000 Oil 6,000 4,000 Hydro 2,000 0 1995 2000 2005 2010 2015 Year  Institutional Framework for Non-Conventional Renewable Energy Development S E C The Draft National Energy Policy and Strategies of Sri Lanka T (MOPE 2006, p. 14) states that GoSL will endeavour ‘to I reach a minimum level of 10% of electrical energy supplied to O the grid…by a process of facilitation… and the target year to N reach this level of NRE penetration is 2015’. According to Mr. Harsha Wickramasinghe, the General Manager of the Energy Conservation Fund (ECF), this is the first national T policy that has given serious consideration to the W development of NRE. NRE in Sri Lanka is identified in the O Draft Policy (MoPE 2006, p. 14) as small-scale hydro-power, biomass (including dendro power, biogas and waste), solar power, wind power and, in the future, resources such as wave and ocean thermal energy. The resource endowment of Sri Lanka limits the small-scale, grid-connected renewable energy potential to essentially three energy sources - hydro, bio-power and wind power - in the period under review. “Small-scaleâ€? can be defined as projects of less than 10 MW in capacity, the limit which is imposed on the private sector for NRE projects that are not subject to public tender. Though small-scale hydro and biomass plants have been in existence for many decades, the World Bank funded Energy Services Delivery (ESD) Project, from 1997 to 2002, and subsequently the Renewable Energy for Rural Economic Development (RERED) Project, 2002 onwards, were undoubtedly important catalysts for the recognition of these technologies as private sector, grid-connected generation options with significant potential. The first NRE project to be commissioned under the ESD Project was an SHP plant with an installed capacity of 0.96 MW, in 1996. Two years later, a 0.10 MW waste heat plant was commissioned. In May 2000, the first pilot wind power plant was connected to the national grid with the assistance of the ESD Project, establishing wind power too as a viable technology that merits serious consideration. In November 2004, the first commercial-scale dendro power plant became operational in Walapane.  Institutional Framework for Non-Conventional Renewable Energy Development S E C Table 2.2 Cumulative Commissioned Capacity of Small Scale, Grid-Connected T Renewable Energy Technologies in Sri Lanka 1996-2006 I Technology 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 O Small Hydro 1.03 2.00 - 8.68 11.21 23.64 31.26 39.66 74.42 86.50 *94.53 N Biomass - - 0.10 - - - - - 1.10 - - Wind - - - - 3.00 - - - - - - Other - - - - - - 0.02 - - 1.00 - T * As at 30 June 2006 Source: Energy Purchase Branch, Ceylon Electricity Board W O As evident from Table 2.2, of the three identified technologies, only small-scale hydro power has matured into a thriving industry which is set to exceed 100 MW by the end of 2006. As per CEB data as at 30 June 2006, there has been visible growth during the latter half of the past decade, in terms of both the number as well as installed capacity of NRE projects. This is captured in Charts 2.4 and 2.5. CEB had received 1,050 project proposals, but Letters of Intent (LoI) were issued to only 242. Of these, developers of only 81 projects have proceeded to sign Standardised Power Purchase Agreements (SPPA) with CEB as at 2005 year-end. In subsequent sections, the progress of each technology is presented in detail. Chart 2.4 Incremental Growth of NRE Projects 60 50 Number of Projects 40 30 20 10 0 1995 1997 1999 2001 2003 2005 Year LoI Issued SPPA Signed Commissioned Source: Energy Purchase Branch, Ceylon Electricity Board  Institutional Framework for Non-Conventional Renewable Energy Development S E C T Chart 2.5 Cumulative Growth of NRE Capacity I 250 O N 200 T 150 W MW O 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year SPPA Signed Commissioned Source: Energy Purchase Branch, Ceylon Electricity Board The success of the grid-connected component of the ESD and RERED Projects can be defined in terms of the growth of the SHP industry; the development of biomass and wind technologies is yet to take off. Each technology has its particular menu of impediments that must be dealt with to pave the way for progress. A judicious analysis of the lessons learnt over a decade, nevertheless, will prove invaluable to shorten the learning curve for both biomass and wind power sectors, while aiding to further accelerate the growth of the SHP industry. The structural framework to support GoSL’s NRE policy now necessitates the formation of a regulatory authority and an implementing agency. The Public Utilities Commission of Sri Lanka (PUCSL) will be empowered to act as the regulator and the Sustainable Energy Authority (SEA) will be set up to drive the NRE industry to achieve GoSL’s targets. As detailed in the Draft National Energy Policy and Strategies of Sri Lanka, the institutional responsibilities for the development of NRE will revolve around the first four institutions described hereafter. The fifth mentioned is a forum that has contributed significantly to NRE development in the past few years.  Institutional Framework for Non-Conventional Renewable Energy Development S E i] Ministry of Power and Energy C T MoPE is the line ministry and the apex institution of GoSL I responsible for the country’s power and energy sectors. As such, O MoPE formulates national policies and strategies for the energy sector and oversees their effective and timely implementation N (TERI 2005, p. 3). T According to the Draft National Energy Policy and Strategies of W Sri Lanka, MoPE shall O Æ’ prepare essential long-term plans, including an integrated national energy plan for 25 years; Æ’ maintain the National Energy Database and publish the national energy balance and energy sector performance annually, with the assistance of the Department of Census and Statistics; and Æ’ carry out rural electrification programs, with the assistance of the Ministry of Finance and PUCSL. ii] Public Utilities Commission of Sri Lanka PUCSL was established under the Public Utilities Commission of Sri Lanka Act No. 35 of 2002 to regulate ‘certain utilities industries pursuant to a coherent national policy’. The main objectives and functions as detailed in this Act (Part IV) include Æ’ protecting the interest of consumers and promoting safety and service quality; Æ’ promoting competition and efficiency in resource allocation, operation and investment; Æ’ exercising licensing, regulatory and inspection functions and enforcing related provisions; Æ’ regulating tariff and other charges levied by the regulated entities where required by any industry Act; and Æ’ setting and enforcing technical and other standards relating to the safety, quality, continuity and reliability of the utilities. PUCSL will be empowered to execute regulation once individual industry legislations are enacted and made effective (MoPE 2006, p. 4).  Institutional Framework for Non-Conventional Renewable Energy Development S E C The Draft National Energy Policy and Strategies of Sri Lanka T holds PUCSL accountable for I Æ’ implementing long-term plans, policies and targets as set O out by MoPE for GoSL, with the assistance of other N stakeholders such as ECF or SEA and electricity utilities; Æ’ approving electricity pricing policies proposed by electricity distribution utilities, with the concurrence of T the General Treasury; W Æ’ planning and executing rural electrification programs, O including targeted subsidies, as decided by MoPE and the Ministry of Finance; Æ’ carrying out fuel diversity and security measures with the assistance of electricity utilities and other key players; and Æ’ ensuring supply-side energy efficiency, together with electricity utilities. iii] Energy Conservation Fund ECF has been established under the Energy Conservation Fund Act, No.2 of 1985 to finance, promote and initiate activities and projects relating to efficiency, conservation and demand-side management of energy. ECF also investigates and encourages alternative sources of new and renewable energy. The Draft National Energy Policy and Strategies of Sri Lanka requires ECF to prepare, promote and facilitate a 20 year NRE Plan, detailing interim targets for specific NRE technologies, upper thresholds of pricing and resource costing. In addition, ECF is assigned the task of executing demand-side energy efficiency strategies and targets, with the aid of other stakeholders. Legislation is currently being drafted to reconstitute ECF as SEA with a broader mandate to Æ’ develop renewable energy resources; Æ’ implement energy efficiency improvement and conservation programs; Æ’ analyze, develop and recommend policies; and Æ’ source and manage funds to achieve above objectives.  Institutional Framework for Non-Conventional Renewable Energy Development S E C Identifying energy development areas, rationalizing the approvals T process for NRE projects, administering the Sri Lanka Energy I Fund and functioning as the National Technical Service Agency O of the Clean Development Mechanism in Sri Lanka are among the key functions of SEA, states Mr.Wickramasinghe. If officially N requested, the RERED Project will consider assisting MoPE to procure experts to prepare an institutional development plan for T SEA (The World Bank 2006, p. 2). W O iv] Ceylon Electricity Board CEB is a single, vertically integrated, state-owned electric utility, which is responsible for the planning, generation (public sector), transmission, distribution and sale of power in the country (TERI 2005, p. 3). Without the support of the utility, the development of any grid-connected generation option will not be possible. CEB’s financial health governs investor confidence and the risk appetite of lending institutions. Favourable utility reforms, therefore, are vital to the growth of all private sector investments in the power sector, including in NRE opportunities. Nonetheless, it must be noted that the SHP industry flourished within the existing framework sans reform. CEB, MoPE, the World Bank and other stakeholders together have created an enabling environment in the past years to encourage indigenous NRE technologies in Sri Lanka. Figure 2.1 Key Institutions for NRE Development Line Ministry Ministry of Power and Energy Regulator Public Utilities Commission of Sri Lanka Facilitator Sustainable Energy Authority Utility Ceylon Electricity Board  Institutional Framework for Non-Conventional S Renewable Energy Development E C v] Renewable Energy Cluster T I The Renewable Energy Cluster (REC) was formed in September 2005 under the National Council for Economic O Development (NCED). NCED was set up to bring together N private and public sector stakeholders to jointly develop national economic policies and plans (NCED 2005, p. 1). T W As such, under the effective joint chairmanship of the O Secretary to MoPE and the Director General of PUCSL, REC has been instrumental in initiating almost all significant resolutions pertaining to the renewable energy sector to date. At least eight important decision-makers, stakeholders and/or experts are represented at most REC meetings. REC has successfully paved the way for PUCSL and SEA to carry out their functions by establishing a constructive consultation process among all parties concerned. Section Three Sri Lanka’s Small Hydro Power Experience  Sri Lanka’s Small Hydro Power Experience S E C The first SHP turbine in recorded history was installed in 1887 by T Gilbert Gilkes and Company. Between 1887 and 1959, 369 plants I totaling approximately 10 MW were commissioned, mostly in tea O plantations. About 60 of these are still in operation (Bandaranaike 2000, p. 1). Almost four decades later, the first modern SHP plant N was commissioned in 1996. Ten years hence, over 100 MW have been connected to the national grid. As at 30 June 2006, CEB had T on record 141 SHP projects amounting to 269.64 MW in various H stages of completion. R Table 3.1 E SHP Industry at a Glance E Status Capacity (MW) Number of Projects 31 Dec 2005 30 June 2006 31 Dec 2005 30 June 2006 Commissioned 83.64 94.53 81 51 SPPAs signed 168.79 92.38 44 38 LoIs issued 71.55 82.74 42 52 Total 323.98 269.64 167 141 Source: DFCC Consulting (Pvt) Ltd. According to the Grid Connected Small Power Developers Association (GCSPDA), the sole organization representing the SHP industry, the commercially viable potential totals about 400 MW. They claim that this potential can be realized by 2010 with the right encouragement from GoSL. GCSPDA’s projection can well become a reality in the future, given official statistics. As at 30 June 2006, CEB had received a total of 1,050 project proposals; only 242 of those were issued LoIs by CEB; 93 of the projects with LoIs proceeded to sign SPPAs with CEB; and 89 projects are still under development or commissioned3. There has been a steady growth in the number of commissioned projects, which totaled 44 at the end of 2005, as apparent from Chart 3.1. In 2004, 11 projects were connected to the national grid, the highest recorded in a given year. In addition, there is a marked increase in the number of SPPAs signed per annum from 2002 onwards. At the end of 2005, the total number of valid SPPAs (excluding those cancelled) was 75. 3 Data sourced from Energy Purchase Branch, CEB  Sri Lanka’s Small Hydro Power Experience S E C T Chart 3.1 Cumulative Number of I Commissioned SHP Projects O 90 N 80 70 T 60 Projects H 50 40 R 30 E 20 E 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year SPPA Signed Commissioned Source: DFCC Consulting (Pvt) Ltd. In 2002 alone, 17 SPPAs totaling an unequaled 64 MW of capacity were commissioned. Since then, over 10 MW of SPPAs have been signed and commissioned every year, apart from 2003. In that year, the SHP industry installed only 3 projects amounting to 5.4 MW. Chart 3.2 Cumulative Installed Capacity of Commissioned SHP Projects 180 160 140 Capacity (MW) 120 100 80 60 40 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year SPPA Signed Commissioned Source: DFCC Consulting (Pvt) Ltd.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E C The significant features of this industry are that they are run-of- T the river hydro projects, less than 10 MW in capacity and I developed by the private sector. In August 1997, the Ministry of O Irrigation and Power announced a policy direction to encourage N private sector financing for power generation from small-scale renewable energy resources. Small-scale projects for this program T have been defined as plants under 10 MW, though approval from H CEB for those marginally above 10 MW are considered on a case- by-case basis (CEB, undated b). Furthermore, in an attempt to R mitigate the social and environmental impact of these projects, E the Central Environmental Authority (CEA) has imposed strict E guidelines on the release of water back into the river after generating power. Thus, all projects are run-of-the-river type, with relatively minimal alteration of the natural flow. Performance Appraisal The following analyses are conducted on the entire universe of SHP projects, unless the sample employed is specifically mentioned. Analysis of Capacity 89% of the installed capacity of commissioned projects in 2005 are less than or equal to 3 MW and 64% are less than or equal to 2 MW. Similarly, the design capacity of the majority of projects with valid SPPAs and LoIs are less than or equal to 2 MW. Chart 3.3 Analysis of Capacity of SHP Projects 20 18 16 Number of Projects 14 12 10 8 6 4 2 0 <1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 Capacity (MW) Commissioned Valid SPPA Valid LoI Source: DFCC Consulting (Pvt) Ltd.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E C Analysis of Plant Efficiency T I Between 2001 and 2005, the simple average of the efficiency O level of all commissioned plants is 39%. A significant co- relation between annual rainfall patterns and variation in N actual generation data cannot be established. T Table 3.2 H Efficiency Factor of SHP Plants R 2001-2005 E Year 2001 2002 2003 2004 2005 Plant E 37% 38% 38% 41% 39% Factor Source: DFCC Consulting (Pvt) Ltd. Further analysis reveals that performance of plants does depend on the grid sub-stations they are connected to. Balangoda leads the list, followed by Wimalasurendra and Seethawaka, as evident from Chart 3.4. Plants connected to Deniyaya and Kiribathkumbura show a relatively poor performance. Chart 3.4 Efficiency Factor of SHP Plants Analyzed by Grid Sub-Station 60% 50% 40% Plant Factor 30% 20% 10% 0% 2001 2002 2003 2004 2005 Year Deniyaya Wimalasurendra Kiribathkumbura Nuwara Eliya Balangoda Ratnapura Seethawaka Annual Average Source: DFCC Consulting (Pvt) Ltd.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E C The efficiency of plants was analyzed by their location, as well. T The outcome is compelling and can be summarized as follows: I Æ’ Kahawatte - Plants connected to the Balangoda sub-station O performed well relative to those connected to the Deniyaya sub-station. N Æ’ Nawalapitiya – Plants connected to the Wimalasurendra sub- station performed better than those connected to Seethawaka T and Kiribathkumbura sub-stations. H Æ’ Ratnapura – Interestingly, all plants have relatively high R efficiency factors, regardless of the grid sub-station they are E connected to. E Æ’ Ruwanwella – All plants are connected to the Seethawaka sub-station and show a satisfactory performance, though the one plant connected to this sub-station but located in Nawalapitiya has a relatively low efficiency level. Chart 3.5 Efficiency Factor of SHP Plants Analyzed by Location 60% 50% 40% Plant Factor 30% 20% ‘ 10% 0% 2001 2002 2003 2004 2005 Year Kahawatte Katugastote Kegalle Nawalapitiya Nuwara Eliya Annual Average Ratnapura Ruwanwella Source: DFCC Consulting (Pvt) Ltd. Thus, one can infer that the location of the plant and the grid sub-station it is connected to have considerable bearing on the performance of most plants. However, the period of analysis is too brief for a responsible conclusion. Low plant factor trends also imply that hydrology studies, based on which project capacities have been designed, are not accurate. As such, developers will do well to pay heed to the location and the grid connection facilities of their plants from the outset.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E 32 projects that have been in operation for more than a year C were examined for differences between planned and actual T averages of plant efficiencies from 2001 to 2005. The study I yielded the results presented in Chart 3.6. The deviation O between planned and actual plant factors ranged from plus or N minus 6% to 45%. Only four projects exceeded expected values. Two of the three plants with the worst performance are connected to the Kiribathkumbura grid sub-station. The T plants with the largest negative and positive deviation are H connected to the Seethawaka grid sub-station. Notably, R projects located in Ratnapura had achieved the least E deviation, while all plants in Kahawatte carried relatively high E differences in the range of plus or minus 20% to 30%. Chart 3.6 Percentage Deviation between Planned and Actual Plant Efficiency 9 8 Number of Projects 7 6 5 4 3 2 1 0 -45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 • ” ” ” ” ” ” • • • • • • • • 1 -1 6 11 16 21 26 -41 -36 -31 -26 -21 -16 -11 -6 Percentage Deviation Source: DFCC Consulting (Pvt) Ltd. Incorrect designs can result from the lack of adequate rainfall and river flow data and the failure to accurately capture terrain information, such as ground water retention ability and the impact of upstream development. This investigation reinforces the view that performance forecasts should factor in electricity evacuation limitations. Deviations in plant efficiencies can also signal the existence of operational shortcomings. For instance, performance can be seriously undermined if plant operators do not ensure that trash tracks and channel paths are kept free of debris during heavy rainfall.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E Analysis of Investment C Local SHP cost per MW has reduced since the industry’s T inception in 1996, but has gradually escalated from 2000 onwards. I The largest year on year cost increase of 60% was experienced O between 2001 and 2002. N Table 3.3 T Sample Actual Cost per MW of H Commissioned Projects Item 1996 1999 2000 2001 2002 2003 2004 2005 2006* R Average Cost per E 84 93 52 83 73 94 109 125 132 MW (SLR Millions) E Average Cost per 1.52 1.32 0.69 0.93 0.76 0.97 1.08 1.24 1.28 MW (USD Millions) Year on Year - - -44% 60% -12% 29% 16% 15% 6% Increase (in SLR) Size of 1 4 1 6 4 3 11 5 6 Sample Percentage of 50% 80% 100% 100% 80% 100% 100% 56% 86% Universe *As at 30 June 2006 Source: DFCC Consulting (Pvt) Ltd. However, the average cost of projects, which are less than 1 MW, has risen steadily every year, reaching SLR 132 million per MW in 20064. The majority of projects in the sample are between 1 and 3 MW and their costs have therefore influenced the average trend described above5. The projects costs of larger capacities have not changed significantly over the years, as evident from Chart 3.7. Chart 3.7 Sample Actual Cost per MW 180 Analyzed by Commissioned Capacity Cost per MW (SLR Millions) 160 140 120 100 80 60 40 20 0 1996 1999 2000 2001 2002 2003 2004 2005 2006 Year <1 1 3 3+ Ave 4 Average cost per MW of the 2 projects that were commissioned by June 2006. 5 The sample of projects commissioned as at 30 June 2006 represent 63% of projects less than 1 MW, 59% of projects from 1 to 3 MW and 100% of projects above 3 MW. Source: DFCC Consulting (Pvt) Ltd. Table 3.3  Characteristics of the Small Hydro Power Industry in Sri Lanka S E C Between 1999 and 2005, steel, copper and cement prices have T increased steadily and, at times, steeply. International steel I and copper prices affect the cost of electro-mechanical O imports and the local price of cement has a considerable N impact on civil construction costs. In addition, inflation has predictably risen and the Sri Lankan Rupee (SLR) has depreciated against the US Dollar and the Euro. The T compounded effect of all these factors should have resulted H in a sharp escalation of development costs, as illustrated in R Chart 3.8. In comparison, the average development costs of E projects in the sample have increased relatively modestly. An E index of the period summarized in Table 3.4 indicates that by 2005 average cost per MW has grown by only 34%, as opposed to all other factors, which show increases ranging from 43% to 230%. Table 3.4 Price and Cost - 2005 Index 1999=100 Item 2005 Cement (SLR) 174 Copper (SLR) 330 Steel (SLR) 186 Exchange Rate – USD:SLR 143 Exchange Rate – Euro:SLR 167 Inflation – Colombo Consumers’ Price Index 164 Average Cost per MW 134 Source: Central Bank of Sri Lanka, London Metal Exchange, DFCC Consulting (Pvt) Ltd. Chart 3.8 Sample Actual Cost per MW 350 Analyzed by Capacity 300 Index (Base Year 1999=100) 250 200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 Year Cement (SLR) Steel (SLR) Copper (SLR) USD:SLR Euro:SLR CCPI Average SHP Cost per MW (SLR) Source: DFCC Consulting (Pvt) Ltd.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E Nevertheless, projects costs continue to increase, as has been C concluded from an examination of 15 projects that are currently T under construction. The average cost of 8 projects, between 1 I and 3 MW in capacity, is 2.5% more expensive than that of O similar projects commissioned in 2006. Nevertheless, the average N costs of projects below 1 MW and above 3 MW have significantly increased by 40% or more, when compared with the sample’s average costs of similar capacities in previous years. T H Table 3.5 Cost per MW of Projects under R Construction Analyzed by Capacity* E Item <1 MW 1 3 MW 3+ MW E Average Cost per MW 221 124 117 (SLR Millions) Size of 1 8 5 Sample * As at 30 June 2006 Source: DFCC Consulting (Pvt) Ltd. By the end of 2005, 31 unique companies had developed 44 SHP projects and the majority ownership of only one project is held by a foreign company. Thus, the bulk of the investment in the SHP industry comes from local companies and individuals. Furthermore, with one exception, the five main engineering firms which provide turnkey services to this sector are owned and managed by Sri Lankans. A physical inspection of 15 sites was carried out for the purpose of this study. 4 of the plants have installed machinery and equipment manufactured in China, while the other plants operate with those sourced from Europe. Discussions with engineers have confirmed that as long as the manufacturer of equipment has a credible track record and a reliable operation, the point of origin has no bearing on the procurement decision. However, the plant efficiencies of established European manufacturers have remained relatively high. As evident from the above data, local engineers must be given due credit for employing innovative ways to control the development cost of projects, against all odds. This achievement can be attributed to three main reasons. Improved construction methodology and project management have reduced the time, effort and cost of building SHP projects. Moreover, engineers are increasingly resorting to low cost electro-mechanical solutions. Though there is no evidence of compromises in the quality of plants constructed, only time can prove the reliability of innovations used by engineers in SHP development in Sri Lanka.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E C Analysis of the Project Life Cycle T I As at 30 June 2006, three stages of the project life cycle have been analysed as follows: O N a] LoI to SPPA T 38 SPPAs were valid as at 30 June 2006. As shown in Chart H 3.9, 45% of these projects took 1 to 2 years, and 40% of the R projects took 2 to 3 years to meet the requirements to sign E the SPPA, as set out in the LoI. E Chart 3.9 Time Taken to Convert LoIs into SPPAs 5 6 Number of Years 4 5 3 4 2 3 1 2 <1 0 2 4 6 8 10 12 14 16 18 Number of Projects Source: DFCC Consulting (Pvt) Ltd. b] SPPA to Commissioning Of all commissioned projects as at 30 June 2006 Æ’ 84% of those less than 1 MW became operational within 1 year of signing the SPPA, and none have exceeded 2 years. Æ’ 85% of the projects in the 1-3 MW range were completed within 2 years. The number of projects that took less than a year to complete slightly surpassed the number commissioned between 1 and 2 years of entering into the SPPA. Æ’ Only 5 projects were delayed beyond 2 years, all of which were commissioned in 2004 and after. Given that the construction period of a SHP project generally spans 18 to 24 months, one can only conclude that most developers commence construction before signing the SPPA.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E C Chart 3.10 T Time Taken to Commission Projects with SPPAs I O Number of Years 2 3 N T 1 2 H R E <1 E 0 5 10 15 20 Number of Projects < 1 MW 1 3 MW > 3 MW Source: DFCC Consulting (Pvt) Ltd. c] Launch to Commissioning The period between the launch and commissioning of 43 projects in operation by 30 June 2006 was analysed. Within 18 months, 11 of the 14 projects less than 1 MW and 17 of the 24 projects between 1 and 3 MW were commissioned. The first SHP project at Dick Oya took 30 months to construct. Since then, the capacity of the project, the year of commissioning or the experience of the developer seem irrelevant in determining the duration of the construction period for projects equal to or below 3 MW. Nonetheless, before 2003, the 2 projects in the sample which are above 3 MW took over 3 years to complete, though similar projects thereafter were constructed in less than 18 months. Chart 3.11 Time Taken to Complete Construction of Projects > 36 Number of Months 24 36 18 24 < 18 0 5 10 15 20 Number of Projects < 1 MW 1 3 MW > 3 MW Source: DFCC Consulting (Pvt) Ltd.  Characteristics of the Small Hydro Power Industry in Sri Lanka S E The majority of projects take 3 years to obtain a SPPA and 2 C years to commission a project, disregarding the waiting period T to obtain a LoI. To sign the SPPA, developers with LoIs are I required to obtain approvals from a myriad of institutions. This is a long, drawn-out process. Having signed the SPPAs, O they then face innumerable difficulties to secure private N and/or crown land. Once construction has commenced, projects can get stalled again because of the unavailability of T grid evacuation facilities. These are the prime reasons that H have impeded the progress of SHP projects. External factors R such as political, social and legal issues also can lengthen the E project life cycle. E Furthermore, as per the records of GCSPDA, an analysis of 47 complaints has yielded the results depicted in Chart 2.3. Bureaucratic delays, subjective decision- making and lack of any state facilitation are some of the key obstacles faced by these developers. Chart 3.12 Analysis of Complaints Lodged with Grid Connected Small Power Developers Association Local Authorities Environmental Political Pressure 13% Other NGO 6% Departments 4% 9% Central Grid Environmental Interconnection Authority 17% 9% Crown Land Private Land 33% 9% * Other Departments – 1 complaint each on approvals from Department of Agrarian Services, Department of Irrigation, National Water Supply and Drainage Board and National Building Research Organization. Source: Grid Connected Small Power Developers Association  Key Drivers of Development S E C An effective framework has been established to attract private sector investment for the development of small-scale, run-of-the- river projects in Sri Lanka. This framework rests on five key cornerstones, which together provide a powerful incentive and support structure that tilts the scale towards continued investor confidence, despite numerous obstacles and long delays in implementation. These five factors deserve careful scrutiny as their combined influence draws the fine line between success and failure for the SHP industry. Additionally, the availability of stream flow data, rainfall statistics and high quality topographical detailing have proved invaluable to the industry. The following five factors have played a pivotal role in the progress of the SHP industry. i] Straightforward Application Process CEB issues a LoI to any applicant for any site that can be connected to the national grid, indicating willingness to purchase electricity from the proposed project. The application for LoI is straightforward and issued on a first-come, first-served basis. There is no pre-qualification process to screen applicants. This has prompted many developers with the know-how and interest to search for suitable sites and apply for LoIs. A developer can be an individual or any form of partnership, registered or otherwise, without a blemished civil, commercial or criminal track-record. A developer must forward an initial proposal to CEB, requesting formal approval from CEB to purchase electricity. “The details of the initial project proposal are studied by CEB for reasonableness, any conflicts with other on going private or CEB Master Plan Projects and a tentative grid connection point at 33kV level is identified. In this process, CEB will establish that the project is prima facie technically and financially viable.â€? (CEB undated b) The LoI is issued for six months. A non-refundable application processing fee is levied. During this period the developer is required to submit the feasibility report to CEB, with a plan for the construction of the plant; provide CEB the information required for interconnection studies; and obtain all approvals necessary for the construction of the plant and interconnection facilities, from relevant government institutions and other agencies.  Key Drivers of Development S E C The “CEB Guide for Grid Interconnection of Embedded T Generators, Sri Lankaâ€? provides the requirements and I procedures for the plant’s design, testing, commissioning and operation of the interconnection with the CEB network. The O developer must sign the SPPA with CEB within the validity N period of the LoI and, until such time, submit a monthly progress report to CEB. T H R Rationale for Success E The ease of application for potentially lucrative projects, combined with the reservation of projects according to E priority of application, has proven to be the most effective method for identification of a large number of small sites scattered across a region. One can safely assume that the greater part of the SHP potential has by now been identified and has received or awaits approval from CEB. If, as has been suggested over the years, the identification of sites were carried out by a consultant employed by the utility or similar entity and the sites tendered thereafter, or the qualifications for application were more restrictive, the SHP industry would not have developed this rapidly. ii] Standardised Power Purchase Agreement An Independent Power Producer (IPP) must sign a SPPA with CEB once the terms and conditions set out in the LoI have been fulfilled. SPPA is a standardised, non-negotiable, 15 year contract. The SPPA defines the terms and conditions for the generation and sale of power (CEB undated a). Briefly Æ’ The SPPA ensures that CEB considers an IPP plant a Must Run Facility. Æ’ The plant must be operated and maintained in a manner consistent with Prudent Utility Practices6. Æ’ CEB agrees to purchase all energy output delivered at the interconnection point. Such energy output must substantially satisfy the quality specified by CEB in the SPPA. 6 SPPA defines Prudent Utility Practices as accepted international practices, standards and engineering and operational considerations, including but not limited to manufacturers’ recommendations and the exercise of reasonable skill, diligence, foresight and prudence that would be exercised or generally followed in the operation and maintenance of facilities similar to the Facility.  Key Drivers of Development S E Æ’ IPPs are made responsible for the cost and construction of all C facilities required for the delivery of energy output to CEB at T the interconnection point. Transmission lines must be I constructed according to CEB and International O Electrotechnical Commission standards. Æ’ The SPPA details the tariff calculation methodology N applicable for the duration of the project. Æ’ The developer is required to commission the project within T twenty four months of signing the SPPA. H R Rationale for Success E The SPPA has established a practical basis for private sector E involvement7. Before venturing into a project, a developer knows the terms and conditions the project is governed by. He can forecast the price of sale, since the methodology has been explained. He is aware of the potential risk and, thus, can take an educated decision. Once the documentation has been submitted to and accepted by CEB, the SPPA can be signed within a relatively short period (approximately two weeks), since the agreement process is standardized and, hence, devoid of cumbersome negotiation. From the perspective of the buyer, the SPPA has effectively saved CEB from an administrative nightmare involving a large number of IPPs and a multitude of distinct requirements. The SPPA also lays down stringent requirements for the quality of power purchased. This has resulted in the entire SHP industry maintaining satisfactory technical standards, which in turn guarantees the long term viability of the sector. Hence, the propensity for IPPs to take detrimental decisions, such as employing poor quality, low cost measures to increase short term profitability, has been effectively curtailed. iii] Viable and Guaranteed Tariff The current tariff calculation methodology is based on the World Bank commissioned study conducted by Robert Vernstrom in 1995. The tariff setting methodology is detailed in Appendix 1 of the SPPA, thus: Æ’ The tariff is based on the principle of avoided cost of marginal generation. The tariff is equivalent to the average value of units generated by CEB owned plants which are displaced at the margin by renewable resources based electricity generation of less than 10 MW. 7 A key achievement of ESD Project of the World Bank was the successful resolution of the tariff determination issue between the CEB and the developers, through the SPPA that was developed under the ESD Project. (The World Bank 2004, p.7)  Key Drivers of Development S E C Æ’ The published tariff for a given year is a rolling three-year T average of the avoided cost estimated for that year and I the preceding two years. O Æ’ There is no capacity charge. Æ’ This is a two-part tariff. The rate for the dry season N (February to April) is higher than that for the wet season (May to January). T Æ’ For the duration of the project, the SPPA guarantees a H floor price of 90% of the tariff applicable in the year the R Agreement was signed. E Æ’ The rate for delivery of energy output is published by E CEB every year, before the first day of December of the previous year. Rationale for Success The tariff expectation drives the investment decision. Knowledge of the tariff setting methodology and the guaranteed floor price has enabled investors to take a calculated business decision. Interest in the sector and tariff rate changes are positively co-related as evident from the increase in the number of applications, signing of SPPAs and commissioning of projects in those years with favourable tariff rates, as indicated in Charts 3.13 – 3.15. Chart 3.13 Annual Tariff* versus Capacity 1996-2005 6.00 160 5.00 Cumulative Capacity (MW) 140 Weighted Tariff (SLR) 120 4.00 100 3.00 80 60 2.00 40 1.00 20 0 0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year SPPA Signed Commissioned Weighted Tariff *Tariff is weighted with 3 months of the dry tariff rate and 9 months of the wet tariff rate. Source: Energy Purchase Branch, Ceylon Electricity Board, DFCC Consulting (Pvt) Ltd.  Key Drivers of Development S E The SHP sector took off only after 2000. For instance, more C capacity was added in 2001, than that of the combined total of all T projects in the previous 5 years. Taking advantage of favourable I tariff rates in 2002, IPPs signed more than twice the number of O SPPAs entered into in all the preceding years. N Chart 3.14 Annual Tariff* versus Project Total T 90 1996-2005 6.00 H 80 R 5.00 70 E Number of Projects E Weighted Tariff 60 4.00 50 3.00 40 30 2.00 20 1.00 10 0 0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year SPPA Signed Commissioned Weighted Tariff Source: Energy Purchase Branch, Ceylon Electricity Board, DFCC Consulting (Pvt) Ltd. Similarly, 59 projects were launched since 1993; there is a clear growth trend after 2001. Chart 3.15 Annual Tariff* versus 18 Launched Projects 6 1993-2005 Number of Project Additions 16 5 14 Weighted Tariff 12 4 10 3 8 6 2 4 1 2 0 0 93 94 95 96 97 98 99 00 01 02 03 04 05 19 19 19 19 19 19 19 20 20 20 20 20 20 Year Number of Projects Weighted Tariff Source: DFCC Consulting (Pvt) Ltd.  *Tariff is weighted with 3 months of the dry tariff rate and 9 months of the wet tariff rate. Key Drivers of Development S E C iv] Tax and Import Duty Concessions T I The Board of Investment of Sri Lanka offers tax holidays that can range from 5 to10 years depending on the scale of the O investment. In addition, capital goods are exempt from N import duty during the period of construction and implementation. Some capital goods also enjoy a zero value T added tax (VAT). H R Rationale for Success E Tax and duty concessions for SHP projects enable IPPs to produce and sell electricity at current tariff levels. Elimination E of the present concessions will seriously hinder the SHP industry. Developers have been able to forecast and earn an adequate return on their investments from the cocktail of tariffs, tax concessions and subsidies offered thus far. v] Project Financing Subsequent to the successful completion of the ESD Project from 1997-2002, the World Bank introduced the RERED Project. Both projects have achieved their targets. “As part of the ESD Project, 31 MW were installed through 15 sub-projects as against a target of implementing 21 MW of grid-connected mini-hydro projects.â€? (The World Bank 2004, p. 5) Similarly, the RERED Project was scheduled to finance 85 MW of grid-connected electricity generation capacity addition from renewable energy resources by 2008. As at 30 September 2006, exceeding all expectations, the Project had approved 108.49 MW of SHP, 58.63 MW of which were already commissioned. However, only SLR 3.6 billion was disbursed, though credit facilities totaling SLR 4.8 billion have been approved (RERED Project, undated). The geographic distribution of approved loans is presented in Figure 3.1. The ESD and RERED Projects have established a disciplined legacy of astute risk assessment and management. Each sub- project is closely monitored. Loan officers inspect sites before every disbursement to ascertain if milestones have been successfully met. Independent consultants are also employed to verify compliance. The loan recovery rate is highly commendable.  Key Drivers of Development S E Figure 3.1 C Geographic Distribution of Approved T RERED Projects as at 30 September 2006 I O N T H R E E Source: www.energyservices.lk The RERED Project provides refinancing to six participating credit institutions (PCI), namely DFCC Bank, National Development Bank, Hatton National Bank, Sampath Bank, Commercial Bank and Seylan Bank. PCIs on-lend to private sector, small scale, grid-connected renewable energy projects, subject to the terms stated below (Sri Lanka Energy Managers Association 2003, p. 52): Æ’ PCIs receive refinance up to 80% of the total sub-loan amount. Æ’ The rate of interest is equal to the six-month Weighted Average Deposit Rate (AWDR). Æ’ Sub-loans granted by PCIs shall not exceed 10 years, including a maximum two-year grace period.  Key Drivers of Development S E C Æ’ The maturity period shall not exceed the economic life of T the asset financed. I Æ’ The maximum amount of re-financing available per sub- O project is United States Dollars (USD) 8 million. Æ’ Sub-loans are granted in SLR with GoSL bearing the N exchange risk. Other terms are decided at the discretion of PCIs. T H PCIs lend to qualified SHP projects generally on the R following terms: E Æ’ The project is mortgaged to the lenders. E Æ’ Of the total project cost, only 60%, and at most 70%, is considered for a loan facility. Æ’ The interest rate levied is generally five percentage points, or for a select few, four percentage points higher than the six-month AWDR. Æ’ The term of the loan rarely exceeds eight years, with the grace period limited to two years. Æ’ Loans are often co-financed by two or three PCIs. Æ’ A specified portion of the revenue from the sale of tariff is held in escrow until the loan is repaid. Rationale for Success The SHP industry developed because of the availability of medium to long term financing, via the ESD and RERED Projects. Lower interest rates, higher debt to equity ratios and longer grace and repayment periods matched the requirements of IPPs. Table 3.6 ESD and RERED Project Financing versus Commercial Lending 1997-2002 Terms ESD Finance Commercial Lending Debt: Equity Ratio 60:40 / 70:30 60:40 / 70:30 Weighted Average Deposit Rate Prime Lending Rate + Interest Rate + 4% 2-3% Grace Period 1-2 years 1-2 years Loan Repayment Period 6 to 8 years 6 to 10 years 2003 onwards Terms RERED Finance Commercial Lending Debt: Equity Ratio 60:40 / 70:30 60:40 / 70:30 Weighted Average Deposit Rate Prime Lending Rate + Interest Rate + 4-5% 2-3% Grace Period 1.5 – 2 years 1-2 years Loan Repayment Period Maximum of 8-9 years 6 to 10 years Source: Participating Credit Institutions, ESD and RERED Projects  Key Drivers of Development S E Table 3.7 C Financing based on Commercial Banks’ T Weighted Average Deposit Rate (AWDR) versus I Prime Lending Rate (PLR) O Interest Rate 2000 2001 2002 2003 2004 2005 AWDR 9.9 10.8 7.5 5.3 5.3 6.2 N AWDR + 5% (a) 14.9 15.8 12.5 10.3 10.3 11.2 PLR 21.5 14.3 12.2 9.3 10.2 12.2 T PLR + 3% (b) 24.5 17.3 15.3 12.3 13.2 15.2 H Differential (b-a) 9.6 1.5 2.8 2.0 2.9 4.0 R Source: Central Bank Annual Reports 2004, 2005 E At the given tariff levels, with ESD and RERED Project E financing, SHP projects became good investment options. This attractive level of profitability for the private sector cannot be maintained, unless similar medium to long term development finance is made available to the renewable energy industry. Else, for the continued flow of investment for renewable energy projects, IPPs will seek a higher tariff to compensate for more costly financing. vi] Local Technical Expertise The SHP industry is endowed with a skillful pool of local engineers and engineering firms. The industry has access to experienced and disciplined engineers who have honed their skills in the development of large scale hydro power projects in Sri Lanka. Following in their wake, another generation of business savvy engineers is now gaining recognition both locally and internationally. Rationale for Success Investor confidence in local engineering skills has paid off well. Local engineers have ingeniously adapted imported technology and know-how to suit indigenous conditions. As a result of these efforts, the cost of development in Sri Lanka is 20-30% lower than internationally accepted benchmarks, states Dr. Nishantha Nanayakkara. As evident from the foregoing Analysis of Investment in this Section, their technical prowess has evolved over the years and enabled them to resourcefully counter ever- increasing input costs. Consequently, local expertise is now sought after internationally and two Sri Lankan engineering firms are already established in African countries.  Key Drivers of Development S E C The practice of capitalizing the services rendered by engineers T has also acted as a compelling incentive to ensure a low cost, I high quality outcome in the long term. The relationship between investors and contractors are thus fortified. O Moreover, notes Mr. Sunil De Silva, a former development N banker and the Managing Director of DFCC Consulting (Private) Limited, the benefit to the SHP industry is amplified T by empowered engineers being pre-disposed to channel H lucrative earnings from share ownership towards further R project development. E E  Critical Success Factors 2.3 S E Many industry experts claim that the remaining 300 MW or more C of SHP projects are only marginally viable and the growth of the T SHP industry is set to diminish in the coming years. On the other I hand, 300 MW of indigenous renewable energy represent O significant savings to the country, the consumer and CEB, given that the generation tariff remains relatively cheap. Many IPPs are N of the optimistic view that the full optimal SHP potential can be achieved in the next five years. However, such a target can be met T only if the key issues reviewed next are resolved without delay. H R E i] Sustainable Tariff Methodology E The calculation of the avoided cost based tariff continues to be a contentious issue between CEB and IPPs. CEB contends that the published tariff is more than adequate to develop profitable SHP projects. However, for the past several years, GCSPDA has continuously disputed CEB’s tariff calculation and has called for a tariff structure that is equitable and transparent, and therefore sustainable. Various steps have been taken over the years to resolve this dispute: Æ’ In March 2000, the Capacity Credit Committee comprising representatives of CEB, GCSPDA and the Board of Infrastructure Investment concluded a study on providing a capacity credit in addition to an energy credit. Æ’ In June 2001, Dr. Tilak Siyambalapitiya completed a study for CEB on the existing method of tariff computation and recommended two alternative revisions. Æ’ SPPAs signed in 2002, carry an addendum assuring a bonus of 15% on the annual published tariff. Æ’ Since the published tariff for 2004 was in dispute, the 2003 rate was paid to IPPs in November and December of 2004. Æ’ A budget decision was taken to fix the tariff at the SLR equivalent of USD 0.06 per unit of SHP in 2005. The Treasury was instructed to bridge the difference over and above the avoided cost based tariff published by CEB. Progressive Action None of the above measures had any significant impact on the issue. Therefore, with a view to a conclusive resolution of this long drawn-out debate, the MoPE, with the assistance of the RERED Project, requested The Energy and Resources Institute (TERI) of India to review the tariff setting  Critical Success Factors S E C methodologies for grid-connected small power producers. T This study is currently in progress and favours “technology I specific cost based two tier tariffsâ€? (TERI 2006, p. 23). The recommendations are O Æ’ A cost based approach in two tiers – first tier for six N years corresponding to the debt repayment period and the second tier for the period thereafter till the T fifteenth year. H Æ’ Tariff decisions taken by PUCSL with stakeholder R input will be subject to review every three years. E Æ’ After the fifteenth year, projects continuing to operate will be charged a royalty. E Æ’ The difference between the actual avoided cost to CEB and the decided tariff will be borne by or reimbursed to GoSL. The avoided cost will be estimated jointly by PUCSL and CEB. See Annexure 2 for a comparison between the existing avoided cost and proposed cost plus approach. ii] Creative Project Financing Options The ESD Project and thereafter the RERED Project have been the main sources of medium to long term project finance for the SHP industry. These Projects addressed a market failure – lack of access to project financing with longer tenures. In September 2005, the RERED project declined new applications for debt finance since the allocation for grid-connected renewable energy projects were exhausted. However, only 75% of the allocated funds has been disbursed as at 30 September 2006. Because of limited RERED Project funds and a high level of sector exposure, PCI lending has been curtailed and/or become selective8. Increasingly, IPPs lacking a successful SHP development experience or reliable business track record will face difficulty in raising debt finance, despite the soundness of their project proposals. Additionally, in the absence of a suitable alternative to the RERED Project, PCIs will be inclined to provide debt finance on commercial lending terms, which may adversely impact the financial viability of a large number of SHP proposals. 8 CBSL recommends a sector exposure limit of 10-15%. The exposure to the energy sector is well below 10% of the loan portfolio for all PCIs. The limits for the renewable energy sector imposed by the management from time to time are subjective.  Critical Success Factors S E Progressive Action C T Due to the limited availability of RERED Project funds, any I delays in disbursements exceeding one year may now be liable for O cancellation and these reserves will be released to finance other projects in the pipeline. Furthermore, the World Bank is N considering an additional allocation of USD 40 Million to ease the financing difficulties faced by the SHP industry. This quantum T will finance another 65-70 MW of SHP projects. To create a more H competitive lending environment to benefit IPPs, the inclusion of R financially sound public sector financing institutions as PCIs in E the RERED Project has also been recommended. E To address the shortage of development finance in Sri Lanka, Mr. Jayantha Nagendran of the Administrative Unit of the RERED Project confirms that GoSL has agreed in principle to guarantee a debenture issue to raise the required capital to establish a revolving fund for SHP and other renewable energy industries. This proposal, drafted by the Administrative Unit of the RERED Project, is a pioneering effort to attract private investments under a sovereign guarantee for national infrastructure development programs. The revolving fund will be administered by the proposed SEA. There exists a high demand for project financing, with medium to long-term tenures, in Sri Lanka. However, no effective measures have been taken to establish such a culture despite the long-felt need. The impact of this deficiency is far-reaching in a country that requires a dynamic development agenda. In terms of the NRE sector, the failure of the RERED Project to initiate/create a project financing mechanism to sustain the development that has been successfully achieved is cause for concern. iii] Enhanced Planning, Absorption and Evacuation There are three main technical limitations impeding the development of NRE technologies, including SHP. They are: a] Planning Limitation The contribution from NRE technologies is ignored in generation planning. CEB states that generation from wind power and existing run-of-the-river SHP cannot be scheduled and dendro power, though conceptually dispatchable, is still in an experimental stage in Sri Lanka. SHP plants are must-run facilities. However, under the present SPPA, IPPs do not guarantee a minimum delivery amount. In light of these circumstances, CEB does not consider it prudent to include  Critical Success Factors S E C renewable energy technologies as serious supply options in T generation planning, asserts Mr. Gemunu Abeysekera, the I Deputy General Manager of CEB’s Transmission and Generation Planning Branch. This effectively undermines the O efficacy of NREs. N Progressive Action T H The ELECTRIC module of Energy and Power Evaluation R Program, previously known as the Wien Automatic System E Planning Package (WASP IV), is used to determine the optimal generation expansion plan (CEB 2005, p. 6-2). E “The WASP IV generation planning model has limitations on the number of options per year, hence it does not allow the analysis of small generating units. Also it cannot incorporate generating options like wind plants which cannot be centrally dispatched. Hence use of other generation planning models having adequate scope for all types of generating options would be more appropriate for generation planning.â€? (Energy Forum 2006, p. 33) Thus concludes the Energy Forum (Guarantee) Limited in a recent study on “Incorporating Social and Environmental Concerns in Long Term Electricity Generation Expansion Planning in Sri Lankaâ€?. The study also elaborates the importance of decentralized generation, because it avoids network losses and network investments costs. CEB and some industry experts beg to differ. However, the above exercise, if positively viewed, can initiate the basis for a constructive discussion among stakeholders to determine the means to evaluate all available energy sources in a level playing field. NRE is an option that cannot be ignored by a system heavily burdened by rising oil prices. The time is ripe for MoPE, with the assistance of PUCSL, to collate different perspectives in a participatory approach to achieve optimal generation expansion planning in Sri Lanka. b] Absorption Limitation System stability is a primary concern for CEB. As such, CEB limits embedded generation to 15% of the average demand and 6% of peak demand. This position is supported by the Master Plan Study on the Development of Power Generation and Transmission System in Sri Lanka completed by CEB and Japan International Cooperation Agency in 2006. According to this study, during the day, the current system permits only 20 MW under (n-1) conditions and 100 MW under normal conditions, and that too with  generation control from the dispatch centre. Part 1 of the Critical Success Factors S E Guide for Grid Interconnection of Embedded Generators states C that the requirement for some central control will be reviewed T when the total embedded generation capacity exceeds 10% of the I total minimal grid load (CEB 2000, Part I). CEB maintains that O embedded generation results in ancillary costs that occur because output is uncertain and volatile. There is no central control or N dispatch of embedded generators used in SHP and wind power plants. Generation plant power output is controlled by the T operator and connection availability. The plant will usually be run H at the maximum power available from the power source (Siemens R 2005, V). CEB (2005, p. E-2) estimates the peak demand for E 2007 as 2019 MW, 6% of which is equivalent to 121 MW of E embedded generation. It is very likely that this limit will be breached by SHP projects in 2007. Meanwhile, 10% of a typical minimum load for the system, which is 600 MW, has already been exceeded. GCSPDA questions these limits and has appealed to GoSL to commission detailed studies to ascertain the current technical limitations and provide appropriate solutions, if necessary. Progressive Action As a response to GCSPDA concerns, the RERED Project requested Siemens Power Technologies International of United Kingdom (Siemens) to conduct a preliminary “Technical Assessment of Sri Lanka’s Renewable Resource Based Electricity Generationâ€?. According to this report (2005, p. 8:46) , “studies suggest 140 MW of embedded generation connected at the 33kV voltage level, operating during normal peak load conditions is the limiting value of generation absorption allowable on the 2004 CEB networkâ€?. The absorption capacity would increase to 330 MW in 2008, 640 MW in 2012 and 690 MW in 2013, given that current network development plans are implemented (Siemens 2005, p. II). The Siemens’ Report (2005, p. 8:45-47) stresses the need for more detailed investigations of system limitations and recommends the upgrade of software and increase in the number of trained engineers in the transmission planning department at CEB. CEB has requested the RERED Project for financial assistance for resource improvements in the Transmission Planning Department (The World Bank 2006, p. 3). The RERED Project also awaits a proposal from CEB for a study on the impact of embedded generation on the reverse flow of power through grid sub-stations, short circuit levels and n-1 reliability criteria. Additionally, with the assistance of the United States Agency for International Development (USAID) and in collaboration with  Critical Success Factors S E C Bonneville Power Company of the United States of America T (USA), CEB is currently conducting a comprehensive analysis I of the absorption capacity of Sri Lanka’s power system. O C] Evacuation Limitations N A large number of projects in the pipeline are faced with grid sub-station capacity constraints, which has become the main T reason for CEB to refrain from issuing new LoIs. According H to CEB’s Annual Report for 2005, ‘all the grid sub-stations R which are close to potential mini hydro power sites have E exceeded allowable dispatch limit and hence new proposals are not entertained for connection to these grid sub-stations’. E As at 30 June 2006, the Energy Purchase Branch of CEB had in hand 808 applications for grid-connected, small-scale NRE projects pending approval. 18.4 MW of capacity enhancements for existing projects has also been stalled, due to this reason. This is the most serious technical limitation faced by the SHP industry. Each grid-sub station has an absorption capacity of 25 MW. CEB claims that seven grid sub-stations in SHP resource potential areas will be in violation of the (n-1) condition, if additional transformers are not installed in the near future. GCSPDA asserts that over 130 MW are in the pipeline for connection to Nuwara Eliya, Badulla, Wimalasurendra, Balangoda, Ratnapura and Seethawaka grid sub-stations, all of which require augmentation in the said order of priority, if the absorption capacity limit of 25 MW is to be maintained. Table 3.8 Grid Sub-Station Capacity Augmentation Location No. of 31.5 MVA Transformers Ratnapura 1 Balangoda 2 Wimalasurendra 2 Badulla 1 Nuwara Eliya 1 Seethawaka 1 Deniyaya 1 Total 9 Source: The World Bank Implementation Review Mission April 2006  Critical Success Factors S E In recent years, CEB’s standard LoI issued to developers of SHP C projects stipulates that the developer may have to build or bear T the cost of some or all of the facilities required for the I interconnection on the CEB side of the Point of Supply. Though O the SPPA clearly states that IPP is responsible for facilities required to supply the energy output only up to the N interconnection point, the LoI has made provisions for CEB to request developers to construct or bear the cost of all or some T facilities beyond this point. H R CEB is unable to evacuate power from a significant number of E SHP projects with the existing network. These projects cannot be commissioned without the additional investment for line E augmentation beyond the point of supply. Thus, IPPs are therefore compelled to carry this added burden, especially if construction has already commenced. Previously profitable project forecasts are then rendered commercially unviable, with no recourse available to IPPs. The merits of a deep versus shallow connection charge is debatable. Developers may prefer the lower initial cost resulting from a shallow connection charge. If, however, a deep connection charge is levied, then the obligations of CEB to supply evacuation facilities quickly and reliably can be strengthened. Financial penalties are reasonable to compensate CEB’s failure to evacuate power. Furthermore, the benefits of distributed generation too can be factored into connection agreements depending on the quality of CEB’s capital expenditure planning systems9. Progressive Action To resolve the grid sub-station capacity limitation, MoPE has obtained approval from the cabinet to share equally the cost of development with IPPs who will benefit from capacity augmentation. Development will be carried out in stages and three sub-stations will be targeted initially. However, the decision on priority locations for development requires further deliberation. The Rural Electrification and Network Expansion Project completed by Dr. Tilak Siyambalapitiya in 2006 for the Asian Development Bank may prove to be a valuable guide for this purpose. According to GCSPDA, CEB estimates the development cost of the Badulla sub-station at SLR 348 Million and the Wimalasurendra sub-station at SLR 388 Million. The upgrade of 9 Peer Review, May 2007  Critical Success Factors S E C these two sub-stations can be completed in approximately 2.5 T years. Accordingly, LoIs are now being charged SLR 7 to 8 I Million per MW, as a deposit against the cost of grid sub- station augmentation. Conversely, GCSPDA maintains that O the installation of a single 31.5 MVA transformer can be N completed in one year at an approximate cost of SLR 150 Million. T H Regrettably, as yet, no action has been taken to strengthen the R transmission and distribution line networks to evacuate E generation from SHP projects. GCSPDA has requested GoSL to seek donor assistance to develop supporting E infrastructure as a measure to promote environmentally- friendly energy generation in Sri Lanka. iv] Streamlined Approval Process Almost all projects require an extension of the LoI once or twice (maximum period permitted by CEB), because of bureaucratic delays in obtaining the approvals required to qualify. According to CEB, as at 30 September 2006, 17 SHP LoIs have become invalid mainly due to difficulties in obtaining approvals. Likewise, several SPPAs too have been cancelled. These delays are primarily due to difficulties in securing private and crown land. All in all, the average gestation period for a SHP project is 5 years. (See ‘Analysis of the Project Life Cycle’ in this section for a detailed performance review of SHP projects.) In the absence of firm guidelines or a national mandate for granting approvals to SHP projects, the approval process is arbitrary and can be subject to abuse for private gain by both officials and developers. The many bureaucratic layers have evolved into an incoherent web of regulations imposed by various institutions, which, at times, override and conflict with one another. Progressive Action MoPE has taken a vital step to ensure the progress of the NRE industry by formulating SEA, after considering the views of all stakeholders. The SEA Bill was scheduled to be presented in parliament before the end of 2006. SEA is empowered to act as the implementing agency to achieve national NRE targets and will be the key institution mandated to address the deficiencies in the approval process. Nevertheless, the level of priority accorded by GoSL and MoPE to the development of the NRE sector will have a direct bearing on the effectiveness of SEA.  Critical Success Factors S E Among the numerous suggestions from IPPs to improve the C content and practice of approvals, the recommended changes to T the SPPA are worthy of mention. The SPPA has room to evolve I in terms of the following inadequacies, subject to careful study: O Æ’ The SPPA must be technology specific to address the particular requirements of each industry. The current format N provides a good starting point. Æ’ The bankruptcy, dissolution or liquidation of the buyer T cannot be grounds for termination of the SPPA. H Nationalisation, expropriation, or confiscation of the assets or R authority of CEB by any authority of GoSL cannot be E considered a force majeure event. Though the SPPA does not E have a sovereign guarantee, inability to honour the agreement due to state action is cause for concern. Æ’ The SPPA must address the consequences of restructuring or reorganization of CEB. Æ’ The SPPA must be protected from a change-in-law situation. Æ’ The mediation of a regulatory authority and/or facilitator should be considered to enforce the rights and obligations of the developer. Æ’ Issues with the tariff calculation methodology and its implementation should be resolved. Æ’ The justification for extending the contract period should be reviewed. The SPPA must reflect the many policy changes that are in the offing. An inclusive process accommodating key stakeholder input is always prudent to ensure that the intent and purpose of the SPPA remains unsullied and its effectiveness remains intact. As evident from the above suggestions, the granting of approvals must evolve with time. The current public administrative system has seen little change since the colonial era. Streamlining approval procedures will not only benefit the NRE industry, but may also result in improving the overall performance of the respective agencies. The numerous beauracratic layers can be rationalized and made efficient through the intervention of SEA supported by the mandate and commitment of GoSL. v] Renewable Energy Strategy and Targets Implementation of the above four initiatives calls for a clear plan and a strong commitment. Justified by a comprehensive cost- benefit analysis, GoSL must have a long term vision to promote NRE and release the country from its heavy dependence on imported fossil based thermal energy sources.  Critical Success Factors S E C Progressive Action T I A draft national energy policy has been finalized. (See Section 2 for further details.) Its complement, a national renewable O energy policy is currently being drafted. To be effective, these N policies must establish specific targets that are dynamic, yet achievable. Dedicated institutions must necessarily be held T accountable for the timely and full implementation of these H targets. R E E Common Concerns The five critical success factors that determine the future of the SHP industry have equal import for the development of wind and bio-power, which are now poised for growth10. The advantage for policy makers is that such known derivatives of a mature industry can be dealt with in advance for other emerging technologies to ensure their rapid progress. Common issues detailed above will be alluded to in subsequent sections. 10 Absorption limitations are unique to embedded generation and, hence, may not be applicable to bio- power which can be scheduled. Section Four Exploiting Sri Lanka’s Wind Power Potential  Exploiting Sri Lanka’s Wind Power Potential S E According to CEB (2005, p. 5-2), “studies have revealed that C wind is the most promising option of the available renewable T energy resources for grid connected power generation in Sri I Lankaâ€?. O N Confirming this statement, the Wind Energy Resource (WER) Atlas of Sri Lanka reveals nearly 5,000 km2 of good-to-excellent F wind resource potential. About 4,100 km2 of this area is land, and O the balance 700 km2 is lagoon. As indicated in Figure 4.1, these U areas are largely concentrated in two regions: a] the northwestern R coast from the Kalpitiya Peninsula northwards to Mannar Island and the Jaffna Peninsula; and b] the central highlands, mainly the Central Province and parts of Sabaragamuwa and Uva Province. Other noteworthy regions include the southern part of the North Central Province and south eastern coastal belt of the Southern Province. Using a conservative assumption of 5 MW per km2, the WER Atlas supports a potential of 24,000 MW of installed capacity, bearing wind speeds in excess of 7 m/s at 50 meter height above ground level with wind power densities in excess of 400 W/m2. The resource area for good to excellent wind potential covers 6% of Sri Lanka’s total land area. If moderate wind areas too are considered, 15% of Sri Lanka can yield over 50,000 MW of installed capacity (Young & Vilhauer 2003, p. 4).  S Figure 4.1 Wind Energy Resource Atlas of Sri Lanka E C T I O N F O U R  Resource Development Initiatives S E From 1988 to 1992, the Pre-Electrification Unit of CEB carried C out a resource assessment study of wind power potential in the T southern lowlands that included nine 20 m meteorological towers. I This study identified a potential of 200 MW in the south eastern O regions of the island at approximately 8 MW per km2. N In March 1999, with the assistance of the ESD Project, a 3 MW F pilot plant was commissioned by CEB in Hambantota and is O currently in operation. From 2000 to 2005, the plant factor U averaged at 11%. R Encouraged by the outcome of the pilot project, CEB conducted a second resource assessment on the west coast in the Puttalam area and in the central regions of Sri Lanka, from 1999 to 2002 (CEB 2005, p. 5-2). In February 2002, CEB called for proposals from the private sector to develop a 20 MW wind plant each in Puttalam and Hambantota on a build, own and operate basis. Only one qualified applicant submitted a proposal for a plant in the Kalpitiya Peninsula. Other 13 prospective IPPs, who submitted Expressions of Interest to CEB, claimed that the bidding process was restrictive in terms of the conditions for qualifying and the proposed tariff calculation methodology (Young & Vilhauer 2003, p. 4). The National Renewable Energy Laboratory, in partnership with USAID, published a report on “Sri Lanka Wind Farm Analysis and Site Selection Assistanceâ€? in 2003. NREL’s meso scale WER Atlas is qualified with a site screening process carried out by Global Energy Concepts LLC. The foci of the study were the central, western and southern regions of the country; the northern and eastern areas were excluded because of the prevailing civil conflict.  Resource Development Initiatives S E C Thereafter, CEB unsuccessfully sought to develop a 30 T MW wind farm in the Kalpitiya Peninsula with foreign I funding assistance. Recently, a decision has been taken by O MoPE to issue 5 LoIs, which are sited in that same area. 4 N LoIs are for plants less than 10 MW each, totaling to 33.8 MW; the other LoI for 50 MW has been issued to an Indian IPP. The SPPAs for these projects are now being F prepared. O U R ECF is in the process of establishing a national reference station (NRS) network islandwide for long-term wind data collection. Two NRS masts were expected to be erected in 2006. According to Mr. Harsha Wickramasinghe, these data records will help developers forecast plant performance with greater accuracy.  Key Market Drivers S E C Though the estimated potential is significant, the successful T development of wind power rests on a few key factors, some of I which are concerns common to all grid-connected, small scale O renewable energy generation. These common issues are addressed N in detail in Section 3: Critical Success Factors and emphasize the need for a national renewable energy strategy; technology specific sustainable tariff methodology; improvements in the utility’s F planning, absorption and evacuation capacities; creative financing O options; and a streamlined approval process. U R Issues Specific to Wind Power The Sri Lanka Wind Farm Analysis and Site Selection Assistance Report (Young & Vilhauer 2003, p. 5-14) identifies the factors that influence the development of a wind power project in Sri Lanka as follows: 1] Site Selection Constraints a] Land Availability The estimated potential of 24,000 MW of good-to-excellent wind resources is limited by the availability of land. Areas that must be excluded are Æ’ national parks, wildlife sanctuaries or other reservations; Æ’ migrations routes of birds and habitats of rare or endangered bird species; Æ’ urban areas with aviation and telecommunication infrastructure; Æ’ security zones; and Æ’ culturally sensitive sites. b] Natural Terrain Conditions The orientation of the terrain relative to wind direction is a prime factor in site selection. Wind turbines are generally sited perpendicular to wind direction. When the wind blows consistently from one direction, perpendicular ridgelines are preferred to maximize the number of turbines used; relatively, mast-to-mast spacing is less and row-to-row spacing is more. When multiple directions are involved, the mast-to-mast and row- to-row spacing are similar.  Key Market Drivers S E Generally, the most cost-effective designs have turbine C foundations that run 10-15 m deep. Excavation or grading T must be possible. Also, complex terrain features can lead I to sub-optimal turbine siting. O N Vegetation over 10 m in height may cause turbulence and increase risk of damage to turbines. Adversely, clearing F vegetation may harm the environment and increase project cost. O U R c] Electricity Evacuation Capacity Sri Lanka Wind Farm Analysis and Site Selection Assistance Report reveals that in many areas, grid sub- station and transmission line capacity constraints limit electricity evacuation. For instance, at the time the study was completed in August 2003, only about 20 MW of additional capacity was available at sub-stations on the west coast and the southern region, while 30-50 MW could have been accommodated by sub-stations in the central hills. Even if grid interconnection is possible, transmission lines may have insufficient carrying capacity. New conductors can be used to upgrade existing capacity or alternative paths can be used to create space on the lines. Stability at the grid-interconnection point is another concern, which may have a considerable impact on plant performance if subject to frequent outages or voltage/frequency excursions. Cost of interconnection and transmission particular to the plant must be factored into the project cost to ascertain commercial viability. If projects are concentrated, infrastructure costs can be shared by the developers and even the utility, as in the case of four plants, totaling 33.3 MW, to be developed side by side in the Kalpitiya Peninsula. Ideally, detailed studies must “identify the most cost-effective plan for wind power development that balances system upgrade costs with utilizing sites with the highest wind resource potentialâ€?.  Key Market Drivers S E C d] Logistics T I Transportation of turbines and construction cranes will depend O on weight and dimension limitations of roads. Coastal areas may N escape these restrictions, with the additional advantage of having access by sea. However, roads in Sri Lanka’s central regions are less developed than those on the coast and tend to have many F tight-radius turns and low-capacity culverts. Turbines of only 600 O kW or less can be transported inland under current conditions. U “Although construction logistics present some challenges and R may limit turbine size, they do not preclude development of utility-scale wind energy projectâ€?. 5] Long Term Data Collection Wind patterns of identified areas for development must be monitored over a period of time. This data is vital for forecasting a plant’s performance. Wind patterns in Sri Lanka are governed by the monsoons. The southwest monsoon is stronger and penetrates farther inland than the northeast monsoon. ECF is planning to establish a NRS network covering strategic locations. Data thus collected will prove invaluable to investors. 6] Absorption of Embedded Generation CEB’s primary issue with the development of wind power is ensuring system stability. In the absence of the necessary tools and training to determine the impact of wind power on the system, CEB has little choice but to adopt a conservative approach. In 2003, CEB’s estimate of additional wind power capacity was limited to 7% of peak load, or approximately 100 MW (Young & Vilhauer 2003, p. 4). The Report also recommends a detailed investigation to establish permissible wind power capacity at each candidate site and of the system as a whole, given existing system stability and power quality requirements. With USAID assistance, CEB is currently conducting this study in collaboration with Bonneville Power Company of USA11. 11 According to the Peer Review, a similar study of the New York Power System established that at least 10% of the total generation can be reliably supplied by wind power with only minor adjustments to system planning, operation and reliability practices.  Key Market Drivers S E C 7] Construction Capability T I Though Sri Lanka has adequate know-how in turnkey O development of large scale infrastructure projects, utility- N scale wind power experience is non-existent. Additional expertise and equipment are easily available in India, one F of the largest wind power developers in the world. O In 2003, the capital cost of a 20 MW project with 600 kW U wind turbines ranged between USD 1,195 and 1,325 per R kW. Plant factors of these turbines can vary from 26% to 34%. At large commercial wind farms in USA, turbines with capacities of 1 MW or more were being installed at USD 900 - 1,000 per kW (Young & Vilhauer 2003, p. 23). Accordingly, the appropriate siting and sizing of farms can reduce costs considerably. Furthermore, capital costs and turbine performances have significantly improved over the years12. 12 The American Wind Energy Association claims that the cost of electricity from utility scale wind turbines has dropped by more than 80% over the last 20 years. Costs continue to decline as more and larger plants are built and advanced technology is introduced.  Key Market Drivers S E Resource Optimization Strategy C T For the optimal exploitation of Sri Lanka’s wind power potential, I the following initiatives must be carried out: O N Æ’ conduct an economic analysis to justify the implementation of national wind power generation targets; F Æ’ forecast the quantum of wind energy that can be practically absorbed by the power system, based on empirical expert O knowledge acquired from overseas operations combined with a U sound assessment of the local environment; R Æ’ formulate and implement a medium to long term action plan for the development of wind power; Æ’ supply adequate tools and training to CEB to manage system stability and power quality; Æ’ establish a suitable tariff rate, which ensures economic viability for the country, and commercial viability for the utility and the developer; Æ’ consider the cost of grid augmentation required to evacuate electricity when setting the tariff; Æ’ offer tax concessions and subsidies to developers with the objective of reducing the tariff burden on the electricity consumer; Æ’ provide additional support for site screening and data collection to facilitate investment; and Æ’ assist developers through SEA to resolve difficulties in securing approvals and land. Section Five The Future of Bio-Power in Sri Lanka  The Future of Bio-Power in Sri Lanka S E C This study identifies biomass as renewable organic plant and T animal matter that can generate energy in the form of electricity I and heat. Biomass that can be used for energy purposes include O fast-growing trees and crops, leftover materials and residues from wood based industries, agriculture residues, agro-industrial by- N products, animal manures and municipal solid waste. F I Bio-power has several distinct features: Æ’ Bio-power can be generated on demand, and thus can be V scheduled as a firm source of energy by a centralized system. The E fuel is a product of human labour and resource quality and quantity can be controlled to a great extent. Bio-power differs from run-of-the-river hydro and wind plants, which are directly subject to the vagaries of Mother Nature. Æ’ Generating bio-power is a labour intensive operation. Procuring the resource requires a high level of management to ensure a smooth and profitable operation, whereas both SHP and wind power plants, once constructed properly, warrants little supervision as the resource is provided by nature. Æ’ The bio-power plant operation can provide a sizeable number of employment opportunities, if the biomass used is not a by- product of another industry and is cultivated specifically to fuel the plant. The Bio-Energy Association of Sri Lanka (BEASL) estimates that a 1 MW plant will provide an adequate livelihood for 1,200 villagers. Hence, such bio-power plants can have a continuous positive impact on the quality of life of the people providing the biomass resource. Æ’ In essence, “all biomass is localâ€?, since resources in particular localities can be employed to power local plants, giving rise to distributed generation (Michigan State University undated). Furthermore, unlike SHP and wind power which have limited areas of resource potential, one or more forms of biomass are relatively freely available across the country. Æ’ Bio-power is regarded as carbon dioxide (CO2) neutral. During combustion, CO2 that was absorbed by the plants during growth is simply released back to the atmosphere. If the cycle of growth and harvest is maintained, all CO2 released during combustion will be sequestered. On the other hand, SHP and wind power plants have zero CO2 emissions and are net contributors to the environment. Æ’ Because of fewer emissions during combustion, replacing conventional fossil-fuel sources with bio-power will improve air- quality. Fossil fuel reserves are limited, whereas bio-power is a renewable resource.  The Future of Bio-Power in Sri Lanka S E C Æ’ Biomass, if cultivated for fuel, can carry the added T benefits of improving soil quality and preventing soil I erosion. Further, when by-products and residues of O industries are used for energy generation, problems and N costs of disposal disappear, and an additional source of revenue emerges, instead. F The generation of bio-power carries the added advantages of I securing rural economic growth, national energy security and V environmental benefits for the country. Therefore, the E economic potential of bio-power should be assessed without delay. According to the Energy Efficiency and Renewable Energy Information Centre of the United States Department of Energy, there are four primary classes of bio-power systems: i] Direct Fired – These are the most commonly used systems. The plant burns biomass fuel in a boiler to produce the steam flow that causes a turbine to rotate and in turn spin the electric generator. Though steam generation is a proven technology, actual plant efficiencies are in the low 20% range for biomass power boilers that typically have a capacity of 20-50 MW. Higher efficiencies exceeding 40% can be achieved, but are costly. ii] Co-firing – A portion of existing power plants, usually coal, are substituted with bio-energy. Co-firing is cost effective because much of the existing power plant infrastructure can be used without major modifications or loss in efficiency. The biomass boiler can be tuned for peak performance to achieve a high efficiency of 33-37%, which is similar to that of a modern coal-fired power plant. iii] Gasification – Solid biomass is heated and broken down to a flammable gas. Biogas can be filtered and used in combined cycle systems that use both gas and steam turbines to generate electricity. The efficiency of these systems can reach 60%. Also, hydrogen fuel cells that convert hydrogen gas into heat, power and water vapour can be combined with gasification systems in future applications.  The Future of Bio-Power in Sri Lanka S E iv] Modular Systems – The above technologies are adapted to C suit small-scale usage in villages, farms and industries. T These systems are useful in remote areas where biomass is I abundant, but electricity is scarce. O N Evidently, the most economical forms of biomass for generating bio-power are residues. Generating energy from residues can F recoup the energy value in the material and avoid the I environmental and monetary costs of disposal or open burning. V Residues, as described by the Biomass Program of the United States Department of Energy, are the organic by-products of E food, fiber, and forest production such as sawdust, rice husks, wheat straw, corn stalks, and bagasse (the residue of sugar cane after juice extraction). Worldwide, the most commonly used biomass fuel is wood and the most economical sources of wood fuel are wood residues. However, in the future, fast-growing energy crops may become the fuel of choice for bio-power. In Sri Lanka, there are four key sources of bio-fuels: i] Industry Residues An immediate potential can be identified with wood-based industries (i.e., in Moratuwa); paddy cultivation (e.g., in Anuradhapura, Ampara and Kurunegala); and sugar-cane plantations (i.e., Pelawatte and Sevanagala). In 2004, a LoI was issued for a paddy husk based 3 MW project. Some experts are of the view that 20 MW is a conservative estimate of potential from this source. Experts also surmise that a 25 MW bio-power plant can be sited in each sugar cane plantation in Pelawatte and Sevanagala. Nevertheless, little has been done in the way of realizing power generation possibilities from industry residues in Sri Lanka. In most instances, ensuring a steady supply of raw- materiels from a large number of private sources can be a daunting task. ii] Industrial By-Product A 1 MW power plant is operated by Haycarb Limited in their Badalgama activated carbon manufacturing factory. Heat energy from the production process is used to burn coconut shells in a gasifier. The gas so produced is used as the fuel for the steam boiler. The Badalgama plant capacity is expected to grow to 8 MW in the future. In Sri Lanka, combined heat and power solutions can be widely used for industrial applications in rubber processing, ceramics, tea drying, food processing, brass melting etc. End-user efficiency  The Future of Bio-Power in Sri Lanka S E C can be maximized through such co-generation technologies T (Inter-Ministerial Working Committee 2005, p. 21). For I instance, by using a micro gasifier, both electricity and O thermal energy requirements can be met and the present total N energy cost of the tea industry can be reduced by an estimated 40-50%. Thus, by-products can be used to generate energy in certain industries, the potential for which remains F largely unrecognized. I V iii] Solid Waste The State of the Environment Report in 2001 estimated the E generation of solid waste in Sri Lanka at 6,400 MT per day. Based on the projected growth rate of 1.2% per annum, the daily solid waste quantity in 2006 would nearly reach 6,800 MT. 60% of the total is collected from the Western Province. Unlike in rural areas, the collection and disposal of urban waste has become a crucial issue. Therefore, waste-to- power solutions are an ideal remedy, which is yet to be implemented. iv] Dendro Dendro based bio-power has received serious attention lately as a result of the efforts of a dynamic group of stakeholders. This technology holds much appeal in terms of its employment generation capability in rural areas. As such, the Report of the Inter-Ministerial Working Committee on Dendro Thermal Technology prepared in June 2005 recommends a target of installing 100 MW in three phases by 2010, as indicated in Table 5.1. To date, only 1 MW of dendro power has been commissioned. 1 MW fuel-wood or dendro power plant consumes 30-40 MT of raw material per day. 20-30 MT of fuel wood can be harvested per ha in a year. To power a 1 MW plant, approximately 400 ha is required to yield 10,000 MT of fuel- wood per annum. As such, to operate a target 100 MW of dendro power plants, Table 5.2 shows that 100,000 ha of land have to be harvested. Table 5.1 Targets for Dendro Power Phases Installed Capacity Date of Date of (MW) Commencement Commissioning 1 10 01.07.2005 31.12.2006 11 40 01.01.2007 31.12.2008 111 50 01.01.2009 31.12.2010 Source: Report of the Inter-Ministerial Working Committee on Dendro Thermal Technology June 2005  The Future of Bio-Power in Sri Lanka S E Table 5.2 C Targets for Fuel-Wood Plantation T Phases Developer Out grower Home Gardens/Mixed (20 MT/ha/annum) (20 MT/ha/annum) (5 MT/ha/annum) I 1 1,600 1,600 6,800 O 11 6,400 6,400 27,200 N 111 8,000 8,000 34,000 Source: Report of the Inter-Ministerial Working Committee on Dendro Thermal Technology June 2005 F I Of about 15 tree species tested and identified as suitable tree crops, Gliricidia (Gliricidia Sepium) is by far the most versatile V (Inter-Ministerial Working Committee 2005, p. 29). Gliricidia is a E drought resistant plant that can be found in all parts of the country. It is grown as an under-crop in coconut plantations, as shade-growth in tea plantations and a support plant in intercropping such as pepper. Widely used for perimeter fencing, Gliricidia can flourish in marginal and unutilized lands, as well. It has the capacity of absorbing moisture from the atmosphere and nourishing the soil with nitrogeon. This plant requires minimal attention. Its continuous yielding capacity lends itself for large- scale plantation. Three bio-power plants amounting to 2.1 MW have been connected to the national grid. As at 30 June, only 2 plants were operational. SPPAs for a further 12.3 MW and LoIs for a 3.05 MW plant have been issued as at that date, as per Table 5.3. Table 5.3 Grid-Connected Bio-Power Projects in Sri Lanka Year of Capacity (MW) Project event DP BP SW IR Operational* Walapone 2004 1 Badalgama 2005 1 SPPA Signed Kochchikade 2004 2.5 Thelawala 2004 9.8 LoI Issued Nelungama (paddy husk) 2004 3 Galporuyaya 2004 0.95 Ekala 2005 0.1 Piliyandala 2006 2 Source: DFCC Consulting (Pvt.) Ltd. DP - dendro power SW - solid waste BP - industry by-products IR - industrial residues * 0.1 MW waste heat power plant in Madampe was commissioned in 1998, but no longer operational.  Lessons from Walapone S E C The first and only dendro plant in Sri Lanka was T commissioned in Walapone on 9 November 2004 by Lanka I Transformers Limited (LTL), a subsidiary of CEB. In 2005, O the plant contributed 2.2 GWh to the national grid, operating N at an efficiency factor of 25%. LTL faced many teething problems, which have now been resolved to a great extent. However, the profitability of this venture has been called into F question. Nevertheless, the Walapone operation is a realistic I yardstick for future projects. V E In a discussion with Mr. Ravindra Pitigallage of Lanka Transformers Limited, the following four key aspects of the Walapone operation were highlighted: i] Technical problems Machinery and equipment sourced from India have not proven to be reliable. Aside from an unforeseen cost over- run during procurement, which was beyond the control of IPP, the plant was not operational for most of 2005 because of turbine failure. Thus, proven technology that can be modified to suit the local environment must be employed. ii] Fuel-wood supply bottlenecks LTL contracted with Ceylon Tobacco Company Limited (CTC) to obtain a steady supply of fuel-wood for the plant. This agency mobilized 150 families in 3 adjacent villages to grow Gliricidia as fuel-wood. The supply, however, has not been adequate. LTL now pays SLR 3 per kg (SLR 1 more than the initial contract price), so enabling CTC to secure the required quantity from farther afield. Approximately 4 kg of Gliricidia are required to generate 1 kWh of dendro power. (Moisture accounts for about 20% of Gliricidia’s weight.) This means that LTL spends SLR 12 per kWh for fuel alone. Given the current tariff of SLR 8.50 per kWh, the cost of fuel-wood renders the project commercially unviable. Thus, the cost and reliability of the fuel-wood supply must be ensured at the outset.  Lessons from Walapone S E C iii] Grid failure T The plant is connected to a highly unstable grid via a long I transmission line. Evacuation of generation is only available for O an insupportable 50% of operational time, because of grid failure. Once the boilers are shut down, it takes 4 hours to recommence N operations. Furthermore, combustion of fuel-wood cannot be stopped instantaneously, which means that the quantity fed to the F boiler is consumed even if electricity is generated or not. I Thus, a dendro power plant requires a consistent generation V evacuation system. E iv] Poor siting Evidently, location determines access to raw material, as well as the cost and quality of the evacuation of electricity. Furthermore, proximity to adequate supplies of water for cooling purposes is a necessity for dendro power plants. According to a former employee, the Walapone plant was built on bedrock, which prevented the drilling of wells to draw ground water. Lack of water undermines the smooth flow of the operation and, thus, can contribute to drastically increasing the cost of power generation. Thus, the site for a dendro power plant must be chosen with foresight to minimize contingencies. Section 5 is mainly devoted to the development of dendro based bio-power in Sri Lanka since the focus of the private sector has been concentrated on this sub-sector. However, the issues impacting other forms of bio-power, too, have been dealt with in the process.  Rapid Deployment of Bio-Power S E C In August 2004, the cabinet decided on a series of proposals T to promote electricity generation from biomass through I dendro thermal technology. The key decisions, according to O BEASL, are summarized below: N Æ’ The cabinet decision recommends special emphasis on facilitating financing mechanisms, development incentives F and land allocation procedures for bio-power in the I national renewable energy strategy. V Æ’ This technology is promoted as the third source of firm E power in Sri Lanka. To mobilize large-scale fuel wood farming, fuel wood plantations will be elevated to the level of other commercial crops. Æ’ To support the development of NRE, the Sri Lanka Energy Fund (SLEF) has been created to bridge tariff differences; promote off-grid projects; and finance institutional expenditure, research and development activities, and initial farming enterprises. Æ’ A two-tier tariff comprising SLR 8.50 per kWh for the first 7 years followed by a uniform tariff of SLR 7.00 per kWh thereafter was approved. The difference over and above the avoided cost based power purchase tariff published by CEB will be borne by SLEF. A capacity charge for plants of 5 MW or more will be offered in the future. Æ’ A new SPPA specific to bio-power will also be established at the completion of the first 50 MW. Many of these decisions address issues that are common to all NRE technologies. Section 3: Critical Success Factors describes in detail the recent developments pertaining to five key factors that impact the progress of the bio-power industry and other sectors.  Rapid Deployment of Bio-Power S E C Issues Specific to Bio-Power T I The Report of the Inter-Ministerial Working Committee on O Dendro Thermal Technology (2005) identifies 16 measures to overcome issues and promote the rapid deployment of the N technology. Concerns specific to bio-power, as highlighted in the said Report and by other stakeholders, are F I V I Research and Development E There are two aspects that require attention: a] Technology: The development of technology for bio-power has been relatively slow after World War II because of readily available oil resources (Inter-Ministerial Working Committee 2005, p. 55). Technology differs with the type, quantity and quality of biomass available in Sri Lanka. Continuous research is required to secure economical and efficient solutions. b] Fuel-wood farming: This is a complex subject that involves identifying Æ’ various species that make good fuel-wood (some regional plant varieties are superior to Gliricidia which has a high water content, claim a few potential developers); Æ’ farming methods that are sustainable and profitable (i.e., integrated with other farming practices – Gliricidia leaves make ideal fodder for goats and sheep); Æ’ preparation of raw material for efficient combustion (e.g., Mr. Harsha Wickramasinghe explained that a machine developed by the University of Moratuwa to peel off cinnamon bark can also be used to rid Gliricidia of the moisture-high outer layers); Æ’ cost-effective logistics; Æ’ resourceful storage procedures and waste reduction methods; and Æ’ techniques for management and administration of energy based farms and plantations. This necessitates the involvement of a variety of agencies such as the Coconut Cultivation Board, the Department of Export Agriculture, the Department of Animal Production and Health etc. Those sectors under their purview can benefit by introducing fuel-wood cultivation to farmers as a supplementary source of revenue.  Rapid Deployment of Bio-Power S E C The Alternative Energy Division of the Ministry of Science T and Technology has tested fuel-wood farming in different I parts of the country to a limited degree. The Coconut O Research Institute, too, has carried out large-scale planting N programs in their trail farms. Similarly, under a coordinated program, research institutions in agriculture, horticulture, livestock development etc. can explore best practices in F sustainable farming culture for bio-energy generation in Sri I Lanka. V E A fund has been proposed for research and development. Potential sources of finances are GoSL; specific programs funded by GoSL, such as rural development and poverty alleviation schemes; and international donors, such as the Global Environment Facility. II Resource Assessment Irrespective of present ownership patterns, the Inter- Ministerial Working Committee on Dendro Thermal Technology (2005, p. 30) reports that the cultivation of dendro can be organized as i] large-scale dedicated plantations; ii] large and medium scale under-crop plantations; iii] medium scale village plantations with different agronomic practices; iv] village perimeter fencing tree crop systems; and v] home gardening systems. The availability of such land in areas friendly to the recommended plant species can be ascertained. Concentrations of agro industries with combustible by- products and residues can be located. Thereafter, emphasizes Mr. Parakrama Jayasinghe, the President of BEASL, these locations must be matched with the availability of infrastructure: access to grid sub-stations with available capacity, navigable roads and adequate water for cooling the plant. The SHP experience shows that once an industry is perceived as lucrative, IPPs themselves will carry out extensive resource assessments. Since the bio-power sector has not reached this stage as yet, any initiative taken by a dedicated organization will help speed up the development process, while drawing attention to the existence of the vast potential that has been projected.  Rapid Deployment of Bio-Power S E For instance, BEASL estimates that 500,000 hectares of unused C scrub and chena lands can yield 10 million tonnes of fuel-wood T annually. This tonnage will be adequate to power 1,200 MW of I small power stations across the country (Energy Forum 2006, p: O 21). N Figure 5.1 F Dendro Power Potential in Sri Lanka I V E Source: Bio-Energy Association of Sri Lanka iii] Pilot Program All stakeholders interviewed were in favour of establishing a pilot program to prove the efficacy of dendro power technology. ECF has already earmarked Hambantota for this program. Both CEB and the RERED Project have confirmed their support for a viable proposal. The program is intended to commence with one project and if successful, more plants will be commissioned in allocated sites in the vicinity. Supply of raw material, uninterrupted evacuation of electricity generated and access to water will be the three primary concerns for a pilot project.  Rapid Deployment of Bio-Power S E C Before the pilot program is launched, the Walapone T operation has to be carefully studied to determine the critical I success factors for developing a commercially viable O operation, advises Professor Priyantha Wijayatunga, the N Director General of PUCSL. He also recommends simultaneously prioritizing the use of biomass by-products and residues for bio-power since such raw materials are F readily available in known quantities. I V E iv] Integrated Approach Bio-power has the potential to be an excellent solution to poverty alleviation in marginalized areas. Theoretically, bio- power plants can be erected anywhere in the country and can generate employment at the farm gate selling points; at the collector’s premises; from chipping, packing and transporting fire-wood; and finally, from selling chipped wood to power plants. Consequently, the 1 MW Walapone plant has created income opportunities to over 1,200 villagers (Inter-Ministerial Working Committee 2005, p. 11). Further, energy crops can be grown as plantations or integrated in many ways with existing farming practices. Hence, to exploit its full potential, the bio-power industry requires a diverse pool of experts, resources and institutions, from both the public and private sector, to cooperate seamlessly to achieve a common, well- defined objective. ECF has identified at least 9 ministries whose participation is vital for the development of the bio- power industry. Evidently, this herculean effort demands a dedicated coordinating agency. Therefore, SEA will be established with the mandate to fulfill this requirement. iv] Awareness Building Every new technology needs an awareness building exercise to encourage potential developers, financiers and suppliers, while educating GoSL, the utility, relevant state sector institutions, the general and regional public, non- governmental organizations and other stakeholders. The collection, compilation and dissemination of information must be organized and effective.  Rapid Deployment of Bio-Power S E The most powerful motivator for the rapid development of the C bio-power industry would be publicly establishing the successful T implementation of the proposed pilot program. The Walapone I yardstick, which has caused serious doubts among potential IPPs O and the banking community, must be replaced or restructured to yield a positive outcome. N F Resource Optimization Strategy I V For the optimal and rapid exploitation of Sri Lanka’s E bio-power potential, the following initiatives must be taken: Æ’ conduct a resource assessment to ascertain a] suitable areas for energy plantations, b] the availability of adequate agricultural by-products and residues and c] convenient sites for power plants; Æ’ analyze the net economic benefit of allocating resources to exploit the country’s bio-power potential; Æ’ establish a pilot program to confirm the economic and commercial viability of such projects; Æ’ implement a coordinated research and development effort that focuses on both technology and fuel-wood farming; Æ’ formulate and execute a medium to long term action plan for the development of this technology; Æ’ effect a sustainable tariff rate acceptable to the country, the consumer, the developer and the utility; Æ’ consider the cost of grid augmentation required to evacuate electricity when setting the tariff rate; Æ’ offer tax concessions and subsidies to developers with the objective of reducing the tariff burden on the electricity consumer; Æ’ launch an awareness building campaign to garner the support of developers, financiers and other key stakeholders; Æ’ provide continuous training and support services to pioneering IPPs; and Æ’ supply adequate tools and training to CEB to manage scheduling the generation from many small power plants. Section Six Externalities of Development  Externalities of Development S E NRE and the Economy C T I In 2005, the SHP industry fulfilled 3.2% of the nation’s demand O by generating 277 GWh of environmentally friendly, indigenous energy, almost a decade after the first modern SHP plant was N connected to the national grid (CBSL 2006, Table 36). A decade hence, the national energy strategy targets 1,768 GWh or 10% of S the nation’s electricity requirement in 2015 to be supplied from I the NRE industry (CEB 2005, Table 3.3). X This quantum of power from alternate energy sources improves energy security. Beyond this evident advantage, there lies a greater significance that must necessarily provide the basis for a true economic evaluation of NRE technologies in Sri Lanka. In summary: Table 6.1 Quantifiable Benefits of NRE Power Generation13 Benefit 2005 - SHP 2015 - NRE (in current terms) Economic value generation SLR 1,679 SLR 10,716 (at avoided cost - SLR 6.06/kWh) Billion Billion Foreign exchange saving USD 36 USD 230 (at USD 0.13/kWh) Billion Billion Carbon emission reduction 221,600 MT 1.4 Million MT (at 0.8 kg CO2/kWh*) * According to carbon finance experts, the tonnage is calculated at 0.64 kg of CO2 per kWh. Therefore, the country stands to gain much from the displacement of imported and expensive fossil fuel based thermal power. Further, a preliminary economic analysis of the RERED project demonstrates positive economic rates of returns on investments, especially for mini hydro projects where the rate of return exceeds 20% (The World Bank 2002, p. 59). 13 Bases for calculation: Resource Development Consultants (2006a, p. 9)  Externalities of Development S E C NRE and the Environment T I O All NRE technologies are green energy sources. Bio-power is N considered CO2 neutral. SHP and wind power are net contributors to the environment. Nevertheless, any form of development has an environmental trade-off that must be acknowledged and mitigated. S I X All NRE projects require an approval from CEA. The granting of this approval has become more stringent over the years, and its terms and conditions have evolved to address issues that have arisen from time to time. For instance, an Environmental Impact Assessment has become the norm for SHP projects today, whereas in previous years such a detailed evaluation was the exception. The approval is granted after a site inspection by CEA officials. A final visit is conducted at the time of commissioning to ensure that the terms and conditions of the CEA approval have been adequately met by the developers. Though an annual visit is desirable, CEA does not have the necessary manpower or resources to do so, claims Mr. Pasan Gunasena, the Director General of the Central Environmental Authority. Such visits take place only if complaints about a particular project are received from the general public. Even with this limitation, CEA, on the whole, has carried out its functions successfully in terms of the SHP industry. The experience with this sector will no doubt benefit the assessment of other NRE technologies in the future. The RERED Project, too, simultaneously pays heed to environmental and social concerns. Firm guidelines are laid down in the ‘Environmental Social Assessment and Management Framework’. Qualified consultants are employed to ensure that sub-projects are compliant with the requirements of both CEA and the RERED Project. Loan disbursements are approved and released only on the recommendation of these environmentalists. Some are of the view that developers must be made aware of the importance of conserving the surrounding environment, else they reap the repercussions which can be drastic. Special attention should be paid to mitigate soil erosion. Also, cultivating ground cover in the vicinity will improve water retention, while reducing the incidence of earth slips in high risk areas. According to the consultants, the SHP industry has proven relatively benign in terms of its effect on the environment. The recent escalation of legal action by concerned environmental organizations such as the Green Movement of Sri Lanka compels SHP IPPs to reasonably address environmental issues resulting from  Externalities of Development S E their development activities. For instance, Mr. Suranjan C Kodituwakku of the Green Movement of Sri Lanka is of the view T that the SHP industry must take genuine measures to curb soil I erosion and flooding, conserve regional flora and fauna and O ensure a continuous supply of water required for the community’s livelihood. This position does mirror the opinion of N the consultants employed by the RERED Project. However, many IPPs believe that while the NGOs have a vital role to play S as environmental watch-dogs, the behaviour of certain NGOs is I detrimental to the progress of the industry. They assert that, first and foremost, NGOs must act on the premise that NRE is X inherently environmentally friendly and, as such, provides a superior alternative to thermal energy. An immediate remedy to this growing rift can be the commencement of a constructive dialogue between NGOs and other key stakeholders. Therefore, as a first step, their representation at the REC is recommended. With the advent of the Kyoto Protocol, NRE projects qualify for carbon credits, which is an additional, yet modest source of revenue for IPPs14. It is estimated that carbon finance could improve the Financial Investment Rate of Return by 2% and, therefore, this could prove especially important for biomass power projects where investment risks are higher and rates of return lower (The World Bank 2005, p. 6). Currently, four local NRE projects are registered with the Executive Board of the Clean Development Mechanism. Most local SHP IPPs are now in the process of applying for this benefit. NRE and Rural Development The Mid Term Review Report (1 September 2004-30 September 2006) of the RERED Project examines the impact of five SHP projects on villages in the vicinity. The consultants conclude: “Although these projects do not supply electricity direct to the communities where they are located, the developers have attempted to ensure that these communities benefit by providing them various village improvements in the form of infrastructure development… The main benefit was the building or repair of roads and bridges. The communities agree that this has not only improved access to facilities in nearby service centres but also improved access to the villages. This has increased the farm-gate prices of what is 14 At best, a typical 1 MW SHP project in Sri Lanka can expect a revenue equivalent to the increase in tariff by less than US Cents 1.  Externalities of Development S E C produced in the villages, especially green tea leaf. In some of the T villages people have benefited from supply of water, housing and I school facilities, building community centres and improving O facilities at religious places of worship.â€? N Interviews with developers and visits to 15 SHP sites for the purpose S of this study have confirmed the RERED Project’s survey results. I However, the Mid Term Review notes that while most communities X were pleased with benefits they have gained from developers, a few have complained that the developers had failed to honour their promises. 250 skilled and unskilled labourers are employed during the construction of a typical SHP project. A permanent staff of at least 10 is required for the operation and administration of a SHP plant. Wind power and those bio-power projects generated from residues and by-products have a similar human resource requirement. Dendro power, on the other hand, is labour intensive. The income generation potential for rural communities from dendro based bio-power is substantial. A 100 MW plant is estimated to increase annual earnings by SLR 2,772 million (Inter-Ministerial Working Committee 2005, p. 42). Conclusion A bona fide economic evaluation of each NRE technology must take into account its quantitative and qualitative impact on the economy, society and environment of the country. More importantly, GoSL, in consultation with the main stakeholders, must set the agenda and clearly establish the boundaries of sustainable development. Such an exercise is vital to justify the costs involved to implement the measures suggested in this report. This is the first rational step towards realizing the indigenous energy potential of private sector, grid-connected, small-scale generation. Finally, motivating the private sector to participate in planned infrastructure development is a noteworthy achievement, with positive ramifications. Within a regulated, yet enabling framework, the SHP industry is ample proof that the private sector can contribute responsibly towards achieving development targets. So justified, the possibility of a successful public-private partnership in the development of larger scale renewable energy projects has  Externalities of Development S E become more realistic to policy makers. As such, the construction C and operation of four medium scale hydro power projects are T now being considered for public tender. The diversion of state I owned resources to priority areas, while inviting the private sector O to participate in identified lower-tier development programs, may become a resulting trend, as will the translation of successful N working models in the power sector to other essential infrastructure development. S I X  References Bandaranaike, R. D. (2000) ‘Grid Connected Small Hydro Power in Sri Lanka: The Experience of Private Developers’, Proceedings of the International Conference on Accelerating Grid-Based Renewable Energy Power Generation for a Clean Environment. Washington, DC, 7-8 March 2000. Washington, DC: The World Bank. 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Available from: [Accessed 28 August 2006]  Acknowledgements Our sincere thanks to: Administrative Unit, Renewable Energy for Rural Economic Development Program Bio Energy Association of Sri Lanka Central Bank of Sri Lanka Central Environmental Authority Ceylon Electricity Board Commercial Bank DFCC Bank Energy Conservation Fund Energy Forum Guarantee Limited Green Movement of Sri Lanka Grid Connected Small Power Developers Association Hatton National Bank Hayleys Industrial Solutions Land Reform Commission Lanka Transformers Limited Public Utilities Commission of Sri Lanka Ministry of Finance and Planning Ministry of Power and Energy Ministry of Science and Technology NDB Bank Resource Development Consultants Sampath Bank United States Agency for International Development … and to all who generously shared their valuable time, expertise and views with us.