Regulatory Environment and Small-hydro Development

1. Regulatory Environment and Small-hydro Development Professor Priyantha D C Wijayatunga Public Utilities Commission of Sri Lanka and University of Moratuwa

2. Presentation Outline • Introduction • Public Utilities Commission of Sri Lanka • Regulatory agency Objectives • Functions • Framework for Small-hydro development • Policy and Regulatory interventions • Final remarks

3. Introduction • Traditionally Policy-making, regulation and operations • Not clearly separated • In most cases line-minister regulates • Increasing trend to separate these functions • Assist development of the power sector • Also renewable energy industry • In Sri Lanka Public Utilities Commission established to take over regulation of the electricity industry

4. Public Utilities Commission of Sri Lanka • Established under the Public Utilities Commission of Sri Lanka Act, No. 35 of 2002 • A multi-sector regulatory agency • First of that kind in the region • Electricity and water industries • Down-stream petroleum industry later added • Not yet fully empowered

5. Public Utilities Commission of Sri Lanka … • Independence ensured through • Process of appointing and removal of members • Constitutional Council and Parliament • Financing • License fees • Regulatory levies • Transparency • Stakeholder consultation • Publication of orders and advice provided to te government • Annual report to the parliament

6. Objectives of a Regulatory Regime • Protect the interest of all consumers • Promote competition where appropriate and possible • Promote efficiency in both the operations of, and capital investment in public utilities industries • Promote efficient allocation of resources in public utilities industries

7. Objectives …. • Promote safety and service quality • Benchmark utility services against international standards • Ensure that price controlled entities acting efficiently, do not find it unduly difficult in financing its activities • Eventually leading to investor and consumer confidence in the utility sector

8. Functions • Advice the Government on industry policy on all matters concerning any industry falling within its purview • Collect, record, analyze and disseminate information with an informed opinion, concerning any public utilities industry • Exercise licensing, regulatory and inspection functions • Regulate tariffs and other charges levied by regulated entities

9. Functions …. • Mediation in disputes arising in any public utility industry • Set and enforce technical and other standards relating to safety, quality, continuity and reliability of the public utility industries • Consult any person or group affected by its orders when taking it decisions

10. Framework for Small-hydro Development • Indigenous resource replacing imported fuels • Recognition of avoidance of adverse environmental impacts • Emissions with local impacts • Those impacting globally - GHG • Recognition of avoidance of high cost generation • National resource as a primary energy source • Royalty • Benefits flowing to local population

11. Framework for …. • Recognition of pioneering efforts • Site allocation • Minimum transaction costs encouraging small investors – large number • Standardised arrangements • Adequate compensation for generation costs and incentive to operate efficiently • Minimum impact on consumer price • Bidding for capacity allocation

12. Policy and Regulatory Interventions • Renewable energy portfolio standards • Utility compelled to achieve given level of penetration • 10% of supply by NCRE by 2015 • Portfolio of technologies • Additional burden on the utility • Provided by the central government • Final Economic impact needs to be justified • Or financed through cross-subsidies • Impact on the final consumer price

13. Policy and Regulatory ….. • Feed-in tariffs • Standardised tariffs • Encourage all those having costs below feed-in tariff • Investment incentives • Overcome high investment cost barrier • Increased investment • Tax credits on investment

14. Policy and Regulatory ….. • Production incentives • Attractive tariff • Efficient operation • Tax incentives for a given period • Net-metering • Encourage low cost development and use • Energy banking • Research and development • Incentives for research

15. Policy and Regulatory ….. • Competitive bidding • For a given allocation within a pre-specified penetration level • For supply price • For royalty at a given supply price

16. Pricing Methodologies • Cost based tariffs • Technology specific • Can be project specific or based on a typical project • Covers costs of the investor including a reasonable rate of return • May be more than the average cost of conventional generation • Subsidies to be determined • Who pays for subsidies?

17. Pricing Methodologies … • Shadow/opportunity cost based tariff • Avoided cost in the central generation system • Credit for avoided environmental cost may be given • Can be long-term or short term • Can be average or marginal • Technology/resource independent • Convenient implementation hence low transaction costs

18. Pricing Methodologies … • Efficient low cost projects reap windfall profits • No adverse impact to the utility • Increased investment • Developers likely to reinvest in other not so efficient projects

19. Pricing Methodologies … • Fixed price published examining the average generation cost • No direct relation to cost of projects or avoided cost in the central system • Can be adjusted from time to time depending on • the response of the developers • Or government policy • Convenient to implement and hence minimum transaction costs

20. Implementation Strategy • Government policy passed down to the regulator • Eg 10% of supply by NCRE by 2015 • Regulator implement the policy • Licensees ordered to abide by the penetration level • Flexibility can be left with the utility how to ensure the level of penetration • Can be given the parameters such the pricing methodology etc • Can be a higher level of intervention by even approving prices • Direct subsidy or cross-subsidy examined in tariff determination

21. Final Remarks • Unaccounted benefits of small-hydro needs to be always considered when making decisions • Avoided adverse environmental impacts • Socio-economic benefits to the local community • Indigenous nature of investment • A separate regulatory agency • Provides a place for all the stakeholders to come for their grievances • Can mediate for speedy resolution of issues for fast development of the renewable energy sector

22. End