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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » The prudence of removing furnace oil subsidies

The prudence of removing furnace oil subsidies

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The prudence of removing furnace oil subsidies
January 5, 2013, 6:02 pm
The Island

The Sri Lankan Government has now accepted that the subsidized prices which the Ceylon Petroleum Corporation has in the past been ordered to give will only lead to bankruptcy. It is therefore heartening that the Ceylon Petroleum Corporation has been allowed to do away with the subsidies on the two brands of furnace oil, namely the 1500 high sulfur and 1500 low sulfur. The brand 1500 high sulfur, now supplied at Rs. 65 to the CEB, increases to Rs. 90 and the brand 1500 low sulfur from Rs. 75 to Rs. 100. However, based on the current market prices of crude oil, the sale prices of both these oils should actually be higher.

The Romans used to say that there is no such thing as a free lunch. Someone has to pay. This is the case with all Subsidies. Subsidizing one sector means that rest of the population has to pay for it, either directly or indirectly and should not be made available unless it is absolutely essential.

Furnace oil is used mainly for power generation processes and for industries as a source of thermal energy.

75.88 per cent of thermal energy is from bio mass

75.88 per cent of the thermal energy used in industries however, comes from biomass. A minority of industries, which have been using petroleum products for thermal energy, have been favored with a large subsidy of nearly 50% on imported furnace oil till early last year. This subsidy cost the Ceylon Petroleum Corporation around Rs 7.5 Billion in year 2011.

The excuse given was that the industries have to be supported to be competitive in the world market. The majority of industries, however, had the foresight to change over to biomass, anticipating oil price increases and that the subsidies will have to be changed at an early date. This action is both environmentally and economically beneficial to the country.

It is encouraging that this subsidy has now largely been removed but the price charged of Rs 92 per liter still carries a substantial subsidy. The price revision will now make the small number of industries which are reliant on subsidies to switch to bio mass and thereby gain substantial savings in energy costs. They will thereby also gain the strategic marketing advantage of achieving a smaller carbon foot print.

The complete removal of this subsidy and turning from oil to biomass will ensure that the 200,000 tons of oil consumed by this sector can be eliminated with an annual saving of US $ 111 Million or 2% of the oil bill at current prices.

Sri Lanka cannot afford to have a future dominated by fossil fuel based power generation, artificially propped up by various forms of subsidy. The first step is to work out the true economic cost of power generation using fossil fuel. It will be most surprising if this is anything below Rs 30.00 per kWh. The statistics published by the CEB provides adequate information to make this calculation very easily, if the true price of the fuel inputs is declared. This will justify a concerted initiative to develop the indigenous and renewable energy sources.

Electricity is supplied well below costs

All industries continue to receive electrical power from the national grid, at prices well below the cost of generation. The current average cost of generation with the reduced contribution by the cheap hydro power is declared as approximately Rs 22.70 per kWh with the subsidies. (The true cost is more likely to be about Rs 30.00 per kWh). The cost to the industries even after the last price revision is only about Rs 14.00. It may be claimed that the industries have to be supported to remain competitive in the world market. But the extra cost is being absorbed by the Sri Lankan economy at large and begs the question how long this can continue.

As in the case of thermal energy, the use of biomass for electricity generation is feasible and considering that the consumer tariff for electricity will go up and the subsidies will be reduced or eliminated, the prudent industries will look at the option of self generation using indigenous energy sources. Some industries are fortunately placed with an option for combined heat and power options which will make them economically viable.

Cost reduction with indigenous resources

It is essential that Sri Lanka finds the means of reducing the cost of generation so that the consumers can enjoy a competitive tariff. This can only be done with the optimal use of indigenous resources. Unfortunately this responsibility has been left to the private sector which is obliged to take all the risks and obtain funds in the market place, whereas, the fossil fuel based power projects done by the government enjoy low cost funds supported by intergovernmental loans and many other benefits. In addition the Renewable Energy ( RE) developers are faced with a plethora of barriers both real and those created by interested parties to stifle progress. If a platform is created whereby the RE development is supported at least to the extent that the fossil fuel based projects are given, there is no doubt that the cost of generation can be reduced drastically. The untapped resources of wind and solar with no fuel cost at all, should be viewed as the major contributors to the energy basket in the long term. But their development has to commence aggressively without delay.

The policy declarations by the government of a target of 20% RE by year 2020 has to be supported by viable action plans, if they are to become a reality.

While the utilization of the abundant resources such as Wind and Solar are hampered by the technical barriers imposed by the CEB, the biomass resource suffers from the perceived lack of the reliability of supplies. The technical barriers hindering Wind and Solar power generation has to be discussed and overcome by an open forum of experts. The reliability of bio mass can be achieved by planting of Gliricidia in mixed plantations with cash crops or together with hard wood and fruit trees on a large scale with initiatives promoted by the Government. In this way, Gliricidia will also be given its due recognition as the fourth plantation crop of the country.

The Bio Energy Association and the Mahatma Gandhi Centre have been over the last few years publicizing the value of Gliricidia in several parts of the country. However, to make a substantial impact, many government agencies have to be mandated and mobilized to achieve at least the target set for the year 2020 by working out a plan to switch from fossil fuel to renewable. Any future fossil fuel based power generation projects or the extension of the current contracts based on oil have to be examined much more critically. In this scenario there can be no room for any subsidies for fossil fuels for either power generation or for industries. It will be more appropriate to apply the cess on all imports of fossil fuels as provided for in the Sustainable Energy Authority Act to support the development of the indigenous resources and take away any barriers to the utilization of same.

Postponing the transition of switching to a RE regimen we will be tantamount to passing on a burden to the future generations to pay for the dubious luxury we enjoy now, the cost of which is hidden by the general subsidies allowed.

Eng Parakrama Jayasinghe

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