Electricity reforms at risk

By Dhananath Fernando

Originally appeared on the Morning

• Don’t let amendments derail investment and progress

A new conversation is unfolding around electricity sector reforms in Sri Lanka. After years of debate, there has been broad political consensus on two core principles:

• The urgent need for investment in the sector

• The structural reforms necessary to attract that investment – specifically, the unbundling of generation, transmission, and distribution

The logic is simple: generation, transmission, and distribution are fundamentally different businesses, each with unique asset types, risk profiles, and operational needs. Only by separating them can we improve transparency, increase efficiency, and create space for private capital to flow into each segment.

While there was promising alignment in this direction, the latest developments suggest we may be reversing course, creating uncertainty for investors and risking long-term progress.

The new amendments: One step forward, two steps back?

The 2024 Sri Lanka Electricity Act made an important move by further unbundling generation by source – hydro, coal, thermal, and wind – recognising that each comes with distinct technologies, operating models, and investment requirements. For instance, managing a coal plant requires an entirely different skillset and infrastructure than managing a wind farm.

However, the proposed new amendments roll back this approach by consolidating all generation entities under a single holding company. This re-centralisation undermines the very rationale for unbundling in the first place. It introduces operational inefficiencies and reduces cost transparency, making it harder for regulators to set fair and efficient tariffs.

Even more concerning, the amendments propose that the Government retain 100% ownership – effectively shutting the door on private capital.

The real cost of Govt.-only investment

If the Government intends to invest in electricity infrastructure, it must do so by borrowing through Treasury bills or bonds, adding to the national debt and worsening our already precarious debt-to-GDP ratio. Credit rating agencies will take note, likely downgrading Sri Lanka’s sovereign rating.

More critically, the cost of capital for the Government is around 9% – a prohibitively high rate for infrastructure investment. Every rupee spent here is a rupee less for health, education, or social safety nets.

Let’s not forget: in 2023, the Government injected Rs. 126 billion into the Ceylon Electricity Board (CEB). In 2024, the CEB posted a Rs. 144 billion profit, but only because of that prior cash infusion. Continued State dominance in investment only perpetuates a cycle of dependency.

Why private capital is not forthcoming

Even borrowing from domestic banks is becoming difficult. The Central Bank has capped bank exposure to the electricity sector at 25% of Tier 1 capital (and 55% in aggregate), with strict timelines to reduce this by 2030. These prudential limits are vital for financial system stability, but they also restrict the flow of private lending to the sector.

Another common route – borrowing with a Treasury guarantee – has also become costlier. Under the 2024 Public Debt Management Act, every Treasury guarantee must now carry a risk-based premium. When the CEB explored borrowing $ 50 million from the Asian Infrastructure Investment Bank, the risk premium alone was 4.8%, pushing the total cost of borrowing even higher.

Grid capacity and the renewable energy paradox

None of these challenges exist in isolation. Without urgent investment in transmission and distribution, additional solar or wind generation is meaningless – the grid simply cannot handle the load.

In a recent discussion with Advocata Institute, International Solar Alliance Director General Ashish Khanna emphasised the critical need for grid upgrades and private sector participation. Even Sri Lanka’s Prime Minister participated in early dialogues on a country partnership framework to this effect.

Yet, the new amendments – with their insistence on 100% State ownership and a two-year delay in further unbundling – send precisely the wrong signal. Investors see this as a red flag, not a green light.

Global implications and geopolitical costs

The concerns are not limited to domestic stakeholders. Leading development partners – including the World Bank, Japan International Cooperation Agency (JICA), and Asian Development Bank – have already expressed reservations about the proposed amendments.

We must remember that Japan is a key member of the Official Creditor Committee and one of Sri Lanka’s most consistent development partners. Our multilateral creditors hold a large portion of Sri Lanka’s foreign debt. Their support will be critical not only for the power sector, but for our entire economic recovery as well.

At a time when we are exploring regional grid connectivity and aspiring to meet 70% of energy demand through renewables, these regressive amendments risk turning vision into mere wishful thinking.

The electricity sector does not operate in a vacuum. It is tied to our economic recovery, fiscal health, investment climate, and geopolitical standing. The proposed amendments, while perhaps well-intentioned, threaten to undermine years of consensus-building and policy progress.

We urge policymakers to reconsider. The reforms must be guided not by bureaucratic convenience or outdated control models, but by pragmatism, transparency, and investor confidence. If we fail to course correct now, the cost won’t just be measured in kilowatt hours – it will be measured in lost opportunities, rising debt, and a future dimmed by indecision