WHERE THE WIND BLOWS

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WHERE THE WIND BLOWS

Postby SHARK » Fri Feb 09, 2018 11:27 pm

WHEN THE COUNTRY’S POWER GENERATION SOURCES DRAIN OUT, INVESTORS LOOK ELSEWHERE
January 29, 2018 By Devin Jayasundera

Hydro energy in Sri Lanka is on the verge of being squeezed to the last drop. From being the largest energy source contributing 35% of the generation capacity mix, it is expected to trickle down to around 19% by 2020. Experts point out that hydropower potential in Sri Lanka has already reached its theoretical limit. For energy power plant companies, this offers a serious predicament. With fewer suitable sites to build new hydropower plants, some energy generation firms and investors have already begun venturing beyond our shores to diversify risks and ensure a steady stream of profits for shareholders. The allure of investing in areas like electricity generation lies in its ability to produce reliable returns. Some even call it ‘recession resilient’, given unhinged public demand for utility services like electricity, even in the most unnerving times. But, the Sri Lankan experience of investing in energy generation companies has been quite the contrary. CSE-listed power and energy firms are dominated by auto-fuel and LP like retailing firms Lanka IOC and Laugfs Gas, which make up almost 70% of the total market cap in the sector, while the rest consists of five mini-hydro companies. Hydropower has become an increasingly volatile business given the frequent change in weather patterns experienced over the years. This attaches a significant risk. For investors, such a seesawing performance indicates the exact antithesis of the primary motivation to invest in utility services, which is the promise of steady returns. To avoid this case, firms built their plants in different geographical locations in the country to diversify the risk in the case of bad weather. But this too has been limiting, given that suitable sites are concentrated in the central highlands, resulting in server scarcity of locations to set up new hydropower plants. In 2016, the drought made this case more apparent. Due to the lower rainfall, each listed hydro power generation company recorded a decline in net profit. Cumulative net profits of all companies plunged 30% compared to the previous year. In fact, Resus Energy PLC, controlled by Hemas group, which fully owns six hydropower plants around the country, incurred a loss in its short history. Hydropower generation was Sri Lanka’s major power source from the time electricity became a ubiquitous utility in the country. In 1996, the government relinquished its monopoly in hydropower, allowing the private sector to participate in building mini hydropower plants to boost existing capacity. The Ceylon Electricity Board granting power purchase agreements, which generally extends beyond two decades, ensured a steady stream of revenue.

Enticed by this, investing and developing mini hydropower became a lucrative pastime for high-net-worth businessmen and diversified conglomerates in the early years. But, as Sri Lanka neared the full exploitation point of hydropower, the once bullish market is now gasping for its last breath of fresh air.

If hydropower is out of the equation as a potential energy investment in the country, wind and solar are perceived as the next big bets. But, there is a hitch. As much as investors are eager to invest in these renewable technologies, opportunities are scarce within the country, as the infrastructural landscape is yet to mature to accommodate more projects.
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Among the renewables, wind power is expected to be the major source of power for the country in the future. But currently, the Kalpitiya peninsula, which already harnesses 128 MW, is at its peak because of limits in the grid.

When it comes to solar, land acquisition is the major deterrent. It is estimated that 10 acres of unobtrusive flat terrain is required to generate one megawatt of electricity. In April this year, under the ‘Soorya Bala Sangramaya’ programme, the Ceylon Electricity Board issued a worldwide tender for the construction of 60 solar power plants with a capacity of 1 MW each. However, according to sources, the reception for the tender was lackluster, and proposals were submitted only for 30 solar power plants.

The limitations for investment in wind and solar, and the hypersensitivity of hydro have made some companies look towards thermal energy. Lanka Energy Fund, a venture capital company that went public recently and is focused on investing in power plant projects, invested in two thermal power plants in Bangladesh, owning a 20% and 33% stake in each. The company’s foray into thermal power had provided a hedge against the fluctuating performance of the large base of hydropower plants in its portfolio. “Thermal power brings a broader degree of stability to our income streams,” says Sumith Arangala, chief of the LVL energy fund.

The company’s motivation behind investing in thermal power plants in Bangladesh has been the acute electricity deficit in the country. As a result, the Bangladesh government is far more accommodative towards investment in its power and energy sector. More importantly, this gives the company the flexibility of not depending on just one buyer. “We diversify in terms of buyers as well. So, you mitigate the risk. What if payments don’t arrive? Nothing can be taken for granted,” says Arangala. Investing in power plants in Sri Lanka, especially in the renewable energy frontier, is still less lucrative than in the region. In lieu of this view, Nepal, Bhutan, Bangladesh and East African countries have become sought-after destinations for investment in hydropower.

The choice for Nepal is unsurprising. The abundance of glacial water trickling down from the sky, scathing the Himalaya mountain range, has made it a mecca for hydropower investment. Nepal’s hydropower potential is estimated to be 80,000 MW, of which only 700 MW has been exploited. The Lanka Energy Fund has already planned to invest Rs465 million on a hydropower plant in Nepal from the funds raised in the IPO. VidulLanka PLC has already started construction of a 6.5 MW hydropower plant worth $13.5 million in Uganda.

The overwhelming vision to focus beyond our shores is widely evident given a reading of the annual reports of listed power generation companies. This makes economic sense, but could have ill-intended consequences for the country’s long-term power generation plans. However, non-traditional power and energy sector companies like Aitken Spence, Akbar Brothers and Hirdaramani Group have entered the fray, investing in wind power projects in the country.

The dependence on fossil fuel is based on the reasoning that it is the cheapest alternative available, but the question is how long it would serve the purpose, especially when electricity demand keeps escalating exponentially. Further investment in thermal and coal could be argued as being a step back. The progress in technology has made wind and solar power move beyond the periphery from a mere footnote of a feel good fantasy narrative to an actually affordable and pragmatic energy source.

But, the problem at face is unique. Sri Lanka has become a crowded market for wind and solar energy development. While there is no scarcity of motivation, the opportunities for investment for the private sector is limited. The capacity of the grid is a major barrier for further development, especially in the case when the high wind and hydro seasons coincide. It is only when and how efficiently these issues will be resolved that will dictate energy and power firms’ vision to look inward once again.
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