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

3. Introduction Traditionally Policy-making, regulation and operations Traditionally Policy-making, regulation and operations Not clearly separated Not clearly separated In most cases line-minister regulates In most cases line-minister regulates Increasing trend to separate these functions Increasing trend to separate these functions Assist development of the power sector Assist development of the power sector Also renewable energy industry Also renewable energy industry In Sri Lanka Public Utilities Commission established to take over regulation of the electricity 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 Established under the Public Utilities Commission of Sri Lanka Act, No. 35 of 2002 A multi-sector regulatory agency A multi-sector regulatory agency First of that kind in the region First of that kind in the region Electricity and water industries Electricity and water industries Down-stream petroleum industry later added Down-stream petroleum industry later added Not yet fully empowered Not yet fully empowered

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

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

7. Objectives …. Promote safety and service quality Promote safety and service quality Benchmark utility services against international standards Benchmark utility services against international standards Ensure that price controlled entities acting efficiently, do not find it unduly difficult in financing its activities 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 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 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 Collect, record, analyze and disseminate information with an informed opinion, concerning any public utilities industry Exercise licensing, regulatory and inspection functions Exercise licensing, regulatory and inspection functions Regulate tariffs and other charges levied by regulated entities Regulate tariffs and other charges levied by regulated entities

9. Functions …. Mediation in disputes arising in any public utility industry 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 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 Consult any person or group affected by its orders when taking it decisions

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

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

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

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

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

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

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

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

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

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

20. Implementation Strategy Government policy passed down to the regulator Government policy passed down to the regulator Eg 10% of supply by NCRE by 2015 Eg 10% of supply by NCRE by 2015 Regulator implement the policy Regulator implement the policy Licensees ordered to abide by the penetration level Licensees ordered to abide by the penetration level Flexibility can be left with the utility how to ensure the level of penetration 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 given the parameters such the pricing methodology etc Can be a higher level of intervention by even approving prices Can be a higher level of intervention by even approving prices Direct subsidy or cross-subsidy examined in tariff determination 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 Unaccounted benefits of small-hydro needs to be always considered when making decisions Avoided adverse environmental impacts Avoided adverse environmental impacts Socio-economic benefits to the local community Socio-economic benefits to the local community Indigenous nature of investment Indigenous nature of investment A separate regulatory agency A separate regulatory agency Provides a place for all the stakeholders to come for their grievances 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 Can mediate for speedy resolution of issues for fast development of the renewable energy sector

22. End