Introduction

The Sri Lanka Electricity Act No. 36 of 2024 marks a significant development in the nation’s journey toward modernizing its energy sector. Enacted with the aim of streamlining the regulation, generation, transmission, and distribution of electricity, this legislation addresses longstanding gaps in the industry while introducing provisions designed to foster investment, promote sustainability, and enhance energy security.

This Act comes at a critical juncture for Sri Lanka, as the country seeks to transition to a low-carbon economy while managing the challenges of energy affordability and reliability. Key features of the Act include reforms to the licensing regime, the establishment of stricter compliance standards, and encouragement of renewable energy projects.

In this article, we delve into the key provisions of the Act, analyze its potential implications for stakeholders, and explore how it aligns with Sri Lanka’s broader energy policy objectives.

The Sri Lanka Electricity Act, No. 36 of 2024 (“SLEA”)

Following extensive consultations with stakeholders, political parties, and trade unions, the Sri Lankan Parliament enacted the SLEA in June 2024, with a majority of 44 votes. This new legislation repeals and replaces the Ceylon Electricity Board Act No. 17 of 1969 and the Sri Lanka Electricity Act No. 20 of 2009.

At a time when Sri Lanka’s external debt had reached USD 37.5 billion by the end of June 2024, the SLEA is part of the government’s broader strategy to alleviate public financial burdens. Additionally, it aligns with the country’s ambitious goals of generating 70% of electricity from renewable energy sources by 2030 and achieving carbon neutrality by 2050.

To meet these objectives, the SLEA introduces significant reforms, including the decentralization and corporatization of the electricity sector. Instead of a single government-controlled entity, the Ceylon Electricity Board (CEB), the sector will now operate through multiple independent entities tasked with the generation, transmission, distribution, and trading of electricity.

Key features of the SLEA include:

1.    Decentralization and Corporatization: Establishment of independent entities to promote efficiency and competition.

2.    Promotion of Renewable Energy: Clear guidelines and incentives to accelerate the adoption of renewable energy projects.

3.    Tariff Reforms: Transparent and fair mechanisms for setting electricity tariffs.

4.    Regulatory Oversight: Strengthened role of the Public Utilities Commission of Sri Lanka (PUCSL) in monitoring and enforcement.

5.    Private Sector Participation: Provisions to encourage investments from the private sector to enhance capacity and innovation.

These reforms aim to modernize Sri Lanka’s electricity sector, reduce reliance on government funding, and ensure a sustainable energy future for the country.

Structure of the SLEA

The SLEA is divided into several parts, each addressing specific aspects of Sri Lanka’s electricity sector and introducing transformative changes aimed at modernization and sustainability. Below is an overview of the key sections of the Act and the reforms they introduce:

1.    National Electricity Advisory Council (Part II): The SLEA provides for the establishment of a National Electricity Advisory Council responsible for advising the government on electricity policy, market reforms, and monitoring the implementation of the new market structure.

In drafting the electricity policy in consultation with the Minister, the Council is required to ensure financial viability, mobilise funds by attracting private investors, incentivize the use of renewable energy, and create competitive in the procurement procedures.

2.    Public Utilities Commission of Sri Lanka (Part III): This prescribes that the Public Utilities Commission shall be deemed to be the regulator of the electricity industry. The regulator will issue licenses to entities involved in the generation, transmission, and distribution of electricity. It will also set the terms and conditions of these licenses, monitor the performance of license holders, and issue enforcement orders to ensure compliance with the specified conditions.

Other responsibilities of the regulator include inter alia preventing anti-competitive market practices, resolving disputes, ensuring the reduction of power purchase costs, and periodically setting tariffs and charges payable.

3.    National System Operator (Part IV): SLEA provides for the establishment of a government-owned entity, in which the government holds 100% of the shares, to apply for a National System Operator license. Its primary role is the real-time management of electricity operations, including balancing electricity demand and supply through generation scheduling, grid control, managing bulk supply transactions, and overseeing the overall monitoring of the national grid. This entity will assume the responsibilities previously held by the CEB.

In respect of renewable energy sources, the National System Operator is required to procure energy storage and ancillary services to manage intermittent sources. Further, the National System Operator is tasked with the responsibility of preparing a Long-Term Power System Development Plan every two years, which shall ensure that the power generation plans meet the estimated demand for electricity.

The National System Operator’s role also extends to determining generation requirements and contracting new capacity through competitive procurement. As such, the National System Operator shall be entitled to enter into power purchase agreements and transmission service agreements with those holding valid licences. All agreements previously entered into by the CEB shall be assigned to the Operator for the remaining period.

4.    National Transmission Network Service Provider (Part V): The SLEA establishes an incorporated entity, the National Transmission Network Service Provider, in which the government holds more than 50% of the shares, to apply for a National Transmission Network Service Provider license. This entity will be responsible for the ownership and maintenance of the transmission assets previously held by the CEB. Additionally, it is tasked with developing and expanding the physical infrastructure of Sri Lanka's national grid to ensure the non-discriminatory distribution of electricity.

5.    Independent Corporate Entities (Part VI): Various responsibilities in the electricity supply chain will be undertaken by separate corporate entities, which are required to operate independently whilst coordinating with one another. This includes new corporate entities being set up to take over hydroelectric generation, thermal electricity, and renewable energy generation, all of which are presently vested with the CEB. Such entities shall be subject to oversight by the regulator.

6.    Licensing (Part VII): The SLEA provides for the issuance of licences for the generation, transmission, distribution, and supply of electricity, and this part addresses the eligibility of applicants to make an application and the conditions to be imposed on licensees.

7.    Wholesale Electricity Market (Part IX): A key reform introduced by SLEA is the establishment of a wholesale electricity market, enabling open competitive procurement for new generation capacity. This provision enhances competition across the energy sector, particularly in electricity generation, distribution, and supply. The open access market allows consumers, especially large-scale users, to purchase electricity directly from any licensed supplier or generator, breaking the monopoly of state-owned entities and fostering greater market efficiency.

Effects on Renewable Energy

The legislative reform in the energy sector reflects the country’s attempt to align with the global transition towards the use of renewable energy.

An insightful case study to understand the impact of policy and legislation in transitioning towards renewable energy is Brazil. According to the World Economic Forum's 2023 Energy Transition Index, Brazil has made significant progress, ranking 14th out of 120 countries. This marks a major leap from its 47th position in 2020, showcasing Brazil's rapid advancements in transitioning to cleaner and more sustainable energy sources.

This process started in 2004, when the government facilitated auctions for the installation of renewable energy projects through a competitive bidding process. In 2013, the government launched a Ten-Year Expansion of Energy Program, setting targets for increasing its capacity not only in hydroelectricity but also wind, biomass, and solar energy. Thus, stable regulatory frameworks and ambitious policies were key to attracting investor capital towards diversified renewable energy projects.

The extreme power shortages experienced as a result of Sri Lanka’s foreign exchange crisis, which limits fuel purchases for its coal power plant, in conjunction with the unpredictability of rainfall for hydro-electric generation, underscores the importance of investing in alternative renewable energy sources such as wind and solar.

Diversification would, however, require heavy investments. According to the Minster of Power and Energy, the 2050 target requires an investment of over USD 12 billion. Thus, decentralizing the responsibilities of the energy sector, through SLEA, is a step in the right direction to attract foreign investment.

Conclusion

SLEA represents a forward-thinking approach to addressing the country’s energy challenges while paving the way for a sustainable and efficient electricity sector. By introducing robust regulatory frameworks, fostering competition, and encouraging investments in renewable energy, it sets the stage for significant advancements in energy production and distribution.

However, the success of this legislation will depend on its effective implementation, stakeholder cooperation, and the ability of regulators and policymakers to adapt to emerging challenges. With the right balance of enforcement and innovation, the SLEA has the potential to not only transform Sri Lanka’s energy landscape but also position the country as a regional leader in sustainable energy development.