- Fitch Ratings rules out govt. implementing cost-reflective pricing formula amid rising living costs
- But says generation costs to remain high amid rising oil prices and low hydropower contribution
Fitch Ratings does not see the government raising electricity tariffs in the foreseeable future, but expects power generation costs to remain high in the next couple of years amid rising oil prices and volatile contribution from the low-cost hydro power.
Fitch said this assigning support-driven ‘AAA (lka)’ rating to Ceylon Electricity Board (CEB), accounts for around 70 percent of the power generation in the country.
The rating is equalised with that of the Sri Lankan sovereign (B+/Stable), reflecting strong linkages with the parent, in line with Fitch’s Parent and Subsidiary Rating Linkage criteria.
“The government faces elections in the next 24 months, and amid rising living costs due to higher fuel costs and local-currency depreciation, we do not expect the government to raise electricity tariffs or implement a cost-reflective pricing formula,” Fitch said.
The government sets tariffs based on its socio-economic objectives and has not revised tariffs for almost three years despite rising power generation costs.
CEB’s average cost of supplying a unit of electricity to customers in 2017 was around 20 percent higher than the average tariff.
On the generation side, Fitch expects the hydropower share in the generation mix to remain below historical levels due to declining load factors and very little new capacity additions.
“We expect the CEB to turn to high-cost oil-based sources to meet the shortfall,” the rating agency said.
In addition, the CEB and independent power producers have been compelled to purchase fuel at market prices since mid-2018, after the government introduced a pricing formula, compared with previously offered subsidised prices.
Fitch does not expect the LNG projects proposed under CEB’s generation expansion plan for 2018-2037 to contribute significantly to the generation mix in the next 2-3 years.
With crude prices rallying, traders have now started to bet on the return of the US $ 100 oil.
Meanwhile, Fitch does not expect CEB’s linkages with its parent to weaken in the medium term as the government’s need to provide electricity at subsidised rates can be carried out only by a state entity such as CEB, as private companies would not be willing to incur losses.
Fitch views CEB’s standalone credit profile as much weaker than its support-driven rating, and believes providing a notch-specific standalone credit view of CEB is meaningless due to poor margin visibility and the need for continued State support to sustain operations.
CEB’s balance sheet continues to weaken due to persistent losses and significant investments.
It is unable to recover operating costs under the current tariff structure, and has to borrow to sustain its day-to-day operations.
Further, CEB as the government’s main investment arm in the power sector, is likely to have large capex to improve the country’s power generation, transmission and distribution network.
As such, Fitch does not expect CEB’s balance sheet to recover in the medium term unless the government reduces its debt by converting some of it to equity.