Green Energy; Powering the Transition
Sri Lanka, in complying with its international commitment towards climate change, as well as a way of curbing the drain of massive foreign exchange out of the country in payment of fossil fuel imports, has deployed a mission of driving the nation’s electricity generation towards the green energy by planning to accommodate more renewable energy capacity into the pool via implementing various initiatives through Ceylon Electricity Board (CEB) along with the private sector players.
Steady Uptick in Power Demand to Promote Capacity Expansions
Power generation in Sri Lanka has headed upwards over the years as defensiveness made the sector resilient against economic fluctuations. Power generation measured in GWh has been continuously growing over the past decades while recording a 15-year CAGR of 6% and it is expected to grow at even a faster pace over the next decade. Growth in electricity consumption under the tariff categories of ‘Industrial’ and ‘Commercial’ may further accelerate with the gradual rebound in economic activities along with rapid digitalization despite a temporary setback due to the COVID19 pandemic.
Moreover, number of consumer accounts under the commercial category has been growing over the years at a faster rate than the domestic & religious category. Growth in electricity sales in GWh over the years has been gravitated to the growth in GDP and is expected to follow a similar trend in the coming years.
On the other hand, the population in Sri Lanka is expected to grow at a CAGR of 0.3% over the next 5 years and the per capita electricity consumption over the last decade has also conveyed an upward momentum, albeit a slight dip in 2020. Therefore, the boom in commercial and industrial sectors springing from the anticipated growth in GDP paired with the population growth, are expected to amplify the future electricity consumption.
Transitioning Towards Renewables; a Reshape in Energy Mix
Ballooning energy related CO2 emissions per year had laid foundation to enact the ‘Paris Agreement’, which is a legally binding international treaty on climate change, adopted by nearly 200 countries, to achieve a climateneutral world by the middle of the century.
Accordingly, as the pressure mounts on spurring concerns over environmental protection together with United Nations sustainable development objectives are paving the pathway to transition towards clean energy while leading countries are expected to phase out from fossil fuel usage to mitigate climate change and the associated risks. Global renewable energy share as a percentage of total electricity capacity is poised to grow as various countries around the world have already launched multiple initiatives to wipe out overall carbon emissions.
Sri Lanka has also redirected its journey towards attaining an ultimate goal of 70% green energy by 2030. Accordingly, the largest wind farm, a 100MW facility in Mannar commenced on Dec 2020, and planned capacity expansions of 1,323MW from wind, 2,210MW from solar, 654MW from mini-hydro and 144MW from biomass are expected to fulfil at the end of 20 years. Furthermore, CEB has signed Power Purchase Agreements (PPA) in Other Renewable Energy (ORE) power plants with a total capacity of 539MW in addition to multiple roof-top solar projects to be developed with more private sector participation as few initiatives are in transition towards the renewable energy. At present, total renewable energy has a share of 36% of the Sri Lanka energy mix (GWh)
Local Industry Snapshot
Currently all players listed in the main board of Colombo Stock Exchange (CSE), namely, LVL Energy Fund (LVEF), Windforce (WIND), Vidullanka (VLL), Panasian Power (PAP), Vallibel Power (VPEL), Resus Energy (HPWR), are involved in renewable energy operations which foresee a substantial upside potential in the future. The portfolio diversification of the players is branched out to projects in hydro, wind, solar, biomass and thermal with a geographical dispersion in locally as well as overseas.
Currently, the private players have energy projects in Sri Lanka, Bangladesh, Uganda, Pakistan, Ukraine, Zambia and Nepal that are already commissioned or in near completion. In terms of the competitiveness, the power generation sector appears to be lucrative with a moderate level of rivalry and also with a moderate level of bargaining power from the largest single buyer (CEB) due to the shortage in electricity supply. Level of substitution remains low and the new entrants are also discouraged due to the high capital intensity, high switching cost and regulation barriers prevail in the sector. However, suppliers of machinery & equipment and row materials (specifically for thermal power projects) may have a higher bargaining power due to high level of specialisation.
Power Revolution in Offshore Markets
Operations in Bangladesh and Uganda are distinguished in the composition of income streams of the local private players in the sector, which accounts for a sizable portion in respect of foreign income. Pakistan and Ukraine are also likely to generate a noteworthy contribution while Nepal may also join the pack in the coming years. Asia Pacific region show-up as one of the emerging regions in terms of growth in electricity generation. Further, Asia as a region has a target of integrating 23% renewable energy by 2025. Moreover, Africa claims to have more than enough un-utilised renewable energy resources with the potential to generate more than 1,000 times larger than its projected demand for electricity in 2040.
YoY growth in electricity generation (TWh)
Bangladesh is one of Asia’s emerging economies with a growing need for power and energy and their existing power generation capacity of 21,000 MW is projected to reach 30,000 MW by 2030 and 57,000 MW by 2041. Gas is currently the primary source in power generation, but the country is expected to gradually shift to a much cleaner energy mix with an aim to attain a target of 40% electricity generation via renewable sources by 2041 with the support of the private sector participation, following the 2015 Paris Agreement on climate change.
Uganda, being in the Africa region, also drives with a key objective to transform the country from a peasant to a modern and prosperous country in 20 years urging massive developments in the energy sector. Accordingly, the power generation capacity is expected to widen to 42,000 MW (from 1,250 MW) by 2040 with an electrification target to reach 80% of the population by 2040 while increasing per capita electricity consumption. Under these circumstances, existing and potential overseas operations by local players with a sizable dollar income who are mainly positioned in Bangladesh and Uganda which have further potential for growth in light of the regional prospects, are expected to flourish while harnessing the benefits of steep LKR depreciation against USD.
With all the positive statements, there are also a range of notable risks inherited in the operations of the sector. Heavy Dependence on a single buyer, CEB who is basking on a monopoly status over electricity transmission and distribution in Sri Lanka together with its subsidiary, Lanka Electricity Company (Pvt) Ltd., (LECO) may impact the power generation entities due to possible failures in distribution plants and machinery that could lead to operational difficulties.
Unexpected and volatile fluctuations in the foreign exchange rates may result in an unfavourable impact on the players who have a significant portion of foreign revenue. Further, major adverse fluctuation in interest rates may pose a risk upon debt financing, given the utilities sector players are highly dependent on debt financing. Pressure from weather patterns may also have an impact on renewable energy projects such as wind, solar that are highly dependent on climate related factors which are beyond control.
Therefore, unexpected change in weather patterns might lead to lower than expected energy generation (low plant factor) from the power projects, causing a contraction in revenue streams. Machinery breakdown is another common type of loss in the power sector that requires additional cost to repair or replace along with operational disturbances depending on the magnitude of the incident. Moreover, occasional changes in policies and regulations pertaining to the power generation will also deliver a higher level of risk towards the stability of the sector.
We believe that the significant portion of foreign income generation and availability of pipeline projects with a sizable generation capacity to play a vital role in determining the future growth of the players. Three companies namely, Vidullanka, LVL Energy Fund and Windforce are currently engage in overseas operations with a sizable foreign income portion.
However, the future profitability is expected to be dependent on the level of capacity generation in hand to heighten the operations while grasping the benefit of the thriving demand for electricity generation in locally as well as overseas, together with the foreign exchange gains to be stemmed from the anticipated depreciation in LKR against USD. Accordingly, LVL Energy Fund (LVEF) which accounts for the highest total installed capacity (254MW) among the listed players in the main board of CSE followed by the Windforce (WIND) which is sited as the second highest in terms of the total installed capacity (218MW) are expected to take the lead in the future growth and are likely to be further cushioned by the geographically diversified operations, of which LVL Energy Fund accounts for a 30% contribution from its overseas projects while Windforce accounts for a 30% contribution from its overseas operations, thereby ranking among the highest in the industry.
Moreover, Windforce and LVL Energy Fund showcase a sizable bundle of pipeline projects in local as well as overseas which is expected to further enhance the generation capacity. Considering these essential criteria, LVEF and WIND are appeared to be worthy within the sector.
LVL Energy Fund PLC (LVEF)
LVEF engaged in energy projects hydro, wind and thermal which holds a total installed capacity of 254MW and possesses pipeline projects in local as well as overseas markets. Out of the list, the major project is the upcoming hydro project in Nepal with an installed capacity of 10MW, anticipated to be commissioned by 4QFY22. It has also ventured into the solar power segment via successfully commissioning of its first solar project with a capacity of 1MW in 1QFY22 in the Matugama while having additional 5MW projects in the pipeline with 2MW in Pallekale, Kandy and 3MW in Maho, Kurunegala which are expected to be commissioned by 3QFY22.
The management of LVEF is confident that focusing on increasing the power generation from the existing plant capacities which were accumulated over time is well enough to position themselves to reap substantial returns in the future. The company has currently positioned in Bangladesh and Nepal while generating 38% of foreign income towards its revenue mix. With the booming demand in Bangladesh and the availability of under-utilised generation plants, LVEF is expected to enjoy a significant growth in terms of the profitability.
Windforce PLC (WIND)
WIND is operating in projects of hydro, wind and solar with a total installed capacity of 218MW along with a pile of new projects in the pipeline. WIND’s 2 new projects 30MW solar plant in Senegal and 15MW wind plant in Mannar are in the process while Mannar plant is expected to contribute to the revenue from FY23E onwards although project in Senegal is still in the preliminary stage.
WIND is also in the process of implementing further two new projects; namely solar universe which is a 10MW project that will be located in Batticaloa and is expected to add to the grid by Feb 2022. The second project is an 11.5MW waste to energy project with an investment of LKR 12.5Bn. Waste to energy project will be located in Karadiyana and has an 18 month, timeline for the commencement. Accordingly, total of 66.5MW is expected to be added to the total capacity from future projects. The company has currently positioned in Uganda, Pakistan and Ukraine while generating 30% of foreign income towards its revenue mix.
Analyst: Vidushika Perera, Assistant Manager-Research, First Capital Holdings PLC Email: [email protected]