A thesis submitted in partial fulfillment of the requirement for the degree of Master of Engineering

Thesis (M.Eng.) - Asian Institute of Technology, 1995

Sri Lankan government seeks to encourage private sector participation in power sector due to difficulty of financing investment needed to meet electricity demand. But lack of clear policies has delayed private participation considerably. Specially no policies have been set for the purchase of power from private sector. The first part of the study focuses on developing a methodology for computing a rational purchase price for Sri Lanka. Rates have been designed based on the concept of avoided cost. Long run differential revenue requirement (LRDRR) approach and Peaker approach were used to calculate avoided cost. The avoided cost is intended to reflect the true value of electricity to the utility. But successful private power development will require that the utility pay private developers an agreed-upon rate on their investment, a rate based on the true cost of generating power. Therefore a financial analysis was carried out to calculate the purchase price that gives fair rate of return to Independent Power Producers (IPP) using discounted cash-flow approach. Due to difficulty of getting true cost of power generation by IPP, hypothetical data were used in the financial analysis. It is found that the purchase price which was calculated using financial analysis for IPP is significantly higher than the avoided cost, and therefore the purchase price which is equal to the average avoided cost gives low ROE (return on equity) for IPP. However, if IPP sell electricity only in peak period, the avoided cost to CEB will give high ROE for IPP. It is impossible to justify the appropriate value for the Purchase price at this level due to various limitation. The main objective is to develop a methodology for computing a rational purchase price. These two values (avoided cost and price given by the financial analysis) are the bountries for the appropriate price. The second part of the study focuses on regulating the retail price of electricity under a price-cap regulatory scheme. The main objective of this part of study is to check the workability of an incentive based regulatory scheme for Sri Lankan power sector. It is found that, indexing electricity prices with respect to broad-based index of CPI is not practicable to Sri Lanka due to large swing in CPI.