Powering reform: Why electricity tariffs must be rewired for Sri Lanka's future

SRI Lanka's electricity tariffs have never made much economic sense as they're full of distortions, cross-subsidies and based on outdated assumptions. This is why the Advocata Institute recently made a formal submission to the Public Utilities Commission of Sri Lanka (PUCSL), proposing a complete overhaul of the way electricity is priced. The goal isn’t just to balance the books. It’s to improve transparency and efficiency of the system.

- BY ADVOCATA INSTITUTE

At the heart of this effort lies one central truth: effective electricity pricing must reflect the realities of production and consumption. Electricity is unlike other goods. It is homogeneous—a unit of electricity is identical no matter how it’s generated. It is non-storable—it must be consumed as it is produced. And its cost varies across time, depending on the generation mix and demand patterns. Any pricing system must accommodate these characteristics.

Fixing the foundations: Rational tariff structures

Today’s electricity tariff structure in Sri Lanka is riddled with inconsistencies and cross-subsidies. There are multiple user categories—domestic, General Purpose/Government, Industrial/Hotel, Religious, and Charitable—each with its own rate schedule. Yet, these distinctions often bear little relationship to actual consumption patterns or cost of supply. For instance, a restaurant in a hotel pays a lower rate than an identical restaurant in a shopping mall. This defies logic and undermines equity.

We propose a simpler, fairer approach: consumers who use the same commodity under similar conditions should pay the same rate. The only justified exception is a lifeline tariff for low-income domestic users—a targeted subsidy that ensures affordability without distorting market signals.

Tariffs must also be aligned with the full economic cost of supply, including generation, transmission, distribution, and system losses. Underpricing electricity results in underinvestment, rising debt, and operational inefficiencies—conditions that have long plagued the Ceylon Electricity Board (CEB).

Principles for smart pricing

Drawing on international best practice, we recommend that Sri Lanka adopt five key principles in electricity tariff design:

1.Cost-reflective pricing — Charges should transparently account for generation, transmission, distribution, and losses.