There are currently about 100 megawatts of small hydro plants generating 300 million units of electricity a year, connected to Sri Lanka’s national electricity grid.
Developers say that costs of future development however will go up, as prices of inputs like cement, steel and equipment soars and new sites become more expensive to develop.
"Most of the good sites have been developed already and the remaining sites are a little bit more expensive. They cannot be developed at the prices we developed the last 100 megawatts," Nishantha Nanayakkara, President of the Grid Connected Small Power Developers Association said Tuesday.
Prices of cement and steel have also doubled since 2003, Nanyakkara says, while copper, used in generators has also gone up in price.
"The total cost of generating a unit of electricity from a mini-hydro plant at the moment is about six rupees a unit, but this will definitely go up with future projects. Previous projects of one megawatt cost about 100 million dollars, but this will go up to 120 million dollars for a plant of the same size."
Developers of small hydro power plants, each of which are usually of about a few megawatts in capacity size, sell the electricity generated to state utility the Ceylon Electricity Board (CEB).
Current tariffs are based on the principle of avoided cost – which is what the CEB saves by using lower cost small hydro plants than running more expensive thermal power.
Critics have said that under the avoided cost formula the cost of mini-hydro plant power goes up when petroleum prices go up, making them more like thermal plants than hydro plants.
There are separate tariffs for dry and wet seasons, with developers currently getting paid an average of 5.82 rupees for every unit sold to the CEB.
"Negotiations are ongoing with the government for a cost-based tariff rather than one that is based on avoided cost. This should come within the next one month or so," Nanayakkara said.
The new cost based tariff would factor in investment, returns, operation and maintenance costs, costs of bank financing and also factor in escalation of costs with time.
On this basis, tariffs for other renewable energy like wind power is 12.30 rupees a unit and for dendro or wood based power – 8.50 rupees a unit.
Small hydro developers claim that there is potential of up to 400 megawatts that can be developed in areas such as Badulla, Ratnapura and in the Kegalle district, with plans to do this by 2010.
However, developers and the CEB have frequently disagreed about the number of small hydro’s that should be allowed on the national grid and the extent of the tariff paid.
CEB says a large number of small plants make the system unstable. The utility also complains that it has to cope with several mini-hydro plants dropping off the grid un-announced whenever they run dry.
Because they also cannot be dispatched (switched off by the CEB) the utility is obliged to buy power whether it wants it or not, especially in the wet season when its own hydro plants are in full operation.
All this, the CEB says, contributes to making the utility’s already high costs even higher.
The CEB has also said previously that it would restrict the number of new Letters of Intent (LOI) issued for new plants, though there is an active secondary market for permits already issued.About 60 percent of Sri Lanka’s electricity generating system is thermal fuel based, where average costs of generation are in the region of about 12 to 15 rupees a unit, with the balance run on large and small hydro power.