Why affordable energy, domestic entrepreneurship, fair taxation and retaining skilled professionals must become the foundations of Sri Lanka’s economic transformation
By Dilum Alagiyawanna
Environmentalist | Wildlife Conservationist | Public Policy Analyst
A warning from 2024
On 18 October 2024, I wrote an opinion article in The Island titled “Sri Lanka’s Renewable Energy Strategy: The Risks of Being Penny Wise, Pound Foolish”, questioning the wisdom of prioritising renewable electricity exports, particularly wind-generated electricity to India, without adequately considering Sri Lanka’s long-term domestic energy requirements, industrial development and environmental sustainability.
My argument was not that Sri Lanka should never export electricity. Rather, I questioned whether the long-term economic opportunity cost of such exports had been sufficiently examined.
Two years later, developments in artificial intelligence (AI), digital infrastructure, household electricity pricing, industrial competitiveness and the continuing outward migration of skilled workers have made that question considerably more important.
However, the discussion must now go beyond electricity exports.
Sri Lanka’s future prosperity cannot be built merely by attracting foreign investment, developing energy-intensive data centres or expanding electricity generation. It must also be built by creating an economic environment in which domestic enterprises can expand, ordinary households can afford essential services, skilled professionals can prosper and Sri Lankan products and services can compete internationally.
These objectives are closely interconnected
The fundamental challenge is not simply how much electricity Sri Lanka can generate or export. It is how effectively that electricity can contribute to national economic prosperity.
The economics of exporting energy
Recent observations by Dr Hans Wijayasuriya, President’s Chief Advisor on Digital Economy, provide an important starting point.
Speaking at the Sri Lanka Economic and Investment Summit 2026, Dr Wijayasuriya reportedly observed that the country’s existing data centre capacity is approximately five megawatts (MW), compared with around 1,500 MW in Malaysia.
He suggested that Sri Lanka would require approximately 25–50 MW of AI-capable cloud infrastructure in the short term, initially targeting around 25 MW.
More importantly, he cautioned against excessive investment in data centres primarily serving overseas markets, observing that such facilities could effectively become a means of exporting electricity.
His underlying question was economically significant: what is the next best use of each additional megawatt generated in the country?
This principle should be applied consistently across national energy policy.
If Sri Lanka must carefully examine the economics of exporting energy indirectly through data centres, should it not apply the same scrutiny to exporting electricity directly?
A unit of electricity can be sold across a national border. Alternatively, it can support domestic manufacturing, agricultural processing, refrigeration, scientific research, digital services or thousands of small enterprises.
The correct comparison is between the net national economic benefits of these different uses, taking account of production costs, domestic value addition, employment, investment requirements and environmental consequences.
Gross export earnings alone cannot answer that question.
The overlooked backbone of Sri Lanka’s economy
Sri Lanka’s economic development discussions frequently place considerable emphasis on attracting foreign direct investment (FDI).
Major investment announcements are often presented as evidence of economic progress, with considerable attention given to their monetary value and anticipated employment creation.
Foreign investment undoubtedly has an important role. It can introduce capital, technology, international markets, managerial expertise and valuable infrastructure.
However, investment commitments should not be confused with realised investment, and realised investment should not automatically be equated with substantial new employment creation.
According to the Board of Investment, Sri Lanka attracted approximately US$1.057 billion in FDI inflows during 2025.
Of this amount, approximately US$134 million was associated with 24 newly contracted projects, while the remaining US$923 million originated from expansions and capital infusions into existing operations.
These figures illustrate an important distinction between the total volume of investment entering the economy and investment associated with new projects.
Large investments in sectors such as ports, energy infrastructure, telecommunications and data centres may be highly capital-intensive. Their economic contributions can be substantial, but their direct employment requirements may be relatively modest.
Employment is not the only measure of investment success. Productivity, export earnings, technology transfer, domestic procurement and tax revenues also matter.
Nevertheless, Sri Lanka must recognise that its economy consists of far more than a relatively small number of major enterprises.
The Department of Census and Statistics’ most recent completed comprehensive Economic Census, conducted in 2013/14, found that micro, small and medium-sized enterprises (MSMEs) accounted for approximately 99.8% of non-agricultural business establishments.
These figures represent a historical benchmark rather than a current 2026 measurement.
The Department is now conducting the Economic Census 2025/26, which should provide updated information on the country’s formal and informal enterprises, employment and economic activities.
Even so, the historical findings illustrate the importance of smaller enterprises within Sri Lanka’s economic structure.
Family businesses, small manufacturers, agricultural processors, workshops, independent service providers and individual entrepreneurs collectively support substantial economic activity.
Unlike large corporations, smaller enterprises often lack the financial resources to install dedicated renewable-energy systems, negotiate individual electricity supply agreements or invest in sophisticated energy-efficiency technologies.
They depend heavily on the affordability and reliability of electricity supplied through the public network.
Sri Lanka’s economic transformation must therefore focus not merely on attracting major investors, but also on improving the productivity and competitiveness of its existing entrepreneurial base.
Affordable electricity: A missing foundation of export competitiveness
Successive governments have repeatedly expressed the ambition of transforming Sri Lanka into a competitive export-oriented economy.
Yet export competitiveness cannot be achieved through investment incentives and trade promotion alone.
Manufacturers require reliable infrastructure, skilled workers, efficient logistics, regulatory predictability and affordable electricity.
Electricity is particularly important for industries such as ceramics, rubber products, textiles, engineering, food processing, refrigeration and technology-enabled services.
Consider a manufacturing facility consuming ten million kilowatt-hours annually
A reduction of five US cents per kilowatt-hour in its effective electricity cost would result in annual savings of approximately US$500,000.
This is an illustrative calculation rather than a forecast of achievable tariff reductions.
Nevertheless, it demonstrates why energy affordability can significantly influence productivity, investment and international competitiveness.
The same principle applies to smaller enterprises
For a village-based food processor, refrigeration may determine whether agricultural produce can reach higher-value markets.
For a small engineering workshop, the affordability of electricity may influence whether it can operate modern machinery.
For an export-oriented manufacturer, even modest reductions in production costs can improve competitiveness.
However, electricity affordability must be evaluated carefully.
A low renewable-energy generating tariff does not automatically translate into low electricity bills. Transmission, distribution, storage, backup generation and financing all contribute to the delivered cost.
Similarly, international comparisons must distinguish industrial energy charges from maximum-demand charges, taxes, time-of-use tariffs and reliability costs.
Sri Lanka should therefore establish an independently verified benchmark comparing the complete electricity costs of representative local manufacturers with those faced by competing enterprises in India, Vietnam, Bangladesh, Malaysia and other Asian economies.
The objective should not be to provide artificially cheap electricity through unsustainable subsidies.
It should be to progressively reduce the actual cost of generating and delivering reliable electricity.
Affordable energy should become a deliberate instrument of national industrial competitiveness.
Are we planning electricity demand for the economy we have or the economy we want?
Long-term electricity planning is another issue deserving closer scrutiny.
The Ceylon Electricity Board’s approved Long-Term Generation Expansion Plan 2025–2044 projects annual electricity demand increasing from approximately 16.3 terawatt-hours (TWh) in 2025 to 21.2 TWh by 2030 and 34.3 TWh by 2040.
These projections reflect systematic national electricity planning and should not be disregarded.
However, the development ambitions of other Asian economies provide an instructive perspective.
Vietnam’s revised Power Development Plan VIII, approved in April 2025, anticipates commercial electricity consumption of approximately 500–558 TWh by 2030.
India’s Central Electricity Authority projects national electricity requirements of approximately 2,378 TWh during 2030–31.
These economies differ significantly from Sri Lanka in population, geographic scale, industrial structure and economic size. Their absolute electricity requirements cannot therefore be treated as directly comparable with ours.
Nevertheless, the projections demonstrate the importance of connecting electricity infrastructure with national development ambitions.
Sri Lanka must ask whether its electricity planning adequately reflects the type of economy it wishes to build over the coming decades.
What would national electricity demand look like if Sri Lanka substantially expanded export-oriented manufacturing?
What if agricultural processing, engineering products, pharmaceuticals, biotechnology and advanced services became important growth sectors?
What if the country successfully developed a competitive AI-enabled economy, expanded domestic computing infrastructure and accelerated transport electrification?
The CEB already examines alternative electricity demand scenarios, including higher economic growth and accelerated electric-vehicle adoption.
An additional integrated scenario incorporating ambitious export-led industrialisation, technological transformation and domestic entrepreneurship would provide a useful test of whether existing plans can accommodate future development.
The objective should not be to justify unnecessary generating capacity. Excess investment could impose considerable financial burdens on electricity consumers.
Rather, it should be to prevent inadequate or expensive electricity from becoming a constraint on the industries Sri Lanka hopes to establish.
This has direct implications for long-term electricity export agreements.
Electricity regarded as surplus under one economic development forecast may have considerable domestic value under a more ambitious industrial growth scenario.
That possibility must be examined before strategic resources are committed through long-term contractual arrangements.
The digital economy is not confined to data centres
Sri Lanka’s digital economy strategy must also recognise a fundamental transformation in the nature of employment and entrepreneurship.
Digital economic activity is no longer confined to telecommunications networks, large technology companies, office complexes and data centres.
An increasingly important segment operates from ordinary homes.
Software developers, freelance programmers, graphic designers, video editors, engineers, architects, accountants, researchers and digital consultants can serve international clients without establishing conventional business premises.
These individuals can generate foreign-exchange earnings while continuing to live, work, spend and invest in Sri Lanka.
For such entrepreneurs, entry into international markets may require relatively modest physical infrastructure compared with conventional manufacturing.
A skilled professional equipped with appropriate computing technology, reliable internet access and access to overseas clients can participate directly in the global economy.
However, these professionals face operating costs that national digital development strategies may overlook.
Many require powerful computers, multiple monitors, networking equipment and air conditioning for extended working hours.
In Sri Lanka’s tropical climate, maintaining suitable indoor working conditions can be important for concentration, productivity and equipment reliability.
For these individuals, electricity is not merely a household consumption expense.
It is partly a legitimate input into export-oriented economic activity.
Yet many home-based professionals purchase electricity under ordinary domestic tariffs.
This creates a potential inconsistency between Sri Lanka’s digital economic ambitions and its electricity pricing framework.
Why should the country encourage professionals to participate in the global digital economy without adequately considering the energy costs of operating those businesses from home?
Household electricity affordability: A wider social challenge
Sri Lanka’s domestic electricity tariff structure becomes substantially more expensive as consumption increases.
Under the tariff schedule introduced in May 2026, the high-consumption domestic category carries an energy charge of Rs. 100 per kilowatt-hour, alongside the applicable fixed charge and statutory levy.
A household consuming approximately 600 kilowatt-hours monthly could face an electricity bill exceeding Rs. 50,000 under that schedule.
Such expenditure represents a substantial financial commitment for many Sri Lankan families.
More importantly, household electricity consumption is not necessarily an accurate indicator of household wealth.
A larger family may naturally consume more electricity than a smaller household.
Families may have children studying at home, elderly members, essential medical equipment, refrigeration, water pumps or individuals working remotely.
Increasing temperatures and high humidity can also create greater demand for fans and air conditioning.
Progressive electricity tariffs can legitimately protect vulnerable consumers and encourage energy efficiency.
However, steep increases beyond specific consumption thresholds raise questions about whether the tariff structure adequately distinguishes discretionary consumption from essential household requirements and productive economic activity.
The issue is not whether unlimited electricity consumption should be subsidised.
Rather, it is whether tariff design can be made more equitable while remaining financially sustainable.
Sri Lanka should examine how household size, income, essential electricity requirements and verified home-based business activity might be better reflected in energy affordability policies.
Targeted assistance, efficient appliances, improved building design and wider access to rooftop solar could also help reduce household electricity expenditure.
However, rooftop solar benefits should not be confined to property owners with sufficient capital to finance their own installations.
Apartment residents, tenants and lower-income households require consideration through appropriately designed shared renewable-energy and financing mechanisms.
The national energy transition must ultimately provide tangible benefits to ordinary citizens. (To be continued)