Abstract:

This study investigates the impact of electricity costs on the profitability of Small and Medium-sized Enterprises (SMEs) in Sri Lanka, with a specific focus on the Kundasale Divisional Secretariat Division. Using a quantitative approach and multiple regression analysis on data collected from 100 SMEs, the study found that electricity expenses significantly and negatively affect profitability. The model explained 61.2 percent of the variance in profitability, confirming strong predictive power. Electricity cost (β = -0.421, p < 0.001) and electricity consumption (β = -0.308, p < 0.001) were identified as major factors reducing profitability, while business size (β = 0.259, p < 0.01) showed a positive influence. The findings reveal that smaller firms are particularly vulnerable to rising energy costs due to limited access to technology and capital. The study emphasizes the need for SMEs to adopt energy-efficient practices and for policymakers to introduce tiered electricity pricing, financial incentives for renewable energy use, and stable tariff mechanisms. Enhancing energy efficiency and affordability is vital for strengthening SME competitiveness and ensuring sustainable economic growth in Sri Lanka.