Electricity pricing

S BANERJEE

Electricity pricing
Over a period of time, electricity, which was considered earlier as essential service slowly changed as a commodity and opened for market mechanism to decide electricity pricing. Hence different methods came up. RP X method Marginal costing price basis. Bidding method. (Long term bidding or spot bidding)

Electricity pricing
4.0 OBJECTIVES OF THE POLICY
The objectives of this tariff policy are to: (a) Ensure availability of electricity to consumers at reasonable and competitive rates; (b) Ensure financial viability of the sector and attract investments; (c) Promote transparency, consistency and predictability in regulatory approaches across jurisdictions and minimise perceptions of regulatory risks; (d) Promote competition, efficiency in operations and improvement in quality of supply.

Electricity pricing
Introducing competition in different segments of the electricity industry
emergence of appropriate market conditions.

Tariff Structure
A cost plus electricity pricing mechanism RR = [RB X RoR] + ED + EO&M + T Where:
RR = the total annual revenue requirement of the utility

RB = the rate base (required investment) of the utility

RoR = the allowed rate of return (debt and equity) on investment.

ED = annual depreciation expense

EO&M = annual operation & maintenance (O&M) expense T = annual taxes paid by the utility

a) Rate of Return (ROR)/ Cost of Service

Requires determination of
Allowable costs Rate base which represents the historic cost of the assets employed. Accumulated depreciation Rate of return on the rate base Advantages Traditional approach and familiar to utilities, users and regulatory agencies Simple, unambiguous and fair. Provides predictable, steady returns to the utilities and hence conducive for further investments.

a) Rate of Return (ROR)/ Cost of Service

Disadvantages Tendency to over invest for higher return to the investor. Since the net return is fixed and any reduction in costs or increase in revenue is passed through to consumer, there is little motivation to reduce the cost and make efficiency gains. Inflexibility of tariffs over the tariff period and the time lag for tariff revision

Electricity pricing
Equity norms Cost of debt Depreciation Return Operating norms Benefit from CDM Multi year tariff Procurement through bids

Let us take one example: One 1000 MW station. Cost @ 4.0 Cr./ MW. = Rs. 4000 Cr. Debt equity ratio: 70: 30 = 2800 Cr. : 1200 Cr. Interest rate on loan @ 4% p.a. for 10 years Depreciation @ 3.6% for life cycle of 25 years. Interest on working capital @ 10.25%. O&M expenses @ Rs.10.12 Lakh/ MW. Return on equity @ 14 % Allowable heat rate 2400 Kcal/ Unit. Allowable oil consumption = 1.0 ml/ Unit Heat value of coal = 4000 Kcal/ Kg. Cost Rs. 1000/MT Heat value of oil = 10000 Kcal/L, Cost Rs. 12000/ KL. APC = 10 %

Calculation of loan interest/ year 1st year = 2800*4/100 = 112 Cr. 2nd year= (2800 280)*4/100 = 108 Cr. 3rd year= (2520 280)*4/100 = 89.6 Cr. And so on. Calculation of depreciation/ year = 4000*3.6/100 = 144 Cr. Calculation of working capital Fuel stock (on 80 % av.) for 15 days = 24*106*0.6*0.8/1000*15 = 1.73 Lakh MT. Cost of coal stock = 17.3 Cr. Oil stock (on 80 % av.) for 30 days = 24* 106 *1.0*30*0.8/1000 = 576000 Lt. Cost of oil stock = 691.2 LAKH Cost of inventory = 40 Cr. Cost of O&M exp. (1 month) = 8.43 Cr. Receivable (2 months) = 86.4 Cr. Total interest on WC = 151.83*10.25% = 15.58 Cr.

Calculation for O&M expenditure Calculation on ROE Total capacity charge Capacity charge per unit

= 101.2 Cr. = 1200*14/100 = 168 Cr. =540.78 Cr/12 = 58.88 Cr =58.88*107/ 24*106*0.8*30 =82.62 paisa

Variable charge Fuel charge/ unit = Rs. 0.6*1= 60 paisa Let fuel price adjustment = NIL. Price of electricity = 83+60 = 143 paisa/ KWh. Sent out price = 143/ 0.9 = 160paisa/Kwh. Excluding other statutory charges. This is average cost of pricing. Under market oriented electricity pricing, it is market mechanism which determines the cost of electricity.

U.I RATE STRUCTURE

UI
745

360

240

120 0 49.0 49.5 49.8 50.0 50.5 FREQ.

Pricing under market

Electricity market
Monopoly model Single buyer model Third party or open access model. Power pool (Whole sale market or spot market)

Electricity market
Monopoly model : Total regulated market. Vertical integration. No competition. Single buyer model : A single entity purchase power from all generators on a competitive basis and sells it to the supply entities.
Generator on a competitive basis can be priced for a multi year tariff. (Bidding method) Can be priced under marginal cost (dynamic)

Multi year tariff

multi year tariff : Principle Initially based on present average tariff. Annual fixed increment allowed for a long period (7-10 years) and there after review or linked with CPI with a background of efficiency improvement targets. Items identified as controllable and uncontrollable. Fixed target on controllable items. Fixed charge on generation except taxes, Network cost, financing costs are controllable. Forced majeure, Judicial decision, Change in law/ Govt. policy etc. are uncontrollable. Incentive and benefit sharing Fuel and other risk cannot be pass through i.e. risk lies with investor.

Multi year tariff

multi year tariff : Advantage Less regulatory risk. Firm commitment between investor and consumer . Progressively reflect cost of supply, eliminate crosssubsidy. No specific provision necessitating annual filing for tariff.