Power Sector Economics and Planning

Dr Hiranmoy Roy

Intro. to Eco. Theories and their Importance

Economic Theories: Economic Changes and its consequences Societys institution and technology affect prices Distribution of Income poor can be helped without harming economic performance Business Cycle, Monetary Policy swing in unemployment and Inflation
2

Economic Theories
Pattern of Trade, Impact of Trade Barriers Govt. policies to pursue Growth in Developing Countries, Efficient use of resources, Full employment, Price stability, Fair dist. of income Classical Theories Depression of 1930s Classical theory had the difficulty of explaining Depression.
3

Economic Theories
J. M. Keynes began to develop alternative theories Birth of Keynesian theories But it also had trouble as unemployment and inflation began to rise together Stagflation Post Keynesian Development Critique of Keynes three main developments after Keynes
4

Economic Theories
Monetarism, Supply side Economics, Neo Classical Economics: Rational Expectation Theory Milton Friedman Monetarist Criticized Keynes He argued Monetary Policy is the prime engine in causing fluctuations in eco. Activity through Agg. Demand
5

Economic Theories
Keynes view that monetary policy ineffective to bring eco. Stability was criticized by Friedman In fact, he said the monetary policy contributed to almost all recessions There are differences between Keynes and Monetarists in two issues (i) Relationship between money supply and inflation (ii) Role of Govt. in the economy
6

Economic Theories
Monetarist led by Friedman Inflation is always and everywhere a monetary phenomenon Inflation is caused by rapid expansion of money supply Keynes and his followers activist role of Govt. Keynes lay stress on adoption of discretionary fiscal and monetary policy
7

Economic Theories
Keynes believed that expansion of money supply does not always cause inflation This depends on possibility of expansion of output When eco. Is in depression increase in money supply is likely to lead in large expansion of output and prevent price rise Monetarist opposed to the fiscal policy, budget deficit and pub. debt
8

Economic Theories
They argued that reducing taxes and public expenditure so that role of Govt. in the economy is reduced

Economic Theories
Supply Side Economics: In 1970s problem of stagflation appeared high inflation accompanied by high unemployment Keynes proposition of fluctuation in agg. dd. Responsible for either high unemployment or high inflation could not explain stagflation This led some economists to believe that problem was on the supply side eco. activity
10

Economic Theories
Keynesian theories were incapable of solving Keynesian expansionary fiscal and monetary measures taken to raise agg dd. to remove stagflation or high unemployment , it accelerated further. On the other hand if steps were taken to lower agg dd to lower inflation rate it would further increased already high unemployment rate
11

Economic Theories
Supply side economists mentioned that it was supply shocks, by reducing oil prices and increase in oil prices that caused the problem of stagflation Contraction in supply due to supply shocks , given the agg dd curve price level and inflation could rise on the one hand and agg output could fall giving rise to unemployment
12

Economic Theories
Supply side advocates expansion in money supply increase in employment opp., incentives to work, save and invest more were required to be promoted Increase in agg supply given the agg dd curve will lead to increase in employment on the one hand and reduction in inflation on the other
13

Economic Theories
According to them high rate of tax serves as disincentive to work New Keynesians thus emphasize both fiscal and monetary policies to attain eco. Stability To encourage more saving work and investment , they advocated reducing prevailing high rates of income tax This will not only cause employment to rise but also lower rate of inflation
14

Economic Theories
Laffer Curve When rate of a tax increases from zero upward Govt. revenue from it initially increases, but after a point further hike in rate of tax brings about decrease in revenue for the Govt. So lowering of tax rate not only increase N.I and employment but also reduce Govt. budget deficit
15

Economic Theories
New Classical Macro economics: Rational Expectation Theory : A New Macro theory put forward which is opposed to Keynesian Macro theory According to this new classical macro economic theory consumers, workers and producers behave rationally to promote their interests and welfare.
16

Economic Theories
On the basis of their rational expectation they made quick adjustments in their behaviour Producers and consumers collect every information to determine their behaviour People make a correct relationship between eco. Event and Govt. policies on the one hand and results that follow from that Correct prediction from Govt. policies and changes in eco. environment
17

Economic Theories
E.g., when Govt. makes a deficit budget they will expect that interest rates will rise. So to they will attempt to take loans now when rate of int. is less than paying higher int. rates in future A sharp contrast of Keynesian theory and Rational expectations theory is that according to Keynesian theory deficit in Govt. budget will leads to increase in agg dd and will promote pvt investment
18

Economic Theories
On the other hand according to Rational expectations theory, budget deficit will cause rate of interest to rise which will discourage pvt investment Thus increase in agg dd as result of budget deficit is offset by decrease in pvt investment so that N.I., output and employment remains unaffected
19

Economic Theories
Similarly If RBI increases money supply , consumers, workers and producers expect rationally price level will rise . On the basis of their rational expectations, workers will get their wages raised , landlord raise their rents, bankers and lenders raise their interest and producers will raise the profit margins
20

Economic Theories
As a result of adjustments by various persons, the effect of expansion in money supply on these persons will get cancelled. So according to rational expectation theorists since the consumers, workers and producers themselves make adjustment to save them from adverse effect s of economic events and policies there is no need for the Govt. to intervene in the eco through proper macro eco policy
21

Economic Theories
Thus like Friedman and other monetarists the supporters of rational expectations theory opposed to the activists role by the Govt. However Conservative Govt. (US) of the 1980s gradually become disillusioned with Monetarism and returned to modern version of classical eco management Neo- Classical economics. Like classical eco it stresses the role of free markets in delivering the best possible eco growth
22

Economic Theories
Following three important theories popular in economics Classical / Neo- classical, Keynesian theory, Monetarist theory Classical refers to the works done by a group of economists in the 18th and 19th centuries. Much of these work subsequently been updated by modern economists and they are generally termed as neo-classical economists
23

Economic Theories
We look in to works of classical economists what they believed and proposed Beliefs, Theories, AS & AD policies, Virtual Economy Policies Neo-Classical Theory: Beliefs Malthus Population growth depress eco growth then diminishing returns would cause further problems for growth
24

Economic Theories
They believed Govt. should not intervene to correct this as it would only make things worse so only way to encourage growth is to allow free trade and free markets. This approach is known as laissez-faire approach This approach places total reliance on markets and anything that prevent markets clearing properly should be done away with.
25

Economic Theories
Neo-Classical Theories: Revolved mainly around the role of markets in the economy If markets work freely and nothing prevents their working then the economy would prosper Role of Govt. is to ensure the free workings of markets using supply side policies The main theory to justify this view is Free Market Theory, Says Law, Quantity Theory of Money
26

Economic Theories
Free Market Theory Eco left itself tend to full employment equilibrium Unemployment (a surplus of labour) fall in wages increased dd for labor - equilib restored at full employment Initially hig h wage results in unemp l( a b in diag) . This causes wage rate to fall and unempl in the eco is voluntary unempl
27

Economic Theories
Similarly if there is discrepancy between savings and investment the equilibrium would change in the market. This would require free and flexible market Increase in inv Increased dd for money Increased Rate of int. Increased Savings equilib is restored Compared to Keynesian macro theory of income and employment classical theory is more relevant to the conditions of prevailing in developing countries
28

Economic Theories
And the theory highlight those factors which govern income and employment in these countries While Keynesian theory emphasizes the role of effective dd in the determination of income and employment, classical economists believed that in a free market eco there is always tendency toward the establishment of full employment and sufficient dd for output
29

Economic Theories
Classical theory of employment and output is based on the following two basic notions: Says Law, Wage Price Flexibility Says Law: Jean Baptiste Say early nineteenth century Supply Creates its Own Demand Assumptions: (i) Any increase in goods and services (supply) will lead to an increase in expenditure to buy those goods and services (dd) (ii) There will not be any shortage of dd full employment if there is any unemployment it would simply be temporary Greater production leads to more income and which creates market for goods and deficiency in dd is not a problem
30

Economic Theories
Income which is not spent on con goods will be saved and will be reinvested. Thus inv equals saving Thus leakage caused by saving in income flow is made up by the inv expenditure J. M Keynes bitterly criticized the classical theory of automatic full employment

31

Economic Theories
Wage-Price Flexibility: The amount of production depends not only on agg dd or exp but also on prices of products. Inequality in saving and investment may cause deficiency in agg exp even then over production and unemployment would not arise This is because they thought deficiency would be made by changes in price level Due to increase in savings expenditure declines, it will then affect the prices of the products
32

Economic Theories
At lower prices all products will be sold and so there is no overproduction and unemployment Thus increased savings will bring down the prices of products and not the amount of production and employment Now a question arises to what extent the sellers of the product will tolerate the decline in prices
33

Economic Theories
However to make their prices profitable they will have to reduces the prices of factors such as labourers With fall in wages all workers will get employment but if labourer do not work at lower wages, this is voluntary unemployment according to classical economists According to classical economists involuntary unemployment is not possible in a free market economy, all those who are willing to work at the existing wage rate will get employment
34

Economic Theories
During great depression of 1929-33 Pigou suggested cut in wage rates in order to remove huge widespread unemployment prevailed at that time Keynes criticized Pigous view in his General Theory Supply may not create its entire dd Income earned by different factors of production are equal to the value of the output produced this do not mean that whole income will be spent on goods and services If inv is not equal to desired savings then agg dd will not be equal to agg supply, producers will unable to sell whole output and so profit will be less, they will reduce production which will give rise to involuntary unemployment
35

Economic Theories
In a capitalist eco agg dd is the sum of con dd and inv dd. But in a free market capitalist eco persons who save is different from those who invest. Inv depends on marginal eff. Of capital Keynes also explained that equality between savings and investment can not be brought about by changes in interest rate as savings depends on income. But classical economists ignored changes in income due to their assumption of full employment
36

Economic Theories
Quantity Theory of Money Neo- Classical theory: Agg Supply (AS) and Agg dd (AD): The classicals have complete faith in markets they believed eco would always settle automatically the full emp. Equilib. in the long run However there may be slightly different reaction in the short run as the eco adjusted to its new long run equilib. This can be explained with AD and AS analysis (diagram)
37

Economic Theories
Neo-Classical Theory Policies: Classical view eco is self adjusting, there is no need to actively intervene in the eco Intervention may simply destabilizing and inflationary. The key to long term growth is thus ensure free markets with no imperfections (through supply side policies) Control the growth of the money supply to ensure low inflation
38

Economic Theories
Supply Side Policies: Supply side policies can be used to correct market imperfections. If level of agg supply increases then Says law predicts that dd will also increase This will only be non-inflationary way to get increase in output (Diagram). Money Supply Policies: Open market operation, Funding, Monetary Base Control, Interest Rate Control
39

Economic Theories
Keynesians: Theories The Labor Market, Money Market, The Multiplier, Keynesian Inflation Theory The Labor Market Did not have same faith in market as classical. Wages would be sticky downwards Workers are not happy about wage cuts and would resist, this would mean ages will not fall enough to clear the market and unemployment would linger (Diagram) Demand deficit unemployment
40

Economic Theories
Keynesian Theory Introduction: Much of J.M. Keyneses works took place at the time of Great Depression of 1930s Assumptions: (i) Market did not automatically lead to full employment equilibrium (ii) The Level of output (N.I.) would adjust between leakages and injections Imbalance between leakages and injections (increase in Govt. exp) extra agg dd more employment more income leakages (tax, savings, and imports). If leakages and injectins are equal than equilib restored, this is Multiplier Effect.
41

Economic Theories
Money market: Classical economists believed that savings to be increased to invest more. Keynes argued that savings would mean people to spend less This would mean a decrease in agg dd This would make things worse and firms would be even less inclined to invest as demand for product decreasing Inv depends on business expectation
42

Economic Theories
The Multiplier: Keynesian View of Inflation: Keynes rejected quantity theory of money. Increase in money supply will lead to inflation Increase in M may lead to decrease in V. Alternatively increase in M may lead to decrease in T (transaction) Keynes termed inflation is more likely to be cost push.
43

Economic Theories
Keynesian AS & AD: He argued that economy would settle at any equilibrium level of income at any time, it is duty of Govt. to use appropriate policies to ensure that equilibrium is good one for economy Reflationary policy to boost agg dd As agg dd increases so does output and employ which leads to inflation
44

Economic Theories
Keynesian Policies: Demand management Policies adjusting the level of dd so that eco arrives at full employment If there is shortfall of dd (deflationary gap), Govt. need to reflate the eco. If there is excess dd Govt. need to deflate the eco Demand for Money and Keynesian Liquidity Theory of Interest:
45

Economic Theories
Criticism of L.P. Theory of Interest: He ignored the real factors (like productivity of capital, thriftiness or saving) in the determination of interest rates He assumed rate of interest depends on demand for investment funds. Demand for capital (investment funds) depends on MEC. Reflationary Policies: (Ref.)
46

Economic Theories
Deflationary Policy: (Ref.) Monetarists Theory- Introduction: Monetarism is very close to classical school of thought (Friedman 1960s, 1970s) Stagflation Stagnation and Inflation Monetarists work revolve round role of expectation in determining inflation Monetarists Belief: Re -evaluated QTM and argued increase in money supply would lead to inflation substantial empirical evidence

47

Economic Theories
Expectation adjust so quickly that policy change will immediately be taken by people No short term adjustment Rational Expectation School Inflation is always and every where a monetary phenomenon Monetarists Theory: QTM: Expectation Augmented Philips Curve (Diagram)
48

Economic Theories
Monetarists AS & AD: Short Run, Long Run (Diagram Ref.) Monetarists Policies: Limited their view on Inflation, policy is on inflation only They believed if inflation is controlled stability and growth of the economy will be maintained. The key policy is to control money supply to control inflation and do not intervene to reduce unemployment The only way to change natural rate is through Supply Side policies
49

Economic Theories
Supply Side policies: Non Inflationary increase in capacity (supply) to reduce unemployment (Diagram Ref.) Money Supply Policies: (Ref.)

50

Depreciation Accounting
Depreciation, Characteristics of Depreciation, Various Depreciation Methods Business acquires an asset to be used for more than one year, it appears in the balance sheet as a fixed asset These assets are expected to be used by the business for a number of years this is called the Useful Economic Life (UEL) At the end of the assets UEL, it may have some residual value
51

Depreciation Accounting
During the UEL, the value at which the asset appears in the balance sheet is gradually reduced until it is equal to the residual value at the end of the UEL. This reduction is called depreciation. For accountants, depreciation is an allocation process, not a valuation process. It is important, therefore, for analysis to differentiate between accounting depreciation and economic depreciation.
52

Depreciation Accounting
Income is defined as the amount that can be distributed during the period without impairing the productive capacity of the firm. The cash flows generated by an asset over its life, therefore, cannot be considered income until a provision is made for its replacement. These cash flows must be reduced by the amount required to replace the asset to determine the earnings generated by that asset.
53

Depreciation Accounting
This is underlying principle of economic depreciation The periodic depreciation expense, therefore, segregates a portion of cash flows for reinvestment, preserving that sum from distribution as dividends and taxes.

54

Depreciation Accounting
Suppose an asset costs $240 and is expected to generate net cash flows of $100 per year over its three year life, Over the life of the asset, income equals $60 ($300-$240) as $240 is required to replace the asset As financial statement report income annually, it is necessary to determine how much income (how much depreciation) to report each year.
55

Depreciation Accounting
This requires the allocation of a portion of the multi-period return to each period. Depreciation is an application of the matching concept. It aims to match the cost of buying the asset to the revenue or other benefits generated by its use it as a measure of the use or wearing out of the asset over time
56

Depreciation Accounting
There are many methods that may be used to calculate depreciation. Ideally, the method chosen should be the one which most closely matches the cost to the pattern of benefits obtained Characteristics of Depreciation: Depreciation is a reduction in the book value of fixed assets (with exception of land)
57

Depreciation Accounting
It reduces the book value of the asset but not its market value The reduction in the book value of an asset is permanent, gradual and of continuing nature it is not possible to restore it to its original cost It is a continuing process because the value is reduced either with the use of the asset or with a passage of time.
58

Depreciation Accounting
It takes place gradually unless there is a quick physical deterioration or obsolescence It is not the process of valuation of asset; it is process of allocation of cost of the asset
The term depreciation is used only for tangible fixed assets. This term is not used in the case of wasting and fictitious assets such as depletion of natural resources and amortization of goodwill, respectively
59

Depreciation Accounting
Depreciation has several meanings in literature. However, all different technical meanings However, all the different technical meanings attached to the word depreciation are basically variants of the following four concepts

60

Depreciation Accounting
Decrease in Value: The value of one asset is in someway computed at two different dates, and the value at the later date subtracted from the value at the earlier date is known as the depreciation. This is the generally implied meaning of depreciation. Amortized Cost: This is the accounting concept of depreciation in which the cost of an asset which is considered an operating expense is apportioned among the years of its useful life
61

Depreciation Accounting
Difference in Value between an Existing Old Asset and a Hypothetical New Asset Taken as a Standard of Comparison: This is the appraisal concept of depreciation and the appraisal depreciation means the value inferiority at some particular date

62

Depreciation Accounting
Impaired Serviceableness: With the passage of time equipments and machines are often unable to hold as close tolerances as when they were new. Similarly, owing to decay or corrosion, the strength of structures maybe impaired such impaired functional efficiency is also termed as depreciation there may be several other common reasons for Decrease in value besides impaired serviceableness
63

Depreciation Accounting
Depreciation Methods Annuity or Sinking Fund Depreciation: From an economic perspective, the income reported each year should reflects the rate of return earned by the asset (Table 3.1) The asset just described generates a return of 12% over its three year of life. To report for each year requires the pattern of depreciation (as shown in the Table 3.1)
64

Depreciation Accounting
This pattern, with the amount of depreciation increasing every year, is known as annuity or sinking fund depreciation. Straight Line Depreciation: Given the same asset and the pattern of constant cash flows shown in Table 3.1, the revenues (cash flows of $100) generated by the asset are the same each year, the income shows each year should also be the same.
65

Depreciation Accounting
Straight Line Depreciation with Declining Cash Flows: (Ref. Table 3.2) Straight Line Depreciation with Constant Cash Flows: (Ref. Table 3.3 same as table 3.1) Straight line depreciation is the dominant method in most of the countries and in United States The cost of plant and equipment is depreciated generally by the straight line method, over the estimated useful life of respective asset
66

Depreciation Accounting
The use of this method results in an increasing rate of return rather than the actual rate of return earned over the life of the asset Formula for Straight Line Depreciation Method: Depreciation in year i = 1/n (Original Cost Salvage) Where n = Depreciation Life

67

Depreciation Accounting
Accelerated Depreciation Method: The matching principle can also justify accelerated depreciation patterns, with higher depreciation charges in early years and smaller amounts in later years. Benefits (revenues) from an asset may be higher in early years, declining in later years as efficiency falls (the asset wears out). The depreciation should decline with benefits.
68

Depreciation Accounting
Even if revenues are constant over time, an asset requires maintenance and repairs over time, costs that tend to increase as the asset ages. Accelerated depreciation methods compensate for the rising trend of maintenance and repair costs so that total asset costs are level over the assets life.
69

Depreciation Accounting
Both the efficiency and maintenance of an asset are difficult to forecast, and, in any case accelerated depreciation methods are (like straight line) arbitrary procedures designed to yield the desired pattern of higher depreciation amounts in earlier years Accelerated methods have historically been used for tax reporting, here they are justified by the desire to promote capital investment
70

Depreciation Accounting
The two most common accelerated methods are the Sum-of- Years Digits (SYD) method and the family of declining- balance methods Exhibit 1 Accelerated Depreciation Method- Sum-Of-Years Digits Original Cost = $18000 Salvage Value = $3000 Depreciation life, n = 5 Year Rate(Original Cash Salvage value) Depreciation Expense (Ref. Table)
71

Depreciation Accounting
For Sum-of-Years Digits method Depreciation in Year i = (n-i+1)/SYD X (Original Cost Salvage Value) Where, SYD=n(n+1)/2. for e.g. n=5 SYD=15. Depreciation thus varies from year to year (as I varies) in reverse counting order of the years; that is the pattern is 5/15, 4/15, 3/15, 2/15 and 1/15 and is depicted as follows (Ref. Exhibit 2)
72

Depreciation Accounting
Impact of Depreciation Methods on Financial Statements: The choice of depreciation method impacts both the income statement and balance sheet; for capital-intensive companies, the impact can be significant. As depreciation is an allocation of past cash flows

73

Depreciation Accounting
Accelerated depreciation method, with higher depreciation expense in the early years of asset life, tens to depress both net income and stockholders equity when compared with the straight line method. As the percentage effect on net income is usually greater than the affect on net asset, return ratios tend to be lower when accelerated depreciation is used. Consequently these methods are considered more conservative
74

Depreciation Accounting
Depreciable lives and salvage value impact both depreciation expense and stated asset values. Sorter lives and lower salvage values are considered conservative in that they lead to higher depreciation expense Conservative depreciation practices also increase asset turnover ratio by decreasing the denominator of that ratio
75

Depreciation Accounting
Impact of Inflation on Depreciation: Historical cost based depreciation expense may be used to define income as long as the total expense over the assets life is enough to replace the asset after it has been utilized. If however the replacement cost of the asset increases, than depreciation expense based on the original cost will be insufficient.
76

Depreciation Accounting
Accelerated depreciation methods partially compensate for this inflation effect by shortening the tax recovery period Depreciating the asset over a shorter life serves similar purpose. A number of studies have been examined whether accelerated method compensates for depreciation and /or reflect economic depreciation.
77

Tariff: Different Types of Tariffs

Tariff Components Fixed Charges Variable Charges Interest on Loan Cost of Fuel Return on Equity Depreciation O & M Expenses Interest on W.C Cost of Secondary Fee
78

Tariff: Different Types of Tariffs

1. Nominal Tariff: Cost / Unit: Total Cos (Fixed + Variable Cost)/ Total No. of Units produced 2. Discounted Tariff: N.T X Discounted Factor , discounted Factor = (1/1 + discount Rate) 3. Levelised Tariff: (N.T X DF)/ DF

79

Tariff: Different Types of Tariffs

Independent regulation of electricity tariff is the first step towards reforming the sector ridden by technical and commercial inefficiencies It is expected to create an enabling environment through higher accountability and by facilitating private sector participation

80

Tariff: Different Types of Tariffs

The regulatory bodies have the primary responsibility for efficient tariff setting, especially in ensuing that subsidies are allocated and administered optimally and in distancing the process of tariff setting from political interference Promotion of competition in the electricity industry in India is one of the key objectives of the Electricity Act, 2003
81

Tariff: Different Types of Tariffs

Guidelines are aimed at facilitating competition in this sector through wider participation in providing transmission services and tariff determination through a process of tariff based bidding Section 61 & 62 of the Act provide for tariff regulation and determination of tariff of generation, transmission, wheeling and retail sale of electricity by the Appropriate Commission.
82

Tariff: Different Types of Tariffs

These guidelines have been framed under the above provisions of section 63 of the Act. The specific objectives of these guidelines are as follows: Promote competitive procurement of transmission Services Encourage private investment in transmission lines Facilitate transparency and fairness in procurement Processes Facilitate reduction of information asymmetries for various bidders
83

Tariff: Different Types of Tariffs

Protect consumer interests by facilitating competitive conditions in procurement of transmission services of electricity Enhance standardization and reduce ambiguity and hence time for materialization of projects Tariff Policy: New Tariff Policy of Central Electricity Regulatory Commission (CERC) for 2004-09 CERC has emphasized that all future projects and new investment in generation
84

Tariff: Different Types of Tariffs

transmission and distribution both by public sector utilities as well as IPPs should be structured through a tariff-based transparent competitive bidding process. Detailed regulation based on the existing cost, plus approach which leads to inefficiencies and lack of initiative for better performance

85

Tariff: Different Types of Tariffs

CERC will adopt a normative debt equity ratio of 70:30 for all generation and transmission projects. The return on equity shall be 14 per cent post tax, uniformly applicable to CPSUs and IPPs Tariff Scenario: The other objective of requerying a transparent process is to internalize the concern of the consumers who earlier used to be at the periphery of the process. Towards this end, most ERCs issued tariff consultation papers seeking the comments of stakeholders.
86

Tariff: Different Types of Tariffs

ERCs have adopted a proactive and innovative strategy by conducting the hearings at multiple locations and by holding open-house sessions. This process has made informed decision-making possible by giving access to data that was earlier not available. The transparent process has for the first time led to official recognition of the huge hidden inefficiencies in the system by way of underreported transmission and distribution losses
87

Tariff: Different Types of Tariffs

The other aspect of the change is the attention paid to productive and allocate efficiency in tariff setting. While the ERCs chose to continue to use the broad principles enunciated in the Electricity (Supply) Act, 1948, which essentially is a cost plus kind of regulation, they allowed revenue requirements only to the extent considered reasonable. As a result, the revenue requirements have been pruned in the range of 5%15% in the recent tariff awards issued by some of the ERCs

88

Tariff: Different Types of Tariffs

it would be more appropriate for the ERCs to determine the broad level of efficiency gains being desired while leaving the managers to design strategies to realize them. The ERCs have also instituted measures to allocate the revenue requirement in an economically efficient manner by reducing the extent of cross-subsidies
89

Tariff: Different Types of Tariffs

The regulators thus have the challenging task of creating an environment conducive for rapid restructuring and privatization. They would also need to communicate to the government the rationale of continuing the subsidies Distorted tariffs in India remain a concern, causing as they do an unsustainably high crosssubsidy which does not cover the cost of service provision. Indeed low tariffs rarely benefit Indias poor, most of whom lack access to power, particularly in the rural areas.
90

Tariff: Different Types of Tariffs

The linkage of tariff to cost to service and elimination of cross subsidies is the important feature of the Electricity Act, 2003. The tariff should progressively reflect the cost of supply and it also requires the appropriate commission to reduce and eliminate cross subsidy within time farme

91

Tariff: Different Types of Tariffs

A good tariff design promotes the efficient consumption. There are five basic approaches to cost to service computation namely Embedded Cost of Service Marginal Cost of Service Average Cost of Supply LMRC PBR
92

Tariff: Different Types of Tariffs

Embedded Cost of Supply: The cost determination techniques is also called Cost to Serve according to which the consumer of licensee or a generating company is going to pay for what actually it is consuming, what assets and services it is using for that quantum of supply

93

Tariff: Different Types of Tariffs

The embedded cost approaches, allocates the total revenue requirement to the various categories of consumer based on the analysis of the embedded or historic costs of the utility.

94

Tariff: Different Types of Tariffs

Marginal Cost of Service: Marginal Cost adopts future costs instead of historical costs for determining the costs in supplying electricity to various consumer categories Long Run Incremental Costs (LRIC), a marginal cost approach reflects the cost of expending the system efficiently to satisfy the load forecast of very long time horizon
95

Tariff: Different Types of Tariffs

The concept of the long run incremental costs is embedded in integrated resource planning and generally over long term duration Whether return to scale is present, LRIC would result in insufficient revenue and requires corresponding adjustments to bring it to future average costs.

96

Tariff: Different Types of Tariffs

Average Cost of Supply: This technique simply considers the overall revenue allowance and divides the same by the units proposed to be sold This method is simple, but also has deficiencies in providing price signals since the averaging of costs removes distinctions in the costs that may in serving individual category in view of time varying nature of costs of producing and delivering electricity
97

Tariff: Different Types of Tariffs

Long Run Marginal Cost of Electricity: A classic definition of LRMC of generation is defined as the levelized cost of meeting an increase in demand over an extended period of time. It is calculated by determining the difference in the NPV of two optimal generation development (installation) programs over an extended period (say 30 years)
98

Tariff: Different Types of Tariffs

Sunk costs are not included in the analysis. The first generation installation is done under the current load forecast and the second under a load forecast that has a defined increment of load added. The LRMC is the change in NPV of costs divided by the change in NPV of load. This is a long run marginal cost basis as it determines the marginal increase in costs associated with meeting a marginal increase in demand with all factors of production variable
99

Tariff: Different Types of Tariffs

LRMC results depending on the current demand/ supply balance and the amount of committed new generation. When excess capacity exists, additional energy can be supplied at close to short run marginal cost, as there is sufficient capacity to supply the additional demand When there is no excess capacity the marginal cost of producing additional energy includes the full costs of capacity and operations.
100

Tariff: Different Types of Tariffs

Performance Based Ratemaking: The PBR approach, while recognizing the revenue requirement of the utility, provides incentives for improving efficiency and reducing costs. It weakens the link between the utilitys regulated prices and costs by decreasing the frequency of rate cases and/or by employing external measures of cost.
101

Tariff: Different Types of Tariffs

The control aspects of regulation are thus sought to be replaced with a system of incentives and penalties through institution of industry wide norms As a result, the PBR creates incentives, which are similar to those that would exist in a competitive market place. Such a system would reward efficient management while inefficient ones would sooner or later be thrown out
102

Tariff: Different Types of Tariffs

In frequent tariff reviews also free the government and the regulators to focus on other tasks including improving the quality of supply, enforcing tighter customer service standards, grievance handling and the sustainable development of the electric supply industry These are important tasks, which are vital for the sustainable implementation of reforms
103

Tariff: Different Types of Tariffs

In the current context these get neglected since the entire attention gets focused on tariff determination which is an annual exercise. If tariff rationalization is to be delinked from reform, restructuring and privatization, efficiency improvements and improvements in the quality if service provided to consumers are necessary
104

Tariff: Different Types of Tariffs

The reduction of regulatory risk is an important precondition to privatization. The adoption of PBR will assist in this process PBR also provides advance signals which efficient utilities can use to optimize operations Hence both PBR and the Revenue Cap/Price Cap approach are more conducive to efficiency enhancements than COS
105

Tariff: Different Types of Tariffs

In India, the possible regulatory goals can be to provide powerful incentives for cost reduction, improving the quality of supply and service, to encourage efficiency in use and to promote use of renewable and alternative forms of electricity

106

Tariff: Different Types of Tariffs

Determination of Generation Tariff As per the provision of section 62 of the Electricity Act, 2003 the appropriate Commission is required to determine the tariff for sale by the generating company to a distribution licensees

107

Tariff: Different Types of Tariffs

In case of shortage of supply of electricity, fix the maximum and minimum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between the generating company and the licensee or between the licensees, for a period not exceeding more than one year to ensure reasonable prices of electricity
108

Tariff: Different Types of Tariffs

Determination of Transmission Tariff (TT): As per the clause (d) of Section 39 and clause (c) of section 40 of the Electricity Act 2003, the appropriate commission is required to determine tariff for transmission of electricity for a transmission licensee Two components of TT: (a) transmission charges derived from the revenue requirements of the transmission licensees and (b) transmission losses.
109

Tariff: Different Types of Tariffs

Determination of Wheeling Charges The distribution company may use their distribution system for wheeling of electricity for other licensees or consumers or generating companies or captive power plants wheeling charges also need to compensate the distribution company for (a) network cost and (b) system losses
110

Tariff: Different Types of Tariffs

Principle for distribution tariff includes that the appropriate commission should suitably define controllable and uncontrollable parameters that affects the revenue requirement Availability Based Tariff: ABT has been under discussion since 1994 when M/s ECC, an ADB consultant, first supported it. GOI constituted a National Task Force in February 1995. It had ten meetings till end 1998 Jurisdiction was vested in the CERC
111

Tariff: Different Types of Tariffs

The ABT order dated January 4, 2000 of the Commission departs significantly from the draft notification as also from the prevailing tariff design What is ABT? It is a performance-based tariff for the supply of electricity by generators owned and controlled by the central government It is also a new system of scheduling and despatch, which requires both generators and beneficiaries to commit to day-ahead schedules.
112

Tariff: Different Types of Tariffs

It is a system of rewards and penalties seeking to enforce day ahead pre-committed schedules The order emphasizes prompt payment of dues. Non- payment of prescribed charges will be liable for appropriate action under sections 44 and 45 of the ERC Act

113

Tariff: Different Types of Tariffs

Need of ABT at State Level There are a good number of reasons why ABT must be implemented with in a state. The reasons are listed below: No penalty for state generators/IPPs or Discoms for deviating from the schedule Installed capacity of Captive Power Plants (CPPs) are to be tapped.
114

Tariff: Different Types of Tariffs

To enhance trading and bring grid discipline among open access customers The responsibility of grid discipline should be shared by SEBs also and not just by the regional electricity boards Bottlenecks for Intrastate ABT There is a different set of problems when it comes to implement ABT at state level. These are discussed below
115

Tariff: Different Types of Tariffs

Upgradation of Metering and Billing systems: There is a need to convert/add 0.5 class accuracy meters to 0.2 class meters at Discom- Transco Interface. Instrument transformers are needed to be replaced There is a need for reliable communication means to connect substation, generating plants, open access customer interface point with SLDC Hardware and software is required to consolidate data and produce bill
116

Tariff: Different Types of Tariffs

Demand Control: Possible means of Demand Control that can be used by SLDC are Analyzing the average realization from a substation area and compare it with system marginal price before load shedding Influence demand by using proper tariff structure

117

Tariff: Different Types of Tariffs

Demand Forecasting: The problems in this area are: Discoms doesnt have advanced Demand forecasting tools, Nor does it have historical data to study demand patterns UI Pass Through: At present the complete power purchase cost of Discom is being passed on to consumer via retail tariff . Hence there is no incentive or penalty for Discom to comply with ABT regime Regulator needs to decide the mechanism for pass through to consumers
118

Tariff: Different Types of Tariffs

A specific regulatory formula may need to be build by the state regulators to incorporate this issue.

119

Environmental and Societal Benefits of Energy Technologies

Energy for the New Millennium: (Current Pattern of energy production and consumption, Energy Technology and its importance, Primary energy consumption) Energy has begun to play a more crucial role than ever in the development and well being of every nation. Energy impacts way of living, livelihoods, growth and progress not only at a collective level but also at the individual, grass root level.
120

Environmental and Societal Benefits of Energy Technologies

Today, two billion people rely on traditional fuels such as wood, dung and agricultural residues to meet their heating and cooking needs, entrenching poverty and limiting opportunities. People in developing countries consume an average of one sixth of global primary energy per capita compared to industrialized countries, while the majority of citizens of the least developed countries have no access to electricity at all
121

Environmental and Societal Benefits of Energy Technologies

At the same time, current patterns of energy production and consumption also contribute to environmental degradation at the local, regional and global levels. Strategies and interventions are needed that promote energy as an engine for equitable economic growth and sustainable development.
122

Environmental and Societal Benefits of Energy Technologies

These challenges presents an opportunity to find ways of producing and using energy that are economically, socially and environmentally sustainable and of using this important tool as a means to achieve sustainable development Today, the transportation, manufacturing, commercial, social, cultural and even the agricultural sectors consume energy at a large and ever growing rate
123

Environmental and Societal Benefits of Energy Technologies

The twenty first century is the most critical phase in human history, i.e., the serious challenge of ensuring reliable and adequate supply of energy at an ever growing rate, in a scenario of vastly depleting sources of fossil fuels, a severely polluted environment and almost totally degraded ecology.

124

Environmental and Societal Benefits of Energy Technologies

Overview of Energy Technology and its Importance: There is a resurgent interest in the renewable energy forms and the role that this particular form of energy can play, given the different considerations relating to energy access, energy security and environmental security that are emerging.

125

Environmental and Societal Benefits of Energy Technologies

This chapter examines the current global energy scenario, including supply and demand of commercial energy sources, and the outlook for these. In this context, the niche that renewable energy is occupying, as also the various international imperatives that may accelerate its deployment are examined. Finally, the role for renewable energy in the Indian context is presented.
126

Environmental and Societal Benefits of Energy Technologies

Global Energy Scenario: Global energy demand is primarily determined by three factors: Economic development, Population growth and Technological progress. However, environmental considerations may change the rate of growth and pattern of energy use. Also, in mature economies, there is a delinking between economic growth and energy use as evidenced by energy-GDP elasticities of less than unity
127

Environmental and Societal Benefits of Energy Technologies

An analysis of primary energy shares from 1850-1990 reveal a transition away from traditional renewable energy forms to fossil fuels. The initial increase in the share of coal till World War I, followed by emergence of oil, and natural gas; a peaking in the share of oil in the 1970s
128

Environmental and Societal Benefits of Energy Technologies

The current global primary energy consumption is 9.7 Gtoe, with developed countries of North America and Europe consuming a little over half this energy. The consumption in North America has grown at about 1.5% per annum during1990-2003, which is similar to the world average of 1.6% per annum. In contrast, the primary energy consumption in the Asia-Pacific region grew at about 3.9% per annum, indicating the need for energy in this fast growing region of the world

129

Environmental and Societal Benefits of Energy Technologies

Oil consumption has a predominant share of 37% in total primary energy consumed globally, followed by coal with 26% and natural gas with a share of 24%. In the Asia Pacific region too, oil plays a major role. However, the penetration of natural gas is not as high as the world average. In this region, coal continues to be consumed in large quantities
130

Environmental and Societal Benefits of Energy Technologies

131

Clean Development Mechanism

Kyoto Mechanism, CDM and its Characteristics, Small Scale Project Categorization Section 86(1)(e) of Electricity Act 2003 (the Act) mandates the Commission to promote cogeneration and generation of electricity from renewable sources of energy by providing suitable measures for connectivity with the grid and sale of electricity to any person

132

Clean Development Mechanism

The United Nations Framework Convention on Climate Change (UNFCCC) is the centerpiece of the global efforts to combat global warming. It was adopted in June 1992 at the Rio Earth Summit, and its primary objective is the stabilization of greenhouse gas concentration in the atmosphere at a level that would prevent man- made interference with the climate system.
133

Clean Development Mechanism

This was further strengthened at Kyoto in 1997, wherein the nations of the World agreed that industrialized countries would reduce aggregate emissions by 5.2% below 1990 level by 20082012 The Kyoto Mechanisms: The Protocol broke new ground by introducing three innovative market based mechanisms: Joint Implementation (JI), the Clean Development Mechanism (CDM) and Emissions Trading (ET)
134

Clean Development Mechanism

They aim to maximize the cost effectiveness of climate change mitigation by allowing parties to pursue opportunities to cut emission, or enhance carbon sink, at a lesser cost The cost of curbing emissions varies considerably from region to region as a result of difference in, for example, energy sources, energy efficiency and waste management
135

Clean Development Mechanism

Of the three flexible mechanisms under the aegis of the Kyoto Protocol, the Clean Development Mechanism is the only one involving developing countries CDM aims to direct private sector investment from industrialized countries (the Annex- I countries of the Protocol) with emission reduction commitments to procure Certified Emission Reduction (CERs) from eco friendly, development oriented Projects and activities, which reduce GHG emissions, also known as the CDM Projects

136

Clean Development Mechanism

Clean Development Mechanism: CDM is an investment proposition by which industrialized countries would invest in a GHG mitigation project in a developing country The organization in the industrialized country would get credit towards their emission reduction targets, while the Project proponent in the developing country would receive new capital flows and clean technology
137

Clean Development Mechanism

The CDM has two primary goals: To assist Annex I countries in reaching their emission reduction targets. To promote sustainable development objectives in the host countries (non-Annex I countries)

138

Clean Development Mechanism

The first goal allows developed countries to achieve their reduction obligations through projects in developing countries that reduce emissions through clean energy, energy efficiency and renewable energy projects The Main Characteristics of CDM: Participation in a CDM project activity is voluntary and CDM investments will be market driven. Public and private parties are eligible to participate.
139

Clean Development Mechanism

CDM activities must lead to measurable reductions in emissions, which will be transferable to the investor in the form of CERs Contribution to sustainable development in the host country is a primary aim of CDM projects

140

Clean Development Mechanism

The Indian Government has formed the Designated National Authority (DNA), to endorse CDM Projects, which meet the sustainability criteria set by the Indian Government. The Executive Board (EB) of UNFCCC has also accredited several agencies to function as Designated Operational Entity (DOE) for project validation and verification
141

Clean Development Mechanism

Why CDM in India The commitments given by the governments of Annex-I countries are translated to corporate commitments to reduce GHG emissions in their operations Opportunities for GHG emission reduction in Annex I countries are few and the cost of doing so is also high as compared to the GHG emission opportunities in a developing country
142

Clean Development Mechanism

As a result, many corporate from the developed countries are forming strategic alliances with corporate in the developing countries to meet their emission reduction commitments. They finance a potential CDM project and against that take the credit of GHG emission reduction
143

Clean Development Mechanism

There are many such projects in India that will contribute to GHG emission reduction at low cost and the corporate from Annex I countries are entering into agreement with Indian companies to invest in CDM Projects and buy carbon credits For Indian Industries, this improves the Internal Rate of Return (IRR) of their Projects and further improves their bottom line
144

Clean Development Mechanism

Project has to fall under one of the three project categories defined by the CDM Executive Board TYPE (i): Renewable energy projects with a maximum output capacity of 15 MW TYPE (ii): Energy efficiency improvement which reduce energy consumption, on the supply and/or the demand side, by up to the equivalent of 15 GWh per year
145

Clean Development Mechanism

TYPE (iii): Other project activities that reduce anthropogenic emissions by sources, and directly emit less than15/ktCO2 e annually Glossary of Terms Related to Clean Development Mechanism: According to the Kyoto Protocol, gas emission reductions generated by Clean Development Mechanism and Joint Implementation project activities must be additional to those that otherwise would occur
146

Clean Development Mechanism

Annex I Countries: These are the 36 industrialized countries and economies in transition listed in Annex 1 of the UNFCCC. Their responsibilities under the convention are various, and include a non-binding commitment to reducing their GHG emissions to 1990 levels by the year 2000

147

Clean Development Mechanism

Annex B Countries: These are the 39 emissions-capped industrialized countries and economies in transition listed in Annex B of Kyoto Protocol 8% decrease (e.g. EU) to a 10% increase (Iceland) on 1990 levels by the first commitment period of the Protocol, 20082012
148

Clean Development Mechanism

Base Line: A baseline should cover emissions from all gases, sectors and source categories listed in Annex A (of the Kyoto Protocol) within the project boundary Baseline Methodology: A methodology is a tool to determine the baseline for an individual project activity, reflecting aspects such as data availability, sector and region
149

Clean Development Mechanism

Building: Bundling: Refers to combining or aggregating a number (more than one) of smallscale projects and/or project activities into a single emissions reduction project. Small- scale CDM project activities may be bundled at the following stages in the project cycle Carbon Offsets: Offsets are tradable emission reductions that are used to offset emissions from various sources, such as emissions related to personal or business air travel
150

Clean Development Mechanism

Carbon Dioxide Equivalent (CO2 e): The universal unit of measurement used to indicate the Global Warming Potential (GWP) of each of the six greenhouse gases listed in Annex A of the Kyoto Protocol carbon dioxide (CO2 ), methane (CH4 ), nitrous oxide (N2 O), hydro fluorocarbons (HFCs), per fluorocarbons (PFCs), and sulphur hexafluoride (SF6 )
151

Clean Development Mechanism

CERs (Certified Emission Reductions): The technical term for the output of CDM projects, as defined by the Kyoto Protocol. One CER is the reduction of 1 tonne of carbon dioxide equivalent. Certification: Certification is the written assurance by the designated operational entity that, during a specified time period, a project activity achieved the reductions in anthropogenic emissions by sources of Greenhouse Gases (GHG) as verified
152

Clean Development Mechanism

Clean Development Mechanism (CDM): The CDM was established by Article 12 of the Protocol and refers to climate change mitigation projects undertaken between Annex 1 countries and non-Annex 1 countries Project investments must contribute to the sustainable development of the non-Annex 1 host country, and must be independently certified
153

Clean Development Mechanism

This latter requirement gives rise to the term certified emission reductions or CERs, which describe the output of CDM projects, and which under the terms of Article 12 can be banked from the year 2000, eight years before the first commitment period (2008-2012) Crediting Period: The crediting period for a CDM activity is the period for which reductions against the baseline are verified and certified by a designated operational entity for the purpose of issuance of certified emission reductions (CERs)
154

Clean Development Mechanism

Project participants are able to choose the starting date of a crediting period to be after the date the first emission reductions are generated by the CDM project activity A crediting period cant extend beyond the operational lifetime of the project activity The project participants may choose between either a fixed crediting period of 10yrs or three renewable crediting periods of a maximum 7 years each (i.e. maximum 21 years)
155

Clean Development Mechanism

Debundling Test: Debundling is defined as the fragmentation of a large project into smaller parts Designated Operational Entity (DOE): An entity designated by the COP (or MOP), based on recommendation by the Executive Board, as qualified to validate proposed CDM project activities as well as verify and certify reductions in anthropogenic emissions by sources of Greenhouse Gases (GHG) A designated operational entity shall perform validation or verification and certification on the same CDM project activity
156

Clean Development Mechanism

Emission Reductions Purchase Agreement (ERPA): Agreement which governs the purchase and sale of emission reductions Greenhouse Gases (GHGs): These are gases released by human activity that are responsible for climate change and global warming

157

Clean Development Mechanism

The six gases listed in Annex A of the Kyoto Protocol are carbon dioxide (CO2 ), methane (CH4 ), and nitrous oxide (N2 O), as well as hydro fluorocarbons (HFCs), per fluorocarbons (PFCs), and sulphur hexafluoride (SF6 ) Host Country: The country where an emission reduction project (under Joint Implementation or the Clean Development Mechanism) is physically located.
158

Clean Development Mechanism

Kyoto Protocol: Adopted at the Third Conference of the Parties to the United Nations Convention on Climate Change held in Kyoto, Japan in December 1997, the Kyoto Protocol commits industrialized country gratifiers to reduce their greenhouse gas (or carbon) emissions by an average of 5.2% compared with 1990 emissions, in the period 2008-2012.
159

Clean Development Mechanism

Leakage: Leakage is defined as the net change of anthropogenic emissions by sources of Greenhouse Gases (GHG) which occurs outside the project boundary, and which is measurable and attributable to the CDM project activity. Letter of Approval: A letter issued by the Designated National Authority (DNA) of the Host Country to a CDM Project confirming that the project, as proposed, will assist the Host Country to achieve its goals of sustainable development.
160

Clean Development Mechanism

Non-Annex I Countries: Countries which are not listed in Annex I of the UNFCCC (generally developing and least developed countries) Non-Annex B Countries: Countries which are not listed in Annex I of the Kyoto Protocol (generally developing and least developed countries) Party to the Kyoto Protocol: A country that has ratified the Kyoto Protocol.
161

Clean Development Mechanism

Project Activity: A project activity is a measure, operation or an action that aims at reducing Greenhouse Gases (GHG) emission Project Boundary: The project boundary encompasses all anthropogenic emissions by sources of Greenhouse Gases (GHG) under the control of the project participants that are significant and reasonably attributable to the CDM project activity
162

Clean Development Mechanism

Project Design Document (PDD): A project specific document required under the CDM rules which will enable the Operational Entity to determine whether the project (i) has been approved by the parties involved in a project, (ii) would result in reductions of greenhouse gas emissions that are additional, (iii) has an appropriate baseline and monitoring plan.
163

Clean Development Mechanism

Project Idea Note (PIN): A note prepared by a project proponent regarding a project proposed for a potential CER buyer, such as the World Bank or SENTER Registration: Registration is the formal acceptance by the Executive Board of a validated project activity as a CDM project activity. Registration is the prerequisite for the verification, certification and issuance of CERs related to that project activity
164

Clean Development Mechanism

Sustainable Development: The original definition by the Brundtland Commission report (WCED, 198) states that development is sustainable when it meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Sustainable development is a requirement of CDM projects and it is the responsibility of the host country to confirm whether a CDM project activity
165

Clean Development Mechanism

United Nations Framework Convention on Climate Change (UNFCCC): The international legal framework adopted in June 1992 at the Rio Earth Summit to addresses climate change. It commits the Parties to the UNFCCC to stabilize human induced greenhouse gas Validation: The assessment of a projects Project Design Document, which describes its design including its baseline and monitoring plan, by a Designated Operational Entity
166

Clean Development Mechanism

Verification Report: A report prepared by an Operational Entity, or by another independent third party, pursuant to a Verification, which reports the findings of the Verification process, including the amount of reductions in emission of greenhouse gases that have been found to have been generated.

167

Regulatory Framework and Subsidy

Role of central agencies, Role of FIPB, Subsidies: The growth of the economy, calls for a matching rate of growth in infrastructure facilities. The growth rate of demand for power in developing countries is generally higher than that of Gross Domestic Product (GDP). In India the Power Sector, hitherto, had been funded mainly through budgetary support and external borrowings.
168

Regulatory Framework and Subsidy

Due to growing demands from other sectors, particularly social sector and the severe borrowing constraints, a new financing strategy This is reflected in the new policy enunciated in 1991, allowing private enterprise, a larger role in the power sector

169

Regulatory Framework and Subsidy

State Electricity Boards (SEBs) in India are beset with problems of high Transmission and Distribution (T and D) losses, large out standings to central sector companies, inadequate investments, and irrational tariff structures These problems have resulted in power shortages and poor-quality power supply to customers, and to the eroding of the financial viability of the SEBs

170

Regulatory Framework and Subsidy

The setting up of an independent, autonomous, and accountable regulatory structure at the central and state levels was, therefore, becoming extremely essential to address the above issues Rationalize the Tariff Structure by setting up independent regulatory bodies Ensure transparency in generation, transmission and distribution by unbundling and corporatizing the SEBs Provide financial and operational autonomy.
171

Regulatory Framework and Subsidy

In order to get a overview the following points aid in learning the Regulatory framework of the India Power Sector: Common Minimum National Action Plan for Power: The Chief Ministers met on 16th October and 3rd December, 1996 to discuss and deliberate upon the issues pertaining to the power sector
172

Regulatory Framework and Subsidy

Recognized that the gap between demand and supply of power is widening Acknowledged that the financial position of State Electricity Boards is fast deteriorating Power sector cant be sustained without improvement of operational performance of State Electricity Boards

173

Regulatory Framework and Subsidy

Agreed that reforms and restructuring of State Electricity Boards are urgent and must be carried out in a definite time frame Identified creation of Regulatory Commissions as a step in this direction Requirements of the future expansion and improvement of power sector cannot be fully achieved through public resources alone and it is essential to encourage private sector participation in generation, transmission and distribution
174

Regulatory Framework and Subsidy

A national consensus evolved for improving the performance of the power sector in a time bound manner and the following was adopted National Energy Policy: The Government would soon finalize a National Energy Policy State Electricity Regulatory Commission: Each State/Union Territory shall set up an independent State Electricity Regulatory Commission (SERC)
175

Regulatory Framework and Subsidy

To set up SERCs, Central Government will amend Indian Electricity Act, 1910 and Electricity (Supply) Act, 1948 To start with such SERCs will undertake only tariff fixation Licensing, planning and other related functions could also be delegated to SERCs as and when each State Government notifies it Appeals against orders of SERCs will be to respective High Courts unless any State Government specifically prefers such appeals being made to the Central Electricity Regulatory Commission
176

Regulatory Framework and Subsidy

Central Electricity Regulatory Commission: Union Government will set up a Central Electricity Regulatory Commission (CERC) CERC will set the bulk tariffs for all Central generating and transmission utilities Licensing, planning and other related functions could also be delegated to CERC as and when the Central Government notifies it All issues concerning inter-State flow and exchange of power shall also be decided by the CERC
177

Regulatory Framework and Subsidy

Rationalization of Retail Tariffs: Determination of retail tariffs, including wheeling charges etc., will be decided by SERCs which will ensure a minimum overall 3% rate of return to each utility with immediate effect. SERCs are mandatory If any deviations from tariffs recommended by it are made by a State/UT Government, it will have to provide for the financial implications of such deviations explicitly in the State budget
178

Regulatory Framework and Subsidy

Private Sector Participation in Distribution: State Governments agree to a gradual programme of private sector participation in distribution of electricity Role of Central Agencies: The Central Government would make a comprehensive review of the role of Central Electricity Authority (CEA). Techno- economic approval of competitively bid power projects will be simplified and CEA shall not be concerned with capital cost, tariff and other commercial aspects of the project. Powers regarding approval of projects

179

Regulatory Framework and Subsidy

State Governments will have powers to accord approval for power projects The role of FIPB will be minimized by putting as many projects on the automatic clearance route as feasible Ministry of Environment & Forests have, proposed the following delegation to the States for environment clearance
180

Regulatory Framework and Subsidy

All cogeneration plants and captive power plants up to 250 MW Coal based plants up to 500 MW using fluidized bed technology subject to sensitive areas restrictions Power stations up to 250 MW on conventional technology Gas/Naphtha based station up to 500 MW
181

Regulatory Framework and Subsidy

Autonomy to the State Electricity Boards: States will allow maximum possible autonomy to the State Electricity Boards. The State Electricity Boards will be restructured and corporatized and run on commercial basis Improvements in the Management Practices of State Electricity Boards: State Electricity Boards will professionalize their technical inventory manpower and project management practices
182

Regulatory Framework and Subsidy

Improvement of Physical Parameters: Government of India will carry out necessary amendments in the relevant Acts/Rules to allow private participation in transmission PFC and other financial institutions will give higher priority for funding of R&M schemes. Clearance to R&M projects will fully be delegated to the States and no clearance will be required from CEA
183

Regulatory Framework and Subsidy

Cogeneration/Captive Power Plants: State Governments will encourage cogeneration/captive power plants Advance Action and High Priority for Hydro Projects: A national policy on hydro power development will be evolved by the Central Government which, inter-alia, would include development of mega hydro projects, both in the public sector and the private sector, at locations with substantial hydro potential, along with concomitant
184

Regulatory Framework and Subsidy

Due Emphasis for Investment in North Eastern Region: Since there are geographical constraints in the North-Eastern region, the Government shall constantly review the public and private investments being made in that region so that these States get equitable shares in the investments in the power sector

185

Regulatory Framework and Subsidy

Electricity tariffs for farmers in India amount to less than 10 percent of the cost of supply That means a power subsidy for the agricultural sector of an estimated US$6 billion a yearequivalent to about 25 percent of Indias fiscal deficit, twice the annual public spending on health or rural development, and two and a half times the yearly expenditure on irrigation
186

Regulatory Framework and Subsidy

At the same time, the quality of supply to farmers has worsened over the years Operational inefficiencies and high distribution losses due to pilferage have contributed to the financial insolvency of power utilities across India

187

Regulatory Framework and Subsidy

A study covering two statesAndhra Pradesh and Haryanaassessed the impact of cutting subsidies as part of broad reforms of governance and regulation aimed at reducing losses, controlling theft, strengthening metering and collection, and moving to independent tariff setting, competition, and privatization
188

Regulatory Framework and Subsidy

189

Regulatory Framework and Subsidy

The Costs of Unreliable Quality and Supply Although farmers pay a small fraction of the cost of power, they endure the frustration and economic costs of supply that is both unreliable (not available at predictable times) and of poor quality (with fluctuating voltage)

190

Regulatory Framework and Subsidy

Both problems mean that water often cannot be pumped during critical periods in the plant growth cycle, leading to lower crop yields and incomes for farmers Electricity is available to agriculture mostly during off-peak hourssometimes for as little as three and a half hours a day

191

Regulatory Framework and Subsidy

The Costs of Theft The electricity subsidies take the form of a flat rate paid by farmers per unit of horsepower per pump; farmers actual power use is not metered or recorded. These flat-rate subsidies help to camouflage theft

192

Regulatory Framework and Subsidy

The Costs of Poor Targeting Large farmers are more vocal in arguing for retaining the subsidized flat rate because it represents a manageable share of their gross income Moreover, paying a flat tariff for every pump enables them to irrigate a large area at a low per unit cost. But for small farmers who can afford electricity for irrigation, the cost per hectare is significantly higher
193

Regulatory Framework and Subsidy

Reality Check on Reform To gain a better understanding of the potential impact on farmers of different reform packages, the study simulated several policy reform scenarios Business as usualwith tariff increases but deteriorating quality Gradual reformwith steeper tariff increases and some improvement in quality
194

Regulatory Framework and Subsidy

Accelerated reformwith the same tariff increases but more aggressive improvements in quality Implications: Small and marginal farmers in Haryana have shown a high willingness to pay for improved reliability of power supply because the poor quality of supply has affected them so severely
195

Regulatory Framework and Subsidy

By contrast, medium-size and large farmers (about 60 percent of those owning electric pumps) are less willing to pay in the short run because of their expensive backup arrangements, which reduce their vulnerability to supply fluctuations. So it is the smaller and poorer farmers who end up bearing the cost of wasted resources and unreliable supply
196