ELECTRICITY PRICING AND GENERATION TARIFF

ByS. K. Sharma DGM(Commercial) 1 NTPC

Principles of Pricing
Correct pricing signal to investors and consumers Stable and predictable over the tariff period avoid tariff shocks Protect interest of consumer and investors risk Incentive for efficiency improvement and promoting rational use of electricity Consider socio-economic need of the country to ensure supply and services even to low income group Tariff determination to be transparent and simple Encourage market determination of prices
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Objectives
Promote competition, efficiency in the economy Reliable and quality of power supply Adequate supply to meet the demand Optimum generation on merit order basis Adequate transmission network to facilitate power flow to different parts of the country Promote supply with the environmental norms Sound commercial practices
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Options for Electricity Pricing

Rate of Return (ROR) / Cost of Service Regulation
Performance Based Regulation (PBR) Hybrid Sliding Scale Method

(RPI X) Price / Revenue Cap Regulation

Long Run Marginal Cost (LRMC) Competitive Bidding Price Determination by Market Mechanism
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Rate of Return/Cost of Service Regulation

This is a cost plus pricing strategy. It is based on determination of allowable capital cost and a fair rate of return. Variable cost is on actuals based on the data of the test year.

Advantages
It is a familiar traditional approach.

Provides steady predictable return to utilities for reinvestment

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Rate of Return / Cost of Service Regulation contd..

Limitations
Investor has a tendency to over invest as capital cost forms basis for earning return. It is a backward looking approach continue to pay based on historic cost even if the investment has become unproductive.

Pricing is independent on future price signals.

No incentive to utility to reduce cost or improve efficiency as reduction in cost is pass through to consumers.

As this is based on cost of service, pricing is normally reviewed and fixed on yearly basis, resulting in frequent tariff variations.
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Performance Based Price Regulation (PBR)

This is based on set of performance targets both financial and operational. Pricing is based on financial parameters like capital cost; debt:equity ratio; rate of return; and variable cost are based on normative operating parameters such as heat rate, auxiliary power consumption, plant load factor (PLF) etc. for generation tariff.

Performance Based Regulation (PBR) contd..

Advantages
Provides incentive to utility to perform efficiently as efficiency gains are retained by the utility. Norms are fixed for a tariff period of 4-5 years avoiding frequent tariff revisions.

Limitations
Difficulty in benchmarking of performance data. In order to maximise gains, utility tends to sacrifice quality of service. In case norms are liberal, consumers pay more and in case norms are stringent / not achievable investor may end up 8 in losing.

Hybrid Sliding Scale

This combines features of both Rate of Return (ROR) and Performance Based Regulation (PBR). Cost related to financial aspects are normally based on actuals and those related to operating parameters are based on norms.

This mode of regulation is normally used for transition from ROR to PBR.

(RPI X) Price/Revenue Cap Regulation

It imposes a price cap for the tariff period

The price cap can be only to the extent of retail price inflation (RPI) after accounting for pre-defined efficiency gains.
Formula for Regulation : Pn = P-1 {1+(RPI-X)} + Z Where,
Pn = Price cap for the current year P-1= Average price for the previous year RPI = Retail Price Index in %age X = Impact of efficiency gain in %age Z = External changes not related to inflation or productivity such as Govt. taxes, levies, duties etc.
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(RPI X) Price/Revenue Cap Regulation contd..

Advantages :
Utility has flexibility to incur cost and retain efficiency improvement measures, upgradation etc. as long as these are within the price cap. Choice and technology and fuels is left to the utility.

Benefits of the efficiency gains are shared by the utility and the consumer.

Limitations :
Difficulty in assuming productivity / efficiency gain factor.
Appropriateness of RPI indices for power sector.
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Long Run Marginal Cost (LRMC) Method

LRMC is based on future cost of power which takes into account additional investment required for capacity addition and projected fuel cost. LRMC pricing is based on Estimation of future expansion plan for a period of 20-25 years Estimation of capital cost for the capacity addition Future demand and supply projections Impact of technological developments on cost of capital and requirement of power
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Long Run Marginal Cost (LRMC) Method contd..

Advantages :
Correct price signal to consumer regarding cost of power being consumed.
Provides sufficient investable funds for future capacity addition Promote economic generation Tariff not based on historical cost but more guided towards market requirements.

Old investment can be leveraged for generation of resources for capacity addition.
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Long Run Marginal Cost (LRMC) Method contd..

Limitations :
Number of assumptions like future capacity addition requirement, projected cost, cost of capital etc. Any wrong estimation in any of the parameters may result in unaffordable tariff. For any change in the above factors, corresponding changes in tariff is necessary.

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Competitive Bidding
Electricity pricing under competitive bidding is based on selection of utility through market competition.
Under competitive bidding tariff based bids are invited and utility is awarded the project based on least tariff basis. Tariff so arrived at is fixed for the life of the project. For effective competitive bidding, it is necessary to lay down guidelines for the bidding and ensure transparency in the bidding process.
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Competitive Bidding contd..

Advantages :
This method provides fixed tariff of the life of the project and all risks associated with project cost overrun are to be taken by the investor.

There is no need to fix financial and operating norms.

Consumer is aware about the cost he has to pay for the life of the project and provide a stable tariff basis.

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Market Mechanism
This is dependent on the presence of large number of suppliers and consumers in the market. For pricing through market mechanism, it is necessary that electricity industry has to be structured itself into the market so that adequate freedom is available to the consumer and purchaser for carrying out the business in the market. For this mechanism, it is necessary to unbundle generation, transmission and distribution business and create large number of players in each industry segment. Monopoly in bulk power supply to be dispensed with. Non-discriminatory open access in transmission and distribution system is a pre-requisite. 17

Market Mechanism contd..

Advantages
There is no need to regulate pricing of electricity
Prices are determined by demand and supply in the market.

Competition encourages efficiency in operation and low cost of power

It promotes investment for capacity addition.

It provides a market situation to the consumers and sellers avoiding monopoly in supplies.
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Market Mechanism contd..

Limitations
In energy deficit conditions prevailing in of the countries under such mechanism, utility/seller will try to take undue advantage and prices may increase abnormally.
In case market is not fully developed, utilities may manipulate the market to increase price for their gain California crises.

Switchover to market has to be very gradual.

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GENERATION TARIFF
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Tariff Principles
Regulatory Commission to determine tariff for supply of electricity by generating co. on long/medium term contracts. (Section 62)

No tariff fixation by regulatory commission if tariff is determined through competitive bidding or where consumers, on being allowed open access enter into agreement with generators/traders.
Consumer tariff should progressively reduce cross subsidies and move towards actual cost of supply. (Section 61 (g)) State Government may provide subsidy in advance through the budget for specified target groups if it requires the tariff to be lower than that determined by the Regulatory Commission. (Section 65) Regulatory Commissions may undertake regulation including determination of multi-year tariff principles, which rewards 21 efficiency and is based on commercial principles. (Section 61 (e), (f))

DIFFERENT TARIFF PROVISIONS

180

160

INCENTIVE FIXED CHARGES

140

120

100

80

60

40

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SINGLE PART KPRAO CERC ORDER

0 20 40 60 80 100 120

DEEMED PLF(AVAILABILITY)

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Availability Based Tariff

Generation tariff of regional stations consists of Capacity charges Energy charges UI charges Capacity charges are recovered at 80% availability & pro-rata recovery below 80%. For generation above 80%, PLF incentive at the rate of 25 paise/Unit Energy charges are based on actual fuel cost and normative operating parameters. Energy charges are paid based on scheduled generation. UI charges are linked to frequency and are levied on deviations from schedules.
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Rate (P/Unit)
100 200 300 400 500 600 700 800 0
48.8 48.9 49 49.1 49.2 49.3 49.4 49.5 49.6 49.7 49.8 49.9 50 50.1 50.2 50.3 50.4 50.5
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UI Charges

Freqency (Hz.)
50.6

UI Charges
Max. UI rate increased to 745 p/unit.
A band has been provided for generation above DC. (5% above DC in any time block, restricted to 1% over a day for payment of UI for generation above DC has been provided)

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Generation Tariff
Capacity charges consists of Return on equity (ROE) Interest on Loan Depreciation O&M Cost Interest on Working Capital

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 Tariff Period - 5 years Debt : Equity Ratio -

70:30

In case equity is more than 30% it shall be limited to 30% and excess equity shall be treated as normative loan and shall be serviced at weighted average rate of interest of the outstanding loan. As per this provision, for the stations where debt:equity ratio was 50:50, it will now be 70:30 and equity in excess of 30% will be treated as notional loan.

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 Capital Cost
For existing stations Admitted by Commission upto 31.3.2001 + Addcap & FERV for the period 2001 - 2004. For new stations Actual expenditure capitalised + Spares @ 2.5% for coal based stations & 4% for gas stations & 1.5% for hydro station.

based

Return on Equity
14% post tax Income Tax pass through on Generation Income.
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Interest on loan
On weighted average actual interest rate Outstanding loan as on 31.3.2004

Normative repayment during 2004-09.

Interest on loan has been allowed on normative outstanding loan. Commission has further said that during the period of moratorium, depreciation recovery shall be considered towards loan repayment while working out interest on loan.

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Depreciation
On straight line basis 3.6% - coal based stations 6% - gas based stations 2.57% - Hydro

Advance Against Depreciation

Limited to 1/10th of loan amount i.e. Dep + AAD = 7% (maximum)

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Interest on working capital

Fuel Cost Coal based stations - 1 month for pit head and 2 months for non-pit head corresponding to target availability. Gas based Stations Cost of fuel for 1 month Secondary Fuel Coal based stations Cost of secondary fuel oil for 2 months Gas based Stations Cost of Liquid fuel for month. O&M expenses for 1 month Spares 1% of historical capital cost escalated @ 6% from COD. 2 months receivables Earlier provisions for stock of coal & oil were on normative stock or actual whichever is lower. Now it has been provided on normative basis.
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O&M Charges
These are now fixed on normative basis about 2.5% of current capital cost. Coal based stations - 200/210/250 MW - Rs.10.4 lacs/MW - 500 MW and above - Rs. 9.36 lacs/MW

Gas based stations - Stations with warranty spares - Rs. 5.2 lacs/MW - Without warranty spares - Rs. 7.8 lacs/MW Escalation 4% per year
Tanda & Talcher TPSs O&M cost provision have been provided based on actual of last 5 years

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Operating Norms Heat Rate

- 200 MW - 2500 kcal/kwh (same as earlier) - 500 MW - 2450 kcal/kwh (reduced by 50 kcal/kwh). In case of MDBFP Heat rate will be reduced by 40 kcal/kwh. - Gandhar / Faridabad / Kayamkulam - 2000 kcal/kwh - Dadri / Anta / Kawas - 2075 kcal/kwh - Auraiya - 2100 kcal/kwh - Future gas based stations 1850 kCal/kwh for Advanced class 1950 kcal/kwh for conventional machines
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Specific Oil Consumption

2 ml / kwh (reduced from - 3.5 ml/kwh)

Auxiliary Power Consumption

Without cooling tower 200 MW 8.5 With cooling tower 9.0

500 (TDBFP) 500 (MDBFP)

Gas Stations Open Cycle Combined Cycle

7.0 8.5

7.5 9.0

1.0 3.0

Stabilisation Period
180 days allowed only upto March, 2006.
34 No relaxed norms for target availability have been allowed during stabilisation period.

Target Availability - 80%

Disincentive pro-rata of fixed charges

Incentive at flat rate of 25 paise/unit on generation above 80% scheduled PLF.

Coal Losses
Landed cost of coal shall be computed considering transit loss ofCERC Norm - Pit Head 0.3% - Non Pit Head 0.8%
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Other Provisions
Provision regarding actual or norm whichever is lower has been deleted. It will provide efficiency gain from future stations.

Commercial Operation Date

Earlier regulation stipulated a period of 180 days between synchronisation of a coal unit and its commercial operation.
This provision has been deleted. change. It is a welcome
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Typical Example
Thermal Power Station of 1000 MW
(Capital Cost Rs. 4 Crs/MW) Fixed Charges 1 Return on Equity 2 Interest on Loans 3 Depreciation 4 O&M Expenses 5 Interest on Working Capital Variable Charges Rs./Cr. 743.89 192.00 189.40 214.88 112.74 34.87 Ps./kWh 59.34
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Annexure-1 Annexure-2 Annexure-3 Annexure-4 Annexure-5 Annexure-6

Thermal Power Station of 1000 MW

Unit

Capacity Normative Availability for Fixed cost recovery Generation at norm Availability Energy Export at norm PLF

MW %age MUs MUs

1000 80 7008 6447

Normative Heat Rate Normative Aux. Consumption Specific Oil Consumption

Kcal/kWh %age ml/kWh

Rs./Cr. Ratio %age %age %age %age %age

2500 8 3.5
4000 70:30 16.00 8.5 3.6 2.50
38 12.0

Financial Parameters :
Capital Cost Debt:Equity Ratio Rate of Return on Equity Interest on Loans Depreciation Rate O&M expenses Rate of Interest on Working Capital

Annexure - 1

Return on Equity
Capital Cost Debt:Equity Ratio Equity Return on Equity
Return

Rs./Cr. %age Rs./Cr. %age

Rs./Cr.

4000 70:30 1200 16.00

192

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Annexure - 2

Interest on Loans
Particulars Capital Cost Debt:Equity Ratio Normative Gross Loans Unit Rs./Cr. %age Rs./Cr. Amount 4000 70:30 2800

Net Loans
Gross Loans Repayments Net Loan Average Net Loan Year-0 2800 2800 Year-1 2800 200 2600 2700 Year-2 2600 200 2400 2500 Year-3 2400 300 2100 2250 Year-4 2100 300 1800 1950

Rs./Cr.
Year-5 1800 200 1600 1700 Average

2220

Weighted Average Rate of Interest

Sources of Loans US$ DM SBI Newyork US$ HDFC SBI Uncommitted Debt Weighted Rate of Interest Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. Amount 1500 200 200 300 200 400 Rate of Interest 7 5 7.5 12 12.5 12.0 8.5

Interest on Loan

Rs./Cr.

189.4

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Annexure - 3

Calculation of Depreciation
Particulars Unit

Capital Cost (excluding WCM)

Rate of Depreciation Depreciation

Rs./Cr.
%age Rs./Cr.

4000
3.6 144
Rs./Cr.

Year-1 Capital Cost Depreciation Advance against Depreciation Loan Repayment Allowed Dep + AAD 4000 144 93.2 200 200

Year-2 4000 144 93.2 200 200

Year-3 4000 144 93.2 300 237.2

Year-4 4000 144 93.2 300 237.2

Year-5 4000 144 93.2 200 200

Average

---214.88 41

Annexure - 4

Operation and Maintenance Expenses

Particulars Unit

Capital Cost (excluding WCM)

O&M Cost O&M Escalation Rate O&M Expenses

Rs./Cr.
%age %age Rs./Cr.

4000
2.5 6 112.74
Rs./Cr.

Year-1 Capital Cost O&M Expenses 4000 100

Year-2

Year-3

Year-4

Year-5

Average

106

112.36

119.10

126.24

112.74

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Annexure - 5

Interest on Working Capital

Particulars Contents: O&M Exp. Spares Fuel Coal Oil Receivables Total WC Interest on net WC 1 Month 1 Year 1 Month 15 days 2 Months 2 Months Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. Rs./Cr. 9.4 45.1 31.88 14.83 4.43 185 290.6 34.87 1/12th of O&M expenses (Annexure-4) 40% of O&M expenses (Annexure-4) Variable rate (Ann-6) 59.34ps/kWh multiplied by {6447MUs/(12*10)} Variable rate from Ann-6 (coal) multiplied by {6447MUs/(24*10)} Variable rate from Ann-6 (oil) multiplied by {6447MUs/(6*10)} Fixed+Variable charges for two months supply at 80% Availability Norms Unit Amounts Basis

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Annexure - 6

Variable Charges - Oil

Particulars
Price of Oil GCV of Oil Specific Oil Cons. (Normative) Heat Rate Variable Charges

Variable Charges - Coal

Particulars Unit
Rs./MT kCal/Kg Kg/kWh 832.25 4039 0.610 2465 Price of Coal GCV of Coal Specific Oil Cons.

Unit
Rs./Kl kCal/lr Ml/kWh kCal/kWh Ps./kWh 10866.35 9977 3.50 35 4.13

Heat Rate kCal/kWh (2500-Heat from Oil) Variable Charges Ps./kWh

55.21

Total Variable Charges : 59.34 ps/kWh

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Fuel Price Adjustment Formula :

FPA =
(ps./kWh)

(10*Ho) * (Pom (100-AC) (Kom

Pos) + 10*Hc * (Pcm Kos) 100-AC (Kcm

Pcs) Kcs)

Ho = AC = Pom = Kom = Pos = Kos = Hc = Pcm = Kcm = Pcs =

Kcs =

Heat from Secondary Fuel as derived 35 kCal/kWh Aux. Consumption adopted in tariff in %age 8%. Weighted average price of Fuel Oil as per PSL at the end of Month in Rs./Kl. Weighted average GCV of Fuel Oil on fired basis during the month in kCal/ltr. Weighted average price of Fuel Oil as taken for initial fixation of tariff Rs./Kl 10866.35 GCV of Fuel Oil as taken for initial fixation of tariff 9977 in kCal/ltr. Heat from Coal as derived (2500 heat from Oil) in kCal/kWh. Weighted average price of coal as per PSL at the end of Month in Rs./MT. Weighted average GCV of Coal on fired basis during the Month in kCal/kg. Weighted average price of coal as taken for initial fixation of tariff Rs./MT 832.25 GCV of Coal as taken for initial fixation of tariff 4039 in kCal/kg. 45

THANK YOU
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