Generation Tariff Revision Proposal (2013-2016) As per the Tariff - - PowerPoint PPT Presentation

Generation Tariff Revision Proposal (2013-2016)

As per the Tariff Determination Regulation (Updated as of 14th July 2010), Bhutan Electricity Act 2001 18 July 2013

Outline

 Principles of TDR  Domestic Generation Tariff Trends (1986-2013)  Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal  Clarifications  Changes Proposed in 2013-16 Generation Tariff Revision Proposal  Cost of Supply Methodology  Proposed Generation Tariff for 2013-16

Principles of Tariff Determination Regulation (in accordance with Section 14.1 of the Electricity Act 2001)

TDR

Fairness to both service customers and service providers No unjust discrimination against service providers or users Reflect the actual cost of efficient business

• peration

Conducive to efficiency improvement in business

• peration

Enhance efficient and adequate supply to satisfy the domestic demand Transparency in the determination and presentation

• f tariffs.

Domestic Generation Tariff Trends (1986-2013)

1986- 1994

• CHPC Tariff Nu. 0.10/kWh

1994- 2001

• CHPC Tariff Nu. 0.30/kWh

2001- 2005

• CHPC Tariff Nu. 0.30/kWh
• KHPC Tariff Nu. 0.30/kWh
• BHPC Tariff Nu. 0.50/kWh

2005- 2007

• CHPC Tariff Nu. 0.30/kWh, BHPC Energy Sold to CHPC
• KHPC Tariff Nu. 0.30/kWh
• THPA Energy Tariff 0.30/kWh

2007- 2010

• Royalty Energy Tariff Nu. 0.30/kWh
• Non-royalty or Additional Energy Tariff Nu. 1.20/kWh

2010- 2013

• Royalty Energy Tariff Nu. 0.13/kWh. From 2011, Royalty Energy

Revenue did not accrue to Druk Green

• Non-royalty or Additional Energy Tariff Nu. 1.20/kWh

Particulars As per TDR/Tariff Model Druk Green 2010 Proposal 2010 Tariff Review Outcome. Druk Green 2013 Proposal

• 1. Cost of

Equity 12% 15% Effectively 6% , i.e. 12%

• n 50% of equity only

citing the 60% grant and reasonable return from export

• 15.5%
• At par with norms

in India

• TDR Section 1.8 &

Schedule C allows revision

• 2. Royalty

Energy Production Cost No provision Production cost

• f

royalty energy excluding returns need to be recovered

• No

provision allowed for recovery

• f

production cost

• Royalty energy tariff

reduced from Nu. 0.30 per kWh to Nu. 0.13 per kWh and no royalty revenue accrual to Druk Green

• Total Energy net of

the royalty used for tariff

• Similar to norms in

India

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal

Particulars As per TDR/Tariff Model Druk Green 2010 Proposal 2010 Tariff Decision Outcome. Druk Green 2013 Proposal

• 3. Energy

Import Cost No provision Included in O&M costs Import to be billed separately with yearly ceiling of 49.5 GWh or

• Nu. 92.07 million
• Recovery of actual

cost for full import

• Wheeling charge also

to be recovered

• 4. Other

Costs Cost of Supply

• Allocated CO

costs to plants

• Net assets as

per book of accounts

• Only one-third CO cost

allowed, citing that CO costs relate to new projects & does not belong to any plant

• Nu. 1.236 billion worth

asset handed to other agencies disallowed

• Full Corporate Office

cost less cost segregated for specific new projects

• For

assets transferred to Govt. agencies, liabilities remain with Druk Green

Feedbacks on 2010 Tariff Reviewand 2013-16 Generation Tariff Revision Proposal

Particulars As per TDR/Tarif f Model Druk Green 2010 Proposal 2010 Tariff Decision Outcome. Druk Green 2013 Proposal

• 5. Investment

Plans Scrutiny by the BEA

• Nu. 4.999 billion
• Most

investments disallowed

• Only

1/3

rd

CO investment allowed citing that it is not related to plants. Thereafter,

• nly

85% working

• ut

to Nu. 2.462 billion allowed

• Nu. 3.742 billion
• 6. Donation &

Community Welfare Expenses _ Actual under O&M expenses Removed and not allowed to recover Actual under O&M expenses

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal

Particulars As per TDR/Tarif f Model Druk Green 2010 Proposal 2010 Tariff Decision Outcome. Druk Green 2013 Proposal

• 7. O&M

efficiency gains BEA to determine 0% 2% 0%

• 8. Generation

Tariff _

• Nu. 1.99 per kWh

for Additional Energy

• Nu. 1.20 per kWh for

Additional Energy

• Nu. 1.99 per kWh
• Nu. 0.84 per kWh

for Royalty Energy

• Nu. 0.13

per kWh for Royalty Energy

• Royalty revenues does

not accrue to Druk Green since 2011

Treatment of Equity as Grant  Druk Green owned by DHI, the commercial arm of the government & expected to

• perate commercially and provide returns to the RGoB in the form of dividends

 The Auditors certified treatment of grants received by RGoB as equity  RGOB as the ultimate shareholder has not given any indication to treat the equity as grant Therefore, the grants received for the projects by RGoB be treated as equity.

Clarifications

Grant given by Govts. of India and Austria Grant received by RGoB and invested in the project Completed projects handed over to Druk Green along with corresponding equity and debt but no grants

Clarifications

Treatment of Royalty  TDR 2007 (Updated in 2010) Section 7.3 requires the royalty energy to be sold by Generation Licensees at Royalty Price to implement transfer of subsidy from Generation Licensee to customers  However, in line with EDP 2010 and BSHDP 2008 and based on comments of BCCI, the proceeds from the royalty sales accrues to RGOB since January 2011. Therefore, Since royalty energy proceeds accrues to RGoB and not Druk Green anymore, the transfer of subsidy from Generation Licensee to customers does not arise

Changes Proposed in 2013-16 Generation Tariff Revision Proposal –

• 1. Higher Allowance of Cost of Equity

1. Higher Allowance of Cost of Equity

Allowance of higher CoE in keeping with TDR and also for following reasons; 1.1. No Grants Received by Druk Green

• Druk Green did not receive any grant
• Equity injection from MoF through DHI
• Druk Green operates like any Corporate Entity answerable to shareholders
• Only RE Assets received in form of grant cannot earn Return on Assets (TDR 6.6.2)

1.2. Export Revenues Subsidizing Domestic Tariffs

• Beyond the scope of Act and TDR (EA 14.1.iv & TDR 1.5)
• Linking returns from export to CoE for domestic tariff is an indirect subsidy
• Subsidy through Royalty pricing or through other mechanism under the purview of Govt.
• Curtailing CoE for domestic tariff does not allow Druk Green recover cost of supply

Changes Proposed in 2013-16 Generation Tariff Revision Proposal –

• 1. Higher Allowance of Cost of Equity

1.3. Druk Green’s Declining Returns (Inclusive of Export)

• Fall in profit despite Druk Green’s consistently better operational performance
• Hydropower Benchmarking Study by PA Consultants, Norway;

 Druk Green’s total cost per WMO is the least among other hydropower plants in Asia and South America.  Average production is highest at 6.4 GWh compared to the group average of 3 GWh per WMO

• Operational KPIs of Druk Green

Increase due to Export Tariff of KHP & THP

KPIs Druk Green Average Remarks Power Plant Availability (PPA) 97.66% BC Hydro, Canada 96% and NHPC, India 91% Water Utilization Factor 99.96%

Changes Proposed in 2013-16 Generation Tariff Revision Proposal –

• 1. Higher Allowance of Cost of Equity

Trends in Demand, Supply and Export

• Druk Green’s revenue suffers due to twin effects of decreasing export and low domestic

tariff 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2010 2011 2012 2013 2014 2015 2016 Eneegy (GWh) Generation Export Domestic Demand

Changes Proposed in 2013-16 Generation Tariff Revision Proposal –

• 1. Higher Allowance of Cost of Equity

1.4. Challenges in Financing Opportunities for Hydropower Development

• At existing tariff levels - uphill task to sustain the dividend expectation
• At Druk Green’s current returns of 10-11%, it is unlikely to get investors/financiers

support for new projects and would not facilitate plough back of profit for investment in new hydropower projects. The current returns will not enable Bhutan to achieve the objective of economic self reliance through development

• f a financially viable and reliable electricity industry (EA 3.1.iv).

1.5. Returns Based on Capital Asset Pricing Model (CAPM)

• Expected return on equity = risk free rate + Beta (market return – risk free rate)
• As reference case; NHPC’s Expected returns as per model– 16%

 Beta 0.91  Interest rate of 10 years Indian Govt. bond 8% &  Average Indian market return since 1991 of 17%

• Returns for the power sector in Bhutan should be comparable

Changes Proposed in 2013-16 Generation Tariff Revision Proposal –

• 1. Higher Allowance of Cost of Equity

1.6. High Inflation Rates

• Average inflation is 9%. At 12% CoE, real return is only 3% - not commensurate with risks
• TDR permitted CoE may be appropriate for very low inflation mature economies

1.7. CoE as per Indian Electricity Regulatory Commission (CERC) Norms

• 15.5% post-tax
• Comparison with India relevant because of integrated energy market and export

tariff based on CERC norms 1.8. Higher Average Returns for Listed Companies in Bhutan

• Most listed companies have returns higher than 15%

1.9 . Indicative Generation Tariff of Upcoming Hydropower Projects (Using Tariff Model)

Changes Proposed in 2013-16 Generation Tariff Revision Proposal –

• 1. Higher Allowance of Cost of Equity

1.10. Opportunity Lost from Export

• Huge Opportunity loss due to domestic use of the additional energy
• More than Nu. 1.3 billion during the last 3 years

Year Druk Green Sales to BPC (GWh) Royalty Energy (GWh) Additional Energy (GWh) Opportunity loss on account of additional energy (Mill Nu.) 2010 1,628.03 1,082.53 545.50 370.94 2011 1,683.72 1,044.30 639.42 441.20 2012 1,828.02 1,009.43 818.59 564.83 Total 5,139.77 3,136.26 2,003.51 1,376.97

Changes Proposed in 2013-16 Generation Tariff Revision Proposal

2. Recovery of Cost of Production of Royalty Energy

• Tariff computed on 100% of the total energy volumes
• Cost of production of 15% royalty is not recovered leading to subsidization
• Royalty revenues no longer accrues to Druk Green since 2011
• Realization of 12% CoE is impossible as can be seen from the computation considering

2012 Annual Accounts  Domestic sales – 5.22%  Export sales – 11.74%

• In India, CERC norms also allow the energy net of free energy in tariff computation

Therefore, total energy net of royalty energy be allowed in computation of tariff

Changes Proposed in 2013-16 Generation Tariff Revision Proposal

3. Recovery of Cost of Energy Import

• BEA allows to invoice max. 49.5 GWh or Nu. 92.07 Million worth energy annually
• Cost of import beyond the BEA ceiling could not be recovered in the past
• No generation capacity augmentation in tariff period, import forecast

Therefore, recovery of cost of energy import and its wheeling charges be allowed

Changes Proposed in 2013-16 Generation Tariff Revision Proposal

4. Full Recovery of Other Costs

• Corporate Office Costs to be allowed to recover fully

 Druk Green formed to bring synergy and efficiency under a single company structure  No separate company structure required for each plant  Specific costs pertaining to new projects accounted separately

• Cost of assets handed to Govt. agencies to be allowed to recover

 Creation of assets like schools necessary during project implementation  Some assets transferred to Government agencies  The Druk Green Plants continue to service liabilities Therefore, Druk Green be allowed to include these costs in tariff model

Cost of Supply Methodology Cost of Supply

Operating and Maintenance Costs Depreciation Return on Fixed Assets Power Purchases and Fuel Costs for Electricity Generation Cost of Losses & Non-Payment of Electricity Bills Cost of Working Capital

Regulatory Fees, Duties or Levies

Proposed Generation Tariff for 2013-16

Using the Tariff Determination Model and the proposed changes;

• Cost of generation Nu. 1.99 per kWh is much higher than existing tariff of Nu. 1.2 per kWh
• Increase in tariff for Druk Green proposed in line with the principles of TDR and also to

ensure steady revenues to the RGOB from the hydropower sector Submitted to BEA to consider on commercial terms, consistent to norms in the region Tariff Details Cost of generation (Nu. per kWh) Basochhu Hydro Power Plant 2.95 Chhukha Hydro Power Plant 0.58 Kurichhu Hydro Power Plant 3.66 Tala Hydro Power Plant 2.25 Average Consolidated Tariff 1.99

Thank You!!!