ENERGY POLICY PROGRAM

MARCH 2014

POWER PLANT TARIFF STRATEGIES

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TOPIC 1: POWER PLANT TARIFF STRATEGIES

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INTRODUCTION

One of the most important questions that a power company must ask and answer is what should they charge for providing electricity to the customer?

Average retail electricity prices are calculated by dividing utility revenue by retail sales. It is the measured cost, or average revenue per kilowatt-hour, of power sold. Electric utilities usually offer three primary classes of service: residential, commercial, and industrial. The average price per kilowatt-hour for residential consumers is generally higher than for any other sector due in part to higher costs associated with serving many consumers who use relatively small amounts of power. The industrial sector has the lowest electricity prices due to the economies of serving a few consumers who use relatively large amounts of electricity.

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OBJECTIVES

At the conclusion of this topic, participants will be able to:

1.List the functions of the regulating bodies for setting tariffs.

2.Give the definition of a tariff as explain in this training.

3.Explain the difference between a fixed charge and variable charge.

4.Explain what a tariff should accomplish.

5.List the steps for designing wholesale tariffs.

6.Describe the two part tariff system.

7.Discuss the steps for setting up a two part tariff system.

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FUNCTION OF TARIFF REGULATING BODY

National Electric Power Regulatory Authority Pakistan (NEPRA) is responsible for the regulation of power plant tariffs in Pakistan.

The functions of the regulating bodies include:• Issue and revoke electricity distribution licenses

• Regulate the electrification drive

• Determine electricity distribution competency

• Regulate electricity tariffs and structures

• Regulate electricity service standards

• Settle disputes between suppliers and customers

• Approve expropriation of network assets

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TARIFFS EXPLAINED

A tariff is the amount charged for providing energy under a contract. It includes both fixed and variable charges.

Fixed charges are not based on how much energy you use. It is normally separately identified on your bill, and is often called the ‘daily supply charge’ or ‘service to property’ charge. It can be displayed as a daily rate on your bill (e.g. in ‘rupees per day’), but may appear as a single figure for a billing period.

Variable charges or ‘consumption charge’ is normally the amount you pay for each unit of electricity and/or gas you use. It is listed on your bill as rupees per kilowatt hour (PKR/kWh).

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COST OF ENERGY SUPPLYAs an example, consider the cost of owning and running a car. The various costs can be converted to an average cost per km per month.

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FIGURE 2: ELECTRICITY USE COSTS

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FIGURE 3: NETWORK CONNECTION COSTS EXAMPLE

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TARIFF GOALS

A tariff should accomplish the following:

1.Energy tariffs should firstly allocate resources efficiently among different sectors of the economy and within the energy supply industry.

2.The tariff should satisfy fairness principles such that costs are allocated among customers according to the burden they place on the energy system.

3.The energy tariff should raise sufficient revenue to meet the financial requirements of the utility and finally, the tariff should be simple enough to facilitate billing with available technology while ensuring that customers understand the billing process.

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ELECTRICITY COST CALCULATION EXAMPLE

On Wednesday, April 8, 2014

Fuel Used = 1038.8 TonsFuel Price = 70,913.77 Rupees/TonNet Generation = 3,598,12 kWh

Fuel Cost = 1038.8 Tons * 70,913.77 Rupees/Ton= 73.7 * 106 Rupees

Net Generation = 3,598,712 kWh

Electricity Cost = 73.7 * 106 Rupees / 3,598,712 kWh

= 20.50 Rupees/kWh

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TARIFF CALCULATION EXAMPLE

On Wednesday, April 8, 2014

Fuel Cost = 73.7 * 106 RupeesTransmission Cost (10% fuel cost) = 0.25 * 106 RupeesAdministration Cost (20% fuel cost) = 0.5 * 106 Rupees

O & M Cost = 1.0 * 106 RupeesOther Costs = 3.0 * 106 RupeesTotal Cost = 78.45 * 106 Rupees

Net Generation = 3,598,712 kWh

NEPRA Cost = 78.45 * 106 Rupees / 3,598,712 kWh= 21.80 Rupees/kWh

Electricity Cost = 73.7 * 106 Rupees / 3,598,712 kWh

= 20.48 Rupees/kWh

Tarrif = 21.80 – 20.48 = 1.32 Rupees/kWh

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TARIFF DESIGN

The tariff structure together with the tariff rates make up the tariff. This, together with other charges becomes the tariff package, which when applied to the customer consumption profile gives the electricity cost.

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WHOLESALE TARIFFS

The process of designing wholesale tariffs contains several aspects:

1.The determination of the appropriate revenue requirement (total annual costs).

2.The use of various technical data.

3.The design of the tariff structure. Generally, the tariff process includes four steps.

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FIGURE 5: TARIFF PROCESS

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TWO PART TARIFF SYSTEM

Two-part tariffs shall be applied to those companies whose participation in the electric energy and capacity balance is instructed by the system operator on instant basis. This tariff charges a customer for the amount of energy consumed as well as the rate at which this energy is consumed.

This structure recovers variable costs through a constant consumption charge (e.g. c / kWh) and a capacity cost charge (proportional to rate of use) (e.g. R / kW). This tariff requires metering that is able to log the maximum rate of use in addition to the normal energy metering function.

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FIGURE 6: EXAMPLE OF SYSTEM LOADS AND DIVERSITY CHART

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FIGURE 7: MONTHLY PEAK GENERATION PLUS NET IMPORTS

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FIGURE 8: ENERGY GENERATION PLUS NET IMPORTS

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SETTING UP A TWO PART TARIFF SYSTEM

There are several requirements that must be addressed before two-part tariffs can be designed and adopted.

Organization and Infrastructure -XYZ Company is responsible for providing the information and data needed to develop and implement two-part wholesale tariffs. It is recommended that a review of the organization and the current infrastructure be conducted to identify areas where changes will be needed in order to develop and implement the two-part tariffs.

Data Analysis Equipment and Capabilities:

Metering - The hourly metering installation at all distribution company points of delivery (connection points) needs to be in place

Software and Data Acquisition Systems - Data acquisition systems and software must be in place and able to record all metering data from each point of connection.

Billing Changes - Billing systems may need to be modified to allow for the billing of both the capacity element and the energy portion of the monthly bills.

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FIGURE 9: DEMAND-SIDE MANAGEMENT ACTIVITIES