Pricing of Inter State Sales of Electricity

Transcription

1 Pricing of Inter State Sales of Electricity Final Project Report Infrastructure Development and Financing Submitted to Prof. Sebastian Morris Prof. Rekha Jain Prof. G. Raghuram By Group 1 (Section B) Dwaipayan Sadhu Shailesh Tamagade Shantanu Dey Vinay Madhav Pai Vishnu G On August 24, 2001 Indian Institute of Management, Ahmedabad 1

2 Table of Contents 1. NEED FOR INTERSTATE TRANSMISSION BRIDGING THE GAP BETWEEN SURPLUS AND DEFICIT STATES TRANSMISSION CONSTRAINTS INTER REGIONAL TRANSFER CAPACITY DEVELOPMENT OF REGULATIONS INDIAN ELECTRICITY ACT ELECTRICITY SUPPLY ACT POST LIBERALIZATION MEASURES DRAFT ELECTRICITY BILL Inter State Transmission of Electricity Roles of Various Entities DEVELOPMENT OF A POWER MARKET: PROPOSED PLAN POWER TRADING CURRENT NEW AGREEMENTS ISSUES IN INTER STATE TRANSMISSION REGULATION OF INTER-STATE TRANSMISSION ISSUES IN THE PRICING OF CENTRAL POWER SECTOR UTILITIES (CPSU) TOWARDS A TARIFF POLICY TOWARDS A FRAMEWORK FOR TRANSMISSION TARIFFS TARIFF ISSUES CURRENT TARIFF SYSTEM Bulk Purchase and Sales Order K.P Rao Committee Recommendations Current Mechanism of Transmission Pricing Determination of Norms for inter-state Transmission Tariff - CERC Order

3 5.1.5 Evaluation of the alternatives suggested AVAILABILITY BASED TARIFF Problems with the present system Proposed ABT System Problems with ABT INTERNATIONAL EXPERIENCE US EXPERIENCE Open Access Transmission Issues Retail Wheeling THE UNITED KINGDOM Electricity Act Transmission The England and Wales Power Pool Pricing

4 1. Need For Interstate Transmission 1.1 Bridging the Gap Between Surplus and Deficit States Power trading is comparatively a new business concept in India although trading in power has proved successful in many western countries. The main suppliers of bulk power in India are the central sector stations and their capacity has been fully allocated to states. There are no merchant generators. All IPPs have long-term contracts assuming recovery of full fixed cost and return on equity at 68.5% availability. Some IPPs have even guaranteed off-take of power. Thus there is little untied capacity available for open market trading of power and Inter-state exchanges from surplus to deficit systems are taking place in limited quantities. Inter-regional exchanges in were about 9.87 billion units, which is 2% of the total electrical energy availability in the country. Bulk of inter-regional exports are taking place from Eastern Region which is surplus in power availability. Further trading opportunities exist in terms of exports from Eastern Region but there are transmission constraints in enhancing the supplies. With the strengthening of inter-regional links and increased emphasis on commercialization, the volume of power trading is expected to increase in the future. But power trading to evolve and develop in to a mature and attractive business will take some time. In India there are surplus regions and deficit regions and surplus periods and deficit periods that require to be matched by optimising the generating capacity through transmission of power from surplus areas to deficit areas. For example, regions deficit in peak capacity but surplus in off-peak capacity can transmit power to regions deficit in off-peak capacity. For meeting these requirements, identification of sellers and buyers and for fine-tuning the flow of power on a day-to-day basis, trading can perform a very useful function. If you have a market, trading will be an essential part that must be facilitated in any open economy. Power trading is an attractive business opportunity in India. The factors that create a substantial scope for power trading in the country are: 1?? The given mismatches between power surplus and power-deficient markets in the country 1 4

5 ?? Limited growth of IPPs?? The new generating capacities in the country, which would lead to an increase in power supply However, to effectively carry out power trading in the country, the following steps must be considered:?? More investment to be put into interstate reconciliation metering?? A transparent flow of information for interested participants?? Establishment of a common interstate network pricing model Although power trading has proved successful in many western countries, in India it is still at a nascent stage. The capacity of the central sector stations has been fully allocated to the states. There are no merchant generators. All IPPs have long-term contracts, assuming recovery of full fixed cost and return on equity. Some IPPs have even guaranteed offtake of power. Thus there is hardly any untied capacity available for open market trading, and inter-regional exchanges from surplus to deficit systems are taking place in limited quantities. Interregional exchanges in were about 9 billion units, which is 2 per cent of the total electrical energy available in the country. Further, where trading opportunity exists in terms of exports, for example, from the eastern region, there are transmission bottlenecks. With the strengthening of interregional links, and an increased emphasis on commercialization, the volume of power trading is expected to increase in the future. But for power trading to evolve and de-velop into a mature and attractive business will take some time. With the setting up of mega power projects, strengthening of interregional transmission links, and introduction of availability-based tariff, the volume of power exchanges is going to increase substantially. Introduction of the Electricity Bill, 2000 will provide enabling provisions for establishment of bulk electricity markets to facilitate efficient, competitive and orderly trading and supply of electricity. The draft bill provides for setting up of new generating stations without licence, non-discriminatory access to transmission systems and gradual introduction of "open access" in the distribution system to permit competition among multiple suppliers. Trading of energy has been recognised as a distinct function to encourage market-based operations, leading to the setting up of merchant power stations. The draft bill also provides for a bulk electricity spot market. 5

6 In the near future, with the strengthening of the interregional transmission system between the eastern region and the neighbouring regions by the Power Grid Corporation, it is likely that competition will be generated between the generators in the eastern region to supply power at the minimum cost. A commercially sound trading arrangement for power will not only help achieve optimum utilization of the existing capacities, it will also result, though in the long run, in automatic merit order despatch. 1.2 Transmission Constraints Transmission system were planned and developed for evacuation of central generating stations in a region and not planned for inter-regional power transfers. The planning of transmission system has undergone a change and integration of Regional grids is in progress. Transmission Highways have to be built across the country to facilitate large scale trading of power in future. 1.3 Inter Regional Transfer Capacity The total power transfer capacity of the inter-regional transmission system is about 5500 MW at 220 kv and above level and in HVDC back-to-back systems, which accounts for about 5.5% of the generation capacity in the country. Inter-regional transmission systems that are presently under construction will have the power transfer capacity of 3500 MW. 2. Development of Regulations Indian Electricity Act, Electricity Supply Act and Indian Electricity Rules provide the basic framework for regulating electricity industry in India. 2.1 Indian Electricity Act 1910 The Indian Electricity Act 1910 was enacted to deal with the supply and use of electricity and was applicable to the whole of India. It also deals with the grant of licenses to persons who wish to engage in the business of transmission and supply of electricity and also to non-licensees who wish to engage in transmission, supply and use of electricity. 6

7 2.2 Electricity Supply Act 1948 This Act was enacted right after independence to provide for rationalization of production and supply of electricity and for taking measures conducive to electricity development. It was aimed to ensure a coordinated development of electricity in India on a regional basis. It provides for the necessary legislative powers to link together under one control electrical development of contiguous areas by developing the grid system. 2.3 Post Liberalization Measures In 1991 the power sector was first to open up, by the way of throwing open generation to private players. In 1996 the Central Government along with the state governments went for Common Minimum national Action Plan. The objective of the plan was to initiate steps required to improve the performance of the sector in a time bound manner. Setting up the CERC or Central Electricity Regulatory Commission was a key element of the plan. The Electricity Act 1998 provided for establishment of CERC to regulate the tariff of the central generating companies and sale of electricity to two or more states and to regulate the inter state transmission of electricity undertaken by PGCIL and other organizations, including the tariff. 2.4 Draft Electricity Bill 2000 The proposed legislation provides for enough flexibility in undertaking reforms to make private investment easy, uninterrupted power to the consumer at affordable rates through competition and independent regulation giving enough freedom to the States to decide on the pace and path of reforms taking into account the local specific conditions Inter State Transmission of Electricity Roles of Various Entities For the purpose of interstate transmission of electricity, the Government proposes to make region- wise demarcation of the country, and, from time to time, make such modifications therein as it may consider necessary for the efficient, economical and integrated transmission and supply of electricity, and in particular to facilitate voluntary 7

8 inter-connections and co-ordination of facilities for the inter-state, regional and interregional generation and transmission of electricity. The Government also proposes to set up a centre at the national level, to be known as the National Load Despatch Centre for optimum scheduling and dispatch of electricity among the Regional Load Despatch Centres (RLDC). Roles of the RLDC The Regional Load Despatch Centre is proposed to be the apex body to ensure integrated operation of the power system in the concerned region. The Regional Load Despatch Centre shall comply with such principles, guidelines and methodologies in respect of wheeling and optimum scheduling and despatch of electricity as the Central Commission may specify in the Grid Code. The Regional Load Despatch Centre shall (a) be responsible for optimum scheduling and despatch of electricity within the region, in accordance with the contracts entered or to be entered with the licensees or the generating companies operating in the region; (b) monitor grid operations; (c) co-ordinate grid planning and expansion; (d) exercise supervision and control over the inter-state transmission system; (e) be responsible for carrying out real time operations for grid control and despatch of electricity within the region through secure and economic operation of the regional grid in accordance with the Grid Standards and the Grid Code; and (f) maintain accounts of power flow in the grid. The Regional Load Despatch Centre may levy and collect fee and charges from the generating companies or licensees engaged in inter-state transmission of electricity as may be specified by the Central Commission. The Regional Load Despatch Centre may give such directions and exercise such supervision and control as may be required for ensuring grid operations and for achieving the maximum economy and efficiency in the operation of the power system in the region under its control. Every licensee, generating company, generating station, sub-station and any other person connected with the 2 8

9 operation of the power system shall comply with the direction issued by the Regional Load Despatch Centres. All directions issued by the Regional Load Despatch Centres to any Transmission Licensee of state transmission lines or any other licensee of the state or Generating company (other than those connected to inter state transmission system) or sub-station in the State is proposed to be issued through the State Load Despatch Centre and the State Load Despatch Centres shall ensure that such directions are duly complied by the licensee or generating company or sub-station. Every licensee and others involved in the operation of power system shall comply with the decision of the Regional Power Committee. If any dispute arises with reference to the quality of electricity or safe, secure and integrated operation of the regional grid, it shall be referred to the Central Commission. Roles of Central Transmission Utility (PGCIL) The Ministry of Power has appointed Power Grid Corporation of India Ltd. as the Central transmission Utility and vested it with certain regulatory powers in inter state transmission. The functions of the Central Transmission Utility shall be to -?? Undertake transmission of electricity through inter-state transmission system;?? Discharge all functions of planning and co-ordination relating to inter-state transmission system with (i) State Transmission Utilities; (ii) Central Government; (iii) State Governments; (iv) Generating Companies; (v) Regional Power Committees; (vi) Authority; (vii) licensees; (viii) any other person notified by the Central Government in this behalf;?? Ensure development of an efficient, co-ordinated and economical system of interstate transmission lines for smooth flow of electricity from generating stations to the load centers 9

10 Now any applicant for setting up interstate transmission system should have to obtain the approval of the CTU. PGCIL thus simultaneously dons the mantle of a regulator and and player, which might endanger the competition. PGCIL could conceivably prevent the entry of private players in t5he transmission sector for example by allotting inhospitable and uneconomic regions for setting up and operating transmission infrastructure. 3 Roles of Central Electric Authority The Authority shall perform such functions and duties as the Central Government may prescribe or direct, and in particular -?? Advise the Central Government on the matters relating to the national electricity policy, formulate short-term and perspective plans for development of the electricity system and co- ordinate the activities of the planning agencies for the optimal utilization of resources to subserve the interests of the national economy and to provide reliable and affordable electricity for all consumers?? Specify the acceptable technical standards for construction of electrical plants and electric lines?? Specify the safety requirements for construction, operation and maintenance of electrical plants and electric?? Specify the Grid Standards for operation and maintenance of transmission lines;?? Specify the conditions for installation of meters for transmission and supply of electricity?? Promote and assist in the timely completion of schemes and projects for improving and augmenting the electricity system?? Promote measures for advancing the skill of persons engaged in the electricity industry;?? Advise the Central Government on any matter on which its advice is sought or make recommendation to that Government on any matter if, in the opinion of the Authority, the recommendation would help in improving the generation, transmission, trading, distribution and utilization of electricity 3 Puneet Chitkar et al, The Electricty Sector, IIR

11 ?? Collect and record the data concerning the generation, transmission, trading, distribution and utilization of electricity and carry out studies relating to cost, efficiency, competitiveness and such like matters?? Make public from time to time information secured under this Act, and provide for the publication of reports and investigations?? Promote research in matters affecting the generation, transmission, distribution and supply of electricity?? Carry out, or cause to be carried out, any investigation for the purposes of generating or transmitting or distributing electricity?? Advise any State Government, licensees or the generating companies on such matters which shall enable them to operate and maintain the electricity system under their ownership or control in an improved manner and where necessary, in co-ordination with any other Government, licensee or the generating company owning or having the control of another electricity system; and?? Advise the Appropriate Government and the Appropriate Commission on all technical matters relating to generation, transmission and distribution of electricity Roles of Central Electricity Regulatory Commission The Electricity Act 1998 provides for creation of Central Electricity Regulatory Commission whose functions are:?? To regulate the tariff of Generating Companies owned or controlled by the Central Government?? To regulate the tariff of Generating Companies other than those owned or controlled by the Central Government specified in clause (a), if such Generating Companies enter into or otherwise have a composite scheme for generation and sale of electricity in more than one State?? To regulate the inter-state transmission of electricity?? To determine inter-state transmission tariff regardless of whether power flows through inter-state lines or intra-state lines?? To regulate the trading margin of an Electricity Trader with respect to his inter state operation 11

12 ?? Issue licenses to persons to function as Transmission Licensee and Electricity Trader with respect to their inter-state operations?? To promote competition, efficiency and economy in the activities of the electricity industry?? To associate with the environmental regulatory agencies to develop appropriate polices and procedures for environmental regulation of the power sector?? To frame guidelines in matters relating to electricity tariff for generation and high voltage transmission in accordance with National Electricity Policy?? To arbitrate and adjudicate upon disputes involving Generating Companies or Transmission Companies Roles of Power Trading Corporation (PTC) The Power Trading Corporation (PTC) has been established with majority equity participation by the PGCIL along with NTPC, Power Finance Corporation (PFC) and other financial Institutions. The PTC would purchase power from the identified private projects and sell it to the SEBs. 4 As part of its mega power policy, GOI proposes to set up the Power Trading Corporation (PTC) as sole offtaker of the power generated by mega projects. PTC will buy power from multiple power projects under long term PPAs and sell to multiple offtakers also under long term PPAs. 5 PTC may help to optimize costs as creation of parallel structures can be avoided. Second, in order to manage the business a certain set of skills is required to be developed. The third rationale for formation of a single PTC is that of flexibility. For example, if there are three SEBs out of which one of them has a temporary offtake constraint, the PTC has the flexibility of finding an alternative buyer within the constraints of the technical system. In addition, based on global trends PTC may eventually facilitate the move towards merchant trading. It would then serve its true purpose as defined in its name which is power trading. 6 4 Puneet Chitkara et al, The Electricity Report, IIR

13 ?? Promotion of power trading to optimally utilize the existing power resource in the country?? Catalyzing development of mega power projects and hydro power projects?? Promoting exchange of power with neighboring countries?? Developing a power market?? To carry on the business of purchase and sale of all forms of electrical Power; conventional & non - conventional and also to supply, import and export or otherwise deal in all forms of electrical energy in all aspects?? To plan, promote and take up necessary developmental work, selection of prospective / established Independent Power Producers/Generating, Transmission/Distribution Companies, utilities and enter into contract / power purchase agreements with them. To act to augment power generation, transmission, distribution, optimum utilisation of electrical power and it's trading?? To plan, promote, develop and establish an efficient and reliable power trading and distributing system, policies and procedures towards competitive procurement, transfer /wheeling of power from the power producers / generating and transmission companies within India and abroad and supply within India and abroad and comply with the broad guidelines and objectives laid down by the Government of India or any statutory / regulatory authorities created or established from time to time?? To own, acquire, establish, operate and maintain generating stations, transmission systems and power systems for generation, evacuation, distribution and transmission of power for supply to the State Electricity Boards, Vidyut Boards, Power Utilities Generating Companies, Transmission Companies, Distribution Companies, State Government, Licensees, statutory bodies, other organizations and bulk consumers of power Power Exchanges Through PTC 13

14 During , PTC has traded MUs of power from Western Region to Southern Region. In the year , PTC has traded MUs of energy from the Western to Southern and Northern to Western Region. 2.5 Development of a Power Market: Proposed Plan The Electricity Bill to be introduced shortly, provides for establishment of a bulk electricity spot market to facilitate efficient, competitive and orderly trading and supply of electricity as the electricity industry develops and matures to benefit the consumers from resulting competition and free flow of electricity The following provisions have been proposed in the bill to enable development of competitive power market.?? Setting up of new generating stations without license and they would have freedom to generate and supply electricity in competitive environment?? Non-discriminatory access to the transmission system. Evolution of efficient regional and national grids that would ensure a free and efficient flow of electricity among different regions?? Gradual introduction of 'open access' in the distribution system to permit competition among multiple suppliers?? Trading in the electricity has been recognized as a distinct function to encourage market based operations leading to setting up of merchant power stations. The bill also provides for Bulk Electricity Spot market?? The bill proposes to de-regulate the generation sector and allow prospective generating stations to supply electricity in a free market?? The Bill recognizes the need for progressive reduction in cross subsidization among different classes of consumers.?? Provides for restructuring of SEBs 14

15 3. Power Trading 3.1 Current MUs of surplus energy from PSEB was traded to GEB through PTC from 11th November 2000 to 1st December A detail report on interregional energy exchanges over the years is given in Exhibit New Agreements 7 Trading of Power from West Bengal Power Development Corporation Limited A Power Purchase Agreement was signed with West Bengal Power Development Corporation (WBPDCL) on 14th Feb 2001 for purchase of up to 200 MW of power. The power flow from WBPDCL to Delhi Vidyut Board and Haryana Vidyut Prasaran Nigam Ltd. has started w.e.f as per the allocations made by CEA/MoP. The average power flow is about 3 MUs per day. Trading of Power from Malana Power Company Limited. A Power Purchase Agreement has been signed on 18th June 2001 with Malana Power Company Limited (MPCL) for purchase of entire net electrical energy available from 86 MW Malana Hydro Power Project (excluding free power admissible to Himachal Pradesh). This power will be sold to DVB. Power flow is expected to start from first week of July 2001, after commissioning of Malana Power Project. 4. Issues in Inter State Transmission 4.1 Regulation Of Inter-State Transmission The regulation of inter-state transmission, including the transmission tariff of the utilities engaged in inter-state transfers of energy, is a primary role of the Commission under the Act. There are five Regional Grids operating in the South, West, North, East and North- East. Each of the regional grids is governed by a Regional Electricity Board which came into being through the resolution of the Government of India in 1964 with the intention of promoting integrated operations of the power systems. While the Regional Electricity Boards are advisory in function Regional Load Despatch Centers (RLDCs) established in 15

16 each region by CEA in the 1970s are in operational control of the regional electricity grids. The REBs were given statutory status in 1991 through an amendment of The Electricity (Supply) Act, Over the period January, 1994 to January 1, 1996 the RLDCs which were originally part of he Central Electricity Authority (CEA) were transferred to Powergrid Corporation of India. Through further amendments to the ES Act in 1998 the role of the RLDCs was clarified and they were designated as the apex body to ensure integrated operation of the power system in the concerned region. Simultaneously, the Regional Electricity Boards were able to facilitate the RLDC on matters concerning the smooth operation of the integrated grid and economy and efficiency in the operation of the power system through a unanimous decision of the REB. This amendment has further clarified the system of dispute resolution under which, subject to regulations made by the Commission, all disputes relating to directions given by the RLDCs, are referred to the Central Electricity Authority for decision. The fees to be charged by the RLDCs is also to be specified by the CERC. Over time, the procedures to be adopted for planning and operation of the regional grids have been specified by the Central Electricity Authority, decisions of the REBs and operational practices of the RLDCs. While the system has functioned well with diversification of the nature of utilities connected to the system subsequent to restructuring of the State Electricity Boards and the incentives given to the private investment growth in the volume of inter-state energy sales, rapid increases in the demand for energy with significant regional variations there has been a felt need for a unified code laying down the rules, guidelines and standards to be followed by the various agencies and participants in the Indian Electricity Grid System. In pursuance of this objective the Commission set up a special working group under the Chairmanship of Shri D.P. Sinha, Member CERC with the express purpose of discussing with all stakeholders of the regional grids the modalities to be adopted for formulation of an Indian Electricity Grid Code. The working group submitted its report in the first week of February 1999 which was subsequently forwarded to assist them formulating a draft Grid Code

17 4.2 Issues in the pricing of Central Power Sector Utilities (CPSU) 8 Central Power Sector Utilities today consist of a transmission company (PGCIL), several generating companies (NTPC, NHPC, DVC, and BBMB). Other inter-state (and even inter-regional) companies are likely to emerge as some of the IPPs facing demand problems are allowed to sell in more than one state. These and others such entities as they are commercialized would feel the need to sell across state boundaries. The interregional and interstate sales of power which is currently restricted due to illdefined policy, needs to grow as the regulatory and policy uncertainties are overcome. Thus, a meaningful tariff policy would have to include not merely the CPSU's as such, but also all potential participants in the interstate and interregional business. Similarly, tariff policy would have to address the issue of IPP contracts (Power Purchase Agreements) and how best they can be dealt with or recast in a more rational environment of interstate and interregional movement of power. The two objectives of "affordable power" and "development of markets" for power would demand that any tariff policy would have to necessarily cover?? Tariffs for transmission?? Transmission access rules?? Interregional and interstate restrictions (possibly) to protect what would otherwise become stranded assets?? Existing IPP contracts?? Demand conditions and capacity utilization and hence address the option of time of day pricing The reason for a special focus on transmission rules and transmission pricing is that much of the behaviour of entities and the options available to them in a decentralized situation (and it is already so given the separation of the PGCIL from other generating entities) would be governed a great deal by how transmission is conducted. It needs to be recognized that transmission is not adequately viewed as a profit maximizing business. Indeed if transmission entities are left to maximize their earnings, market failure in generation and distribution are inevitable (through grid congestion, access denial, etc). 8 Prof. Sebastian Morris, Towards a Tariff Policy for Central Power 17

18 Thus restrictions, including on ownership, and appropriate structuring of transmission entities, besides transmission pricing and access are the keys to commercialization of both generation and distribution. Experience elsewhere and a priori analyses tell us that the success of a decentralized system would depend upon the choices available to price elastic participants whether suppliers or buyers. Thus crucial to the emergence and successful working of a market is the existence of sufficient price elastic demand, i.e. bulk consumers. Today many of these have been repelled from the utility system by the absurd tariff structure of the SEBs, that has made the stand alone cost of power for large buyers lower than the price at which the utility (SEB) supplies! Similarly, the need to bring in as much of the elastic supply as possible would mean that the access (including access prices) to the grid would have to be easy and never above the true marginal social cost of access. Cost of access we define as the additional cost of installing meters, data loggers and monitoring rather than of grid capacity. Today in the rare instance when access is allowed, it is charged at very high rates. In the case of captive generators the current policy has effectively barred their access. It is necessary that such suppliers are brought on the state/regional/central grid, and interstate transmission would have to worry about such players. In other words, open access is crucial to overall efficiency and optimality of the system. 4.3 Towards a Tariff Policy 9 If indeed a market in wholesale power is accepted as a means for ensuring the lowest possible cost of power for consumers, then there is little reason to arrive at the tariff for bulk power. Instead, the focus would have to be on how best to create competition in generation. Nevertheless, such a change is likely to take time, and different state systems are likely to move towards that object of mercerization taking differing times. In order to remove the current distortions it is imperative that a tariff framework for interstate and interregional movement of power is announced quickly that is in keeping with the long term objective, but is not sub-optimal today. Sector Utilities (CPSUs) (Part I) 9 Prof. Sebastian Morris, Towards a Tariff Policy for Central Power Sector Utilities (CPSUs) (Part I) 18

19 The object of the policy should be to declare a time frame and a maximum barrier to interstate sale of power. This means that an import duty (and an export duty) should be the basis of restricting interstate transfer of power- not grid capacity per se. The base for the duty both import and export can be as follows:?? When the power is supplied (contracted and deemed to have been supplied) from a state system with a market in bulk power then the import duty is on the price prevailing at that time. Obviously, measurement of power by the hour at the relevant point on the grid would be necessary.?? Where the market is not developed then the contract price for power between the two parties across the state would be basis for levy of import duty. Cost plus has typically led to regulatory capture and generally higher prices and inefficiencies unless accompanied by rather special conditions. Cost plus (rate of return) assumes that some central body (the regulator) knows best and its behaviour is predictable and such as to result in all possible economies including those in the manner of capacity addition can be realised. However incentive regulation is particularly suitable to India today. Essentially it can be very light, reduce regulatory risk considerably, and be very inexpensive and quickly be put in place. And (with safeguards) it brings about large incentives on the part of the regulated to reduce costs. The question of what return is to be given to central power utilities is very important. Prices (whether determined through the market, or through incentive price regulation) would have to be such as to give an expected return on total capital employed that would allow CPSUs (and others) to go the market for both debt and equity. Moreover, there is little doubt that costing has to be on replacement costs basis at the margin, rather than on historical cost as is the case today. 4.4 Towards a Framework for Transmission Tariffs 10 Transmission charges ought to be viewed as consisting of three components 10 Prof. Sebastian Morris, Towards a Tariff Policy for Central Power Sector Utilities (CPSUs) (Part I) 19

20 ?? Connection charges?? Line loss charges?? Congestion charges The first is an access charge to the network and the second is a charge for actually using the network. The third is not really a use charge but a `rent' that reflects the scarcity value of portions of the network. These should be made nearly symmetric between purchases and sellers of power. Line loss charges are essentially to recover the cost of operations and need to be proportional to the use of the grid. It would have to proportional to the energy drawn or fed to the grid times the notional distance that the current travels. Notional distances can be worked out given the grid geometry and simulations of the current flow patterns. Congestion charges cannot be treated as earnings of the regulated transmission entity. Thus with connection and line loss charges the utility would have to earn the stipulated return if it performs as anticipated. Congestion charges would have to be levied only on those suppliers and buyers who come out as being the cause of the congestion given their contracted schedule of power supplies and purchases. 5. Tariff Issues 5.1 Current Tariff System Bulk Purchase and Sales Order The Bulk Purchase and Sales Agreements (BPSA) of the NTPC with the State Electricity Boards allowed NTPC easier norms than optimal and created disincentives that resulted in NTPC with usually the lowest unit variable cost, being denied the high Plant Load factor (PLF) it is capable of achieving. Thus off-peak the BPSAs were such as to result in violation of merit order lowering the PLFs of NTPC stations. Similarly they allowed NTPC only a return of 12% on equity when even the average different cost to the prime borrower was higher. At the bulk supply level, electricity that is traded is either generated 20

21 by NTPC, or is surplus from SEBs. Hence NTPC wields a great deal of market power at this level K.P Rao Committee Recommendations According to KPRC report the tariff structure for bulk electricity generation consists of 1) a fixed charge and 2) a variable charge. The fixed charge consists of interest payments on debt, return on equity (ROE), depreciations, fixed operations and maintenance (O&M) charges, interest on working capital, and taxes. Fuel cost essentially consists of the variable charges. Calculation of various components of the fixed and variable charges is based on certain normative parameters which have to reevaluated with time. The revised norm for ROE e.g. was from 12% to 16% at 68.49% of the PLF. Furthermore KPRC report recommends that power plants be entitled to incentives at the rate of 1 paisa per kwh above the normative PLF of %. Currently NTPC tariffs are being determined in accordance with the KPRC report Current Mechanism of Transmission Pricing 11 The basic elements of transmission tariff are as below: i. Interest on loan capital ii. Depreciation: Depreciation is calculated as per the norms of laid down by the Central Electricity Regulatory Commission (CERC) from time to time. iii. Operation and Maintenance (O and M) Expenditure: O and M charges are 1.5% of the actual expenditure at the time of commissioning of the transmission line in the plain area 2% of the actual expenditure at the time of commissioning of the transmission system in the hilly area. These charges are 11 Puneet Chitkara, Rajiv Shekhar, Prem K. Kalra, Inter-state transmission of electricity: lessons from the northern regional grid collapse 21

22 escalated every year considering 60% weightage to the rise in wholesale price index and 40% weightage to the rise in consumer price index. iv. For the existing transmission system, the equity and loan component of the transmission systems commissioned is notionally divided 50:50 on the book value of the transmission system. The 50% of the book value of the transmission system is deemed as equity for the computation of tariff. 16% return on equity is a component of the fixed charges. v. Interest on Working Capital: working capital consists of O and M expenses for one month, maintenance spares at a normative rate of 1% of the capital cost, receivables equivalent to two months average billing calculated on normative availability level. vi. Tax on the following income streams: a) The 16% return on equity b) The extra rupee liability on account of foreign exchange variation in computing the return on equity not exceeding 16% in the currency of the subscribed capital c) The amount of grossed up Income Tax liability that is, payable and actually paid by POWERGRID, under income streams at (a) and (b) above, relating to Power Transmission Activity. In addition to these fixed charges, PGCIL is entitled to incentives if the availability of the transmission system is certified to be above 95%. Incentive is applicable at the rate of one- percent return on equity for each percentage point increase in availability. Disadvantages: 22

23 i. This is a traditional cost-plus kind of a tariff determination mechanism. Pure costplus regulatory regimes are best suited to environments with high cost uncertainty. Since Transmission Business in India is a regulated monopoly and is under government control, these uncertainties are reduced considerable, though not eliminated. In such conditions sliding scale mechanisms (combinations of cost plus and price cap mechanisms) should be ideally used. ii. These charges are allocated among the beneficiary states (in a particular region) in proportion of the energy drawn by them from the regional grid. This does not give the users an idea about the extent of resource usage and hence does not provide signals for efficient resource utilization. Moreover, there are certain resources in a region, which are not utilized for transmitting power for some of the states in a region. Such resources, however, are pooled together for the calculation of fixed charges. iii. Calculation of Availability for the transmission system requires the available time of each line and SVC equipment to be weighted by its rated capacity or Surge Impedence Loading (SIL) in case of AC transmission lines. Hence, even if a line requires being partially loaded due to some failure, its availability will still be 100%. Since the availability is system based, some states may have to pay towards incentives, even if specific equipment at the interface with that state is not available. iv. This tariff mechanism neither provides any incentive for optimal capacity expansion in transmission or for capacity expansion in generation. v. This mechanism does not provide incentive for optimal capital structuring. vi. There is no economic basis of load shedding. 23

24 vii. Total regional losses are calculated at the end of the month and allocated among the beneficiary states in proportion of their energy drawls. Hence there is no incentive mechanism which forces the beneficiary states to choose between setting its own generating station or drawing from the grid. viii. In the case of inter-regional transactions, the transmission charges for inter-regional assets are shared on 50:50 basis by the two contiguous regions. Some states in a particular region may have to pay even if they do not benefit from such transactions. ix. According to the order of CERC on petition no. 86/2000 dated 8 th December 2000, the states (in case of wheeling of power through state utility system) should ideally agree on wheeling charges. If the two parties are not able to reach, an agreement the calculation is based contract path method or the verifiable opportunity cost of the wheeling utility, whichever is higher. The contract path, however may not be the actual path of power transmission. Though it is well recognized that tracing of flows may be quite involved, the opportunity cost criteria may be enforced for such transactions. This is because wheeling charges should provide incentives to build new lines and expand capacity when necessary. Wheeling charges should reflect system reliability costs. Power system reliability and security must be preserved Determination of Norms for inter-state Transmission Tariff 12 - CERC Order The provisions for sharing of charges for inter regional transmission of power are contained in Government of India, Ministry of Power's Notification dated 16 th

25 December, 1997 as amended vide Notification dated 3 rd March, The relevant provisions are extracted below:- (i) In case of firm power exchange the monthly transmission charges shall be shared in the following manner: a) One-third by beneficiaries of one region; b) One-third by beneficiaries of other region; c) Remaining one-third as per use i.e. the beneficiaries of the importing region which have received power as per the commitment. (ii) In case of non-firm power exchange the notification stipulates sharing of monthly transmission charges in the ratio of 50:50 between the contiguous regions. The "firm power exchange" and "non-firm power exchange" are defined as under:-?? 'Firm Power Exchange' means the uninterruptible transfer of powers in an interstate/inter regional transmission line including the HVDC system, except in case of force- majeure, non payment and outage of transmission lines and / or generations units (in which allocations are made) and is committed by agreement, and / or understanding by selling, buying and transmission utilities for a minimum period of one month, unless a shorter period is specifically agreed to. The firm power exchange could be made between two regions out of unallocated quota / power surrendered by State(s) of one region out of their share in Central Stations or could be the power of State Electricity Boards for bilateral exchange between State (s) of one regions to State(s) of another region.?? 'Non-firm Power Exchange' means any power transfer in an inter-state / interregional transmission lines, (including the HVDC System) which is not covered in the firm power exchange as defined in (vi) above. Such exchange of power between the states or between the regions could be scheduled one day in advance or in real time operation during the course of the day". Various views had been expressed regarding the sharing of the transmission charges. Some have argued for equal sharing i.e. in the ratio of 50 : 50 by the regions involved in inter-regional exchange of power since, according to them, the assets used are built for 25

26 transmission of power in either direction. Some others have suggested that only the importing region should pay the entire transmission charges Evaluation of the alternatives suggested This issue has to be examined in the light of the concepts underlying the planning and expansion of transmission system. The basic purpose of inter-regional links is to facilitate flow of power from surplus to shortage areas across the regions. In case, the transmission tariff for such transactions are fully loaded on the importing utilities, the total power flow on these lines may get limited and transmission charges per unit for such transactions would become high. This may discourage exchange of power from surplus to shortage areas. A line which is used for import by a utility during a certain period may be used by the same utility for export of power under some other condition. The differentiation between firm and non-firm power transactions would also be contentious. The arrangement of charging one-third of transmission charges as per use may also discourage additional investment in inter-regional lines. Also the fact that inter-regional assets are established for mutual benefit of both the regions by way of rendering timely assistance of power as per requirement, improvement in reliability and quality of supply etc. cannot be overlooked. Further, the establishment of reliable inter-regional links would facilitate formation of national grid. In view of this CERC said that till such time market based conditions drive such inter-regional transactions, the arrangement of sharing of the transmission charges for inter-regional assets on 50:50 basis by the two contiguous regions irrespective of the nature of power flow would be a better option and shall be followed. 5.2 Availability Based Tariff Problems with the present system In order to understand the need for the emergence of the ABT it is important to understand the present problems in grid operation. Some of the problems are: 26

27 (a) Low frequency during peak load hours, with frequency going down to Hz for many hours every day. (b).high frequency during off peak hours, with frequency going up to 50.5 to 51 Hz for many hours every day. (c).rapid and wide changes in frequency 1 Hz change in 5 to 10 minutes, for many hours every day (d). Very frequent grid disturbances, causing tripping of generating stations, interruption of supply to large blocks of consumers, and disintegration of the regional grids. These wide frequency fluctuations tend to cause serious damages both at the generation and load ends Experts consider these fluctuations unacceptable all over the world. In India though the problems have been identified, no progress has been made in bringing them under control. One important reason for this has been the absence of direct incentives or penalties for the individual utilities responsible for the problems. There has also been a general reluctance among all concerned to introduce financial incentives or disincentives. Resolution of these problems requires: a).maximisation of generation during peak load hours and load curtailment equal to the deficit in generation. b) Backing down of generation to match the system load reduction during off peak hours, keeping the merit order of generation in view." These problems and their remedies have to be seen in the light of the present system of tariff. The present bulk tariff system does recognise the total cost as consisting of two elements, namely capacity cost and energy cost. In the present system, both the fixed cost and the variable cost of a generating station, are charged to the beneficiaries in proportion to the actual energy drawn by them during that period Proposed ABT System In the proposed ABT system, the fixed charge for a period is to be pro-rated among the beneficiaries in the ratio of their entitlement for power from that station. The logic is that, 27