TERMS OF REFERENCE FOR ELECTRICITY COST OF SERVICE STUDY AND DETERMINATION OF ECONOMIC COST BASED TARIFFS

Transcription

1 TERMS OF REFERENCE FOR ELECTRICITY COST OF SERVICE STUDY AND DETERMINATION OF ECONOMIC COST BASED TARIFFS MARCH 2016

2 1.0 BACKGROUND 1.1 In 2006, the Energy Regulation Board (ERB) conducted a Cost of Service Study, which was intended to determine the cost ZESCO Limited (ZESCO) incurred in generating, transmitting, distributing and supplying power to its various customers as well as to provide the basis of gradual adjustment of electricity prices towards cost reflective levels. 1.2 The 2006 study focused primarily on ZESCO who was at that time the producer and supplier of about 96% of the electricity consumed in the country. However, since then, significant changes have taken place in the Electricity Sector in Zambia. There have been new entrants into the sector, such as Independent Power Producers (IPPs), who have invested in power generation; much higher cost generation sources are being developed by ZESCO and others. Since the lowest cost resources have already been developed; significant new investments have been made to reinforce and expand the transmission and distribution infrastructure to improve and expand supply to existing and new areas of the country. As a result, the cost of electricity production and supply has risen significantly. Further, in order to diversify the generation mix, there is also growing emphasis on developing the renewable energy resources of the country. However, current electricity prices are well below both economic and financial costs. It has, therefore, become imperative that a new electricity cost of service study be undertaken, not only to capture developments since the last study was undertaken, but also to be forward looking in consideration of the forecast electricity demand in Zambia over the longterm, and the future expansion of the power supply infrastructure to meet the forecast future demand in the least-cost manner. The ERB, therefore, wishes to engage the services of an experienced international consulting firm to undertake the cost of-service study and the design of economic cost reflective tariffs. 2.0 OBJECTIVES OF THE STUDY 2.1 The objectives of the study are threefold: firstly, to set electricity tariffs to promote economic efficiency of production and consumption and ensure financial viability of the electricity sector, while taking into account social and equity considerations; secondly to review the current ERB model used for tariff determination and develop a new in-house model for use by ERB during future regulatory review of tariff proposals and tariff determination; and, thirdly, to provide a basis of strategy formulation for the gradual transition from existing financial-cost based tariffs to economic cost -based tariffs, setting of targeted life-line tariffs and associated support mechanism while at the same time maintaining the household consumer category level economic-cost based tariff. 2

3 2.2 To achieve the above objectives, the study should: a) Determine the long-term least cost generation, transmission, distribution and supply 1 programs to meet the forecasted electricity demand in Zambia over the medium to longterm; b) Estimate the long-run marginal cost ( LRMC) of generation, the average incremental cost (AIC) of transmission, and AIC of distribution and supply; c) Determine the economic cost of supply by voltage level, from generation through to the supply level; d) Design economic cost-based tariffs for structure and levels that reflect economic cost of service by consumer category; e) Determine the appropriate tariff structures, and the level of the social life-line tariff; f) propose a comprehensive strategy for transition from financial to economic based tariffs; and g) Prepare a roll out plan for communicating the results of the study, and the proposed strategy of implementation to all stakeholders. 3.0 SCOPE OF THE STUDY 3.1 The scope of the study comprises the following Tasks: 3.2 TASK 1 FIRST FIELD VISIT FOR STUDY LAUNCH AND DATA COLLECTION About 2 weeks after contract signature, the Consultant shall undertake a field mission to Zambia for a stay of about 14 days for the launching of the study, and data gathering. During this period, ERB will introduce the Consultant to the key stakeholders, and the various agencies from whom data and information gathering will be done by the Consultant. The Consultant shall meet with the key stakeholders as advised by ERB to present to them its general approach to carrying out the study as per the Contract. The Study Management Team (SMT), established for the purpose, shall assist and facilitate the data gathering by the Consultant. One month after the field visit, the Consultant shall submit an Inception Report to the ERB. Two weeks after submitting the Inception Report to ERB, the Consultant shall undertake a second visit to Zambia for a stay of about 4 days to present the Inception Report, and to collect any additional information that is required for completeness of the information. 1 Distribution and Supply means down to 220 Volts 3

4 3.3 TASK 2 REVIEW OF STRUCTURE AND CONDUCT OF THE POWER SECTOR INCLUDING THE LEGAL AND REGULATORY FRAMEWORK Undertake a detailed review of the structure and conduct of the power sector including the existing legal and regulatory framework. The review of the legal and regulatory framework should focus on identifying inconsistencies, including the institutional arrangements and weaknesses thereof that pose constraints to the determination and of setting electricity tariffs in accordance with the Zambia Energy Policy Document, and to provide recommendations for addressing the inconsistencies. Prepare a detailed report on the findings from the review and the recommendations. 3.4 TASK 3 - ELECTRICITY DEMAND FORECASTS Review the current electricity demand forecasts under the three scenarios high, medium, and low, prepared by ZESCO, and prepare revised demand forecasts under the three scenarios for the next 20 years up to 2037 for both maximum demand, and energy (all customer categories). The consultant shall prepare a detailed Load Forecast Report stating the findings from the review of the existing load forecasts, the underlying assumptions of the revised forecasts and the methodological approaches utilized for the forecasts. 3.5 TASK 4 - DETERMINATION OF MEDIUM TO LONG-TERM DEVELOPMENT PROGRAMS Based on the Base-case scenario electricity demand forecast from Task 3, determine the long-term least-cost expansion programs for generation, transmission, distribution and supply to meet the projected maximum demand over the next 20 years up to A dynamic optimization computer programming technique should be applied for the determination of the least-cost generation expansion program. Since the Zambian power system is integrated into the Southern African Power Pool, the generation expansion analysis should take into account potential generation developments in the pool over the planning horizon that could impact on the supply situation in Zambia, as well as the integration of renewable energy options in determining the least-cost expansion program for Zambia. In formulating the transmission development program, account should be taken of developments that would enable potential economic bilateral imports from the Pool. The Consultant shall prepare three separate detailed reports as follows: a) The long-term least-cost generation expansion program; b) The transmission expansion program; and c) The distribution and supply expansion program For each of the reports, the input data used and the explanatory notes, and the methodological approach underlying the analysis should be provided. 4

5 3.6 TASK 5 DETERMINATION OF ECONOMIC COST OF SUPPLY AND STRUCTURE AND LEVELS OF TARIFFS From outputs of Task 4, determine: a) the LRMC of generation, the AIC of transmission, and the AIC of distribution and supply of unit of capacity addition to the power system at the peak period by main voltage levels; b) the SRMC (energy and other variable O&M) at generation, transmission, and at distribution and supply ; and c) the economic cost of supply, expressed as (a) capacity cost ( cost/kw/year)or /and fixed charge per month, (b) energy and other variable O&M cost (cost/kwh), and (c) as a composite of (a) and (b) cost/kwh at generation, at transmission, at distribution and supply From the foregoing, determine for each main class of consumer category, using the applicable characteristics, the appropriate structure and level of tariff for each consumer category/class reflecting the economic cost of supply to the category. Should information on consumer characteristics not be available from ZESCO the Consultant is required, using a desk review, to draw from experience in other countries with fairly similar power system as that of Zambia, and with similar consumer classification and patterns of consumption. The Consultant shall prepare and issue a detailed report on Economic Cost of Supply and Consumer Tariff Structures and Levels. The report must provide details of assumptions, analysis, and the methodological approaches used. 3.7 TASK 6 - LIFE-LINE TARIFF MECHANISM, ANALYSIS OF EXISTING TARIFFS, AND ADJUSTMENT TO ECONOMIC BASED TARIFFS Based on the output of Task 5, and utilizing available information in Zambia on poor household uses of electricity for basic needs from consumer household surveys, and/or drawing on international experience, determine the level of electricity requirement for poor households in Zambia for basic needs, clearly defining what the basic needs are, the linkage between household incomes, and expenditures on electricity consumption, and propose a tariff level for poor household consumers, including the appropriate quantity of electricity usage for basic needs. Determine the economic cost differential of the proposed life-line tariff and the economic cost of supply to the household consumer category, and provide recommendations on alternative options by which the life-line tariff subsidy could be administered, and the preferred option Review the current tariffs of ZESCO by consumer category in terms of structure and levels in relation to the proposed economic cost-based tariffs derived under Task 5. Propose 5

6 modifications to the existing structures to reflect the structures of economic cost-based tariffs. Considering the differentials with the economic cost-based tariffs, the Consultant shall propose a trajectory of gradual increases to reach the levels of economic-cost based tariffs within a realistic time frame. The Consultant shall issue a Task 6 report. 3.8 TASK 7 -REVIEW OF FINANCIAL PERFORMANCE OF ZESCO AND PREPARATION OF PROJECTIONS Carry out a detailed review of ZESCO s cost structure benchmarking with cost structure of efficient utilities of similar technical structure as ZESCO, indicating areas of improvements to accepted efficient utility performance standards, and recommend a realistic time frame for reaching the performance standards. Taking into consideration the recommended efficiency improvements and the regulatory requirements of ERB, define a basis of financial viability for ZESCO. Provide a forecast of financial performance of ZESCO over the specified time-frame of the tariff adjustments to demonstrate the impacts of the adjustments on the financial performance of ZESCO. The forecast should take into consideration the proposed expansion programs of the supply infrastructure of ZESCO over the period of the forecast, as well as the regulatory requirements of ERB. The Consultant shall issue a Task 7 report. 3.9 TASK 8- TRANSMISSION WHEELING CHARGES Based on the transmission-level cost of service derived under Task 5, provide a methodology for the determination of transmission wheeling charges, taking into account timeof-day use of the access, and clearly stating the underlying principles, definition of the elements of applicable formulae, and the assumptions. Provide examples drawn from international experience and best practices in situations of third party transmission access, and how issues of congestion and of discriminatory access have been addressed. Further, the Consultant shall provide recommendations to foster efficient utilization of the network TASK 9 ASSESSMENT OF ERB APPROACH TO REVIEW OF TARIFF APPLICATIONS Currently, tariff application to ERB is based on revenue requirement. The Consultant shall undertake a review of this approach in relation to alternative best practice approaches to regulatory review of tariff proposals and tariff determination. The review should focus, among other things, on the following: a) how targeted operational improvements should be considered; b) the incentive structure to promote compliance with regulatory requirements; c) the composition of the regulatory asset-base and its appropriateness based on accepted utility practices; 6

7 d) the current mandated return on the regulatory asset-base, and its implications for the financial viability of ZESCO; and e) Develop an in-house model for use by ERB during regulatory review of tariff proposals and tariff determination (Cost and Income model and Pricing Model) TASK 10 TARIFF ADJUSTMENT ROLL-OUT STRATEGIES The Consultant shall provide a comprehensive roll-out plan that outlines alternative strategies for gradual adjustments (migration path) in existing tariffs ultimately to the economic cost of service of each consumer category. Under this task the Consultant should comment on the applicability of a multi-year tariff regime, as well as automatic cost pass through mechanism. Further, a separate recommendation should be provided on the relative adjustment of the social life-line tariff and the administration of the subsidy in this regard. The recommendations should cover strategies and enforcement mechanisms such as the introduction of a system of penalties to prevent abuse of the life-line by consumers outside the targeted group of households, and a draft of required provision in the Regulatory Act should be provided, as well as the responsibility for the administration of the penalties TASK 11 TRAINING The Consultant shall design and implement a five-day training program to provide training for a select group of technical staff of ERB, ZESCO and the Department of Energy on load forecasting, the generation system expansion model and its application, preparation of leastcost transmission and distribution expansion plans, and the use of computerized models for the estimation of LRMC of generation and AIC of transmission and distribution, SRMC, and tariff design, including the use of consumer characteristics The training shall be conducted in Zambia. It is expected that the close collaboration between the consultant s experts and the local counterpart staff in the various professional disciplines shall target to enhance transfer of knowhow to the local counterpart staff. The Consultant shall design a training program for the purpose TASK 12 -WORKSHOPS The Consultant shall deliver 4 Workshops at critical stages of the assignment as follows: Workshop 1 - presentation of the Inception Report on the findings and recommendations from the first field visit, and setting the stage and tone for the conduct of the assignment. Workshop 2 to present and discuss the reports of Tasks 2 to 6. 7

8 Workshop 3 to present and discuss the reports of Tasks 7 to 10 with special focus on the design and use of the developed tariff determination models (Cost & Income and Pricing Models). Workshop 4- to present and discuss the final Draft Report to the Steering Committee The purpose of the workshops is to solicit comments from the key stakeholders on the results at the various stages of the study as accomplished. It is also to facilitate the dissemination of the final outcome of the assignment to the cross-section of stakeholders and interested parties at the later stage DRAFT REPORT AND FINAL WORKSHOP: The Consultant shall issue the Draft Report consolidating the reports issued at the various stages of the study, and incorporating the comments received from the earlier two workshops. The Report should include an Executive Summary of not more than 10 pages, highlighting the main recommendations and conclusions of the study; the Main Text of detailed analyses, presentation of results, and recommendations ; and Annexes comprising data inputs and sources, underlying assumptions used, details of analyses and computations, and various applied methodologies, and results The draft report will serve as basis of the final Workshop in Lusaka. The Consultant shall make presentations to the Study Steering Committee (SST) following the stakeholder Workshop. A Draft Final Report, incorporating the comments of the Stakeholders from the Workshop and the SST, shall be submitted to ERB. Following review and acceptance of the Draft Final Report, the Final Report shall be issued to bring the assignment to conclusion. 4.0 DELIVERABLES 4.1 All reports by the Consultant shall be submitted to ERB, and, in the form and number of copies as designated. ERB, as the responsible party for the supervision of the implementation of the study, shall coordinate comments from the various stakeholders, and submit comments to the Consultant no later than 2 weeks after the submission of a report to ERB by the Consultant. Each report, as per task order, shall be issued in 5 hard copies and, one electronic copy The following are the specific deliverables: a) An Inception Report; b) A report on the Review of Structure and Conduct of the Power Sector, including the Legal and Regulatory Framework (Task 2); c) A report on long-term Electricity Demand Forecast Report (Task 3); d) A report on Medium-Long-term Least-cost Generation, Transmission, and Distribution and Supply Expansion Programs ( Task 4); 8

9 e) A report on Economic Cost of Supply and Structure and Levels of Tariffs ( Task 5) f) A report on Life-line Tariff Mechanism, Existing Tariffs and Economic Cost-based Tariffs (Task 6); g) A Report on ZESCO financial performance, and Medium -term Outlook of financial performance ( Task 7); h) A report on Transmission Wheeling Charges ( Task 8) i) A report on ERB Tariff Application Review Approach ( Task 9) and Tariff Roll-out Strategies ( Task 10); j) A report on Training and Workshops; k) Draft Report on Electricity Cost of Service and Economic Cost-based Tariffs; l) An excel based tariff determination model and Cost and Income Model together with accompanying instruction manuals; and m) Final Report Consultant shall propose a time-table of the deliverables taking into account the indicated allowed review period of the reports by ERB and the stakeholders, and the completion of the assignment within the stipulated duration of no longer than 12 calendar months (365 days). 5.0 DURATION OF ASSIGNMENT AND LEVEL OF EFFORT 5.1 The duration of the assignment shall not exceed 12 calendar months, and with a level of effort of 28.5 person-months (570 person-days) 6.0 CONTRACT TYPE 6.1 The Contract for the assignment will be a Lump-sum type contract. The Lump-sum will cover: a) professional fees of consultant personnel, and home office support; b) round-trip international travel, including associated incidental expenses; ; c) hotel accommodation and subsistence during travel for assignment; d) hotel accommodation and subsistence in Zambia; e) In-country transportation and communication; and f) Reporting and other secretarial services. 6.2 The Lump-sum excludes all Zambian local taxes applicable to such consultancy services. The Consultant is advised to familiarised itself with the prevailing applicable local taxes for discussion with ERB as to tax responsibility during contract negotiations. 7.0 REMUNERATION 7.1 Payments to the consultant will be linked to the deliverables as follows, subject to acceptance by ERB of each designated deliverable: 9

10 a) 10 % of Lump-sum for the Inception Report; b) 10 % of lump-sum for Task 3 report; c) 20% of lump-sum for Tasks 4 and 5 reports; d) 10% of lump-sum for Task 6 report; e) 15% of lump-sum for Tasks 7,8, 9 and 10 reports f) 10% for completion of training and training report g) 15% of lump-sum for Draft report h) 10% of lump-sum for Final Report 8.0 ORGANIZATION AND MANAGEMENT OF THE STUDY 8.1 ERB will have the overall responsibility for the management and supervision of the study. ERB will provide office space with basic office furniture for the Consultant, and will be responsible for organization of the workshops, provision of conference room and facilities for the workshops, including the catering facilities at the workshop, and the invitations to participants. ERB will set up a Study Management Team (SMT) of about 5 persons, comprising staff of ERB in the key professional streams as that of the key consultant personnel. The SMT will work on day-to-day basis with the Consultant, be the link between the Consultant and the other stakeholders to facilitate the gathering of information and data for the study. It will also be responsible for the consolidation of the comments of stakeholders on the various reports issued by the Consultant, and submission of same to the Consultant. The SMT will be headed by a Study Manager at the level of a Section Manager in ERB. 8.2 A Study Technical Committee (STC), comprising members of the SMT, staff of ZESCO, CEC and staff of Department of Energy will be set up to work with the consultant s key personnel on load forecasting, preparation of generation, transmission, distribution and supply expansion programs, determination of economic cost of supply and the design of economic costbased tariffs, including the use of the computer-based programs under the training program for transfer of know-how. A member of the STC will be nominated to head the STC. Members will assist in soliciting comments on reports submitted by the Consultant from their respective entities. 8.3 A Study Steering Committee (SST) will be set up to be informed and monitor the progress of the study. It will comprise the Permanent Secretaries of the Ministry of Finance and Ministry of Energy and Water, Chairperson of the ERB, Managing Director for ZESCO, the Industrial Development Corporation (IDC), a representative of the Consumers Association, and a representative of the Federation of Zambia Industries. The purpose of the SST is to bring awareness of the study results to the key stakeholders at an early stage and at various key stages of the study with the view to creating understanding of the study outputs to facilitate dissemination of the recommendations and implementation of the study recommendations. The Executive Director of ERB will report to the SST. The Consultant shall make a presentation to the SST of the overall study results on the basis of the Draft Report as described above. 10

11 9.0 QUALIFICATIONS AND EXPERIENCE OF THE CONSULTANT (FIRM) 9.1 The consulting firm should have: a) minimum of 15 years of experience in the power industry, and at least 10 years of experience in power system planning, electricity cost of service studies, tariff analysis, determination and design, and electricity pricing; b) demonstrated experience of having carried out 2 successfully completed similar assignments in the last 5 years; c) demonstrated experience relevant to all aspects of the assignment; and d) demonstrated success in building consensus among stakeholders and in achieving acceptance and recognition of the benefits of cost-effective pricing of electricity 9.2 The consultant s (the Firm s) core team of experts should comprise at least the following, each with the requisite academic qualifications of at least a Master s Degree in the professional field, and a minimum of 15 years of experience for the Team Leader and 10 years of experience for the rest of the core team members in the power sector, and at least 6 years of experience in the various aspects relevant to the study. a) Team Leader b) Power Economist and Electricity Pricing Specialist c) Power System Planning Specialist d) Power Engineer Generation e) Transmission and Distribution Engineer f) Financial Analyst g) Utility Accountant h) Power System Planning Data and Modelling Analyst i) Regulatory Lawyer j) Secretarial Support 11