NIGERIAN ELECTRICITY REGULATORY COMMISSION. Presentation at the ELECTRIC POWER INVESTORS FORUM

Transcription

1 NIGERIAN ELECTRICITY REGULATORY COMMISSION Tariff Design and Regulation Presentation at the ELECTRIC POWER INVESTORS FORUM February 2011

2 OUTLINE Establishment and Functions of NERC MYTO as an Incentive Based Regulation Market Development and the extent of price regulation Pricing Framework for generation Pricing framework for transmission and distribution Asset valuation methodology Incentives provided to Operators Minor and Major Review Processes Other tariffs Risk analysis and Mitigants 2

3 Establishment and Functions of NERC Established and inaugurated in 2005 under EPSRA Independent regulator driving sector reform through: Creating and preserving efficient market structures Maximise access across Nigeria to distribution networks Ensure safe, secure, reliable, qualitative and adequate production and supply of electricity to all consumers Ensure regulation is fair and balanced for licensees, consumers, investors and other stakeholders Ensure fair tariffs to consumers sufficient to allow reasonable earnings for efficient operations and financing operations 3

4 Incentive-Based Regulation Incentive or performance-based regulation(or CPI-X) Economic efficiency through incentivising the industry using financial incentives and disincentives Desired behaviour include lower costs, improved service and more rational allocation of risks and rewards The regulator sets prices or revenues at the beginning of the regulatory control period and adjust these prices each year There are generally three forms of incentive based regulation: revenue cap; weighted average price cap; or some combination of the above 4

5 Profit and Performance-Based Rate Regulation = PQ-Cx(Q)-Cn(Q) = Total Profits P= Unit Price Q= Quantity Sold Cx= Exogenous Costs Cn= Endogenous Costs Method Price Cap P Price Cap With passthrough cost Revenue Cap Rateof Return Covered Ignored Q, Cx, Cn P, Cx Q,Cn PQ PQ,Cx, Cn Cx, Cn - Electricity on Demand 5

6 Activities subject to Tariff Regulation S. 76(1), EPSRA provides tariff regulation for: generation and trading transmission, distribution and system operation MYTO is the tariff vehicle/methodology: T & D uses a revenue requirement approach determined by building blocks methodology while Generation prices derived via Long Run Marginal Cost method to produce a proxy for market price. 6

7 Market Development and Price Regulation Market Stages Transition Stage (1st 5 years) Medium Stage (years 5 to 10) Long Term Generation Regulated prices using Wholesale contracts based on life cycle costs of an efficient new entrant Part unregulated (based on bilateral contracts) Part regulated based on Wholesale contracts (matches the regulated load) Unregulated (based on bilateral contracts) Transmission Regulated prices using building blocks Regulated prices using building blocks Regulated prices using building blocks Distribution Regulated prices using building blocks Regulated prices using building blocks Retailing Regulated prices using building blocks Regulated prices for the regulated load Unregulated prices for the contestable load Unregulated (all load is contestable) 7

8 Legal Basis for Tariff Regulation S. 76(2) requires an appropriate tariff methodology that allows recovery of efficient costs plus a reasonable rate of return gives incentives to improve efficiency and quality sends economically efficient signals to customers regarding cost of consumption on the electricity system phases out or substantially reduces cross-subsidies NERC requires that its preferred tariff methodology produces fair outcomes encourages efficiency and investment into the electricity system; and is simple, transparent and avoids excessive regulatory costs 8

9 MYTO Methodology Product of extensive consultation with industry, consumers, organised labour and Government MYTO provides a 15-year tariff path with annual minor reviews for inflation, exchange rates and gas prices and major reviews every 5 years for all other assumptions/input Using the building block approach to determine cost of providing service and reasonable return to capital invested Incentive-based regulation focuses on our paramount need to fundamentally improve performance in all sectors of the industry Licensees are incentivised by MYTO to outdo projected performance levels built into the tariff path. 9

10 The MYTO Development Process Input to the tariff: forecasts of load, capacity, fuel costs, investment, levels of losses, customer numbers, O & M costs Generation costs, life cycle cost methodology Transmission tariff Building blocks Distribution & retail tariff Building Blocks blocks Final retail tariff To consumers 10

11 Pricing framework for Generation Wholesale contract prices will be based on the most economically efficient new entrant, currently OCGT All generators (existing and new), regardless of age will be paid this wholesale contract price, as an incentive to Successor Gencos IPPs holding PPAs will continue to be paid according to their PPAs Wholesale contracts will be securitized under the market securitization process and will novate to standard bilateral contracts Wholesale price are set in two parts: Capacity and Energy charges floating with inflation and exchange rates 11

12 MYTO Assumptions for New Entrant Plant Assumption Units Value Comments Capacity MW 250 Gross capacity of the plant Life of plant years 20 Auxiliary requirements % 2 Capacity factor % 80 Station Marginal Loss Factor(MFL) 0.92 The life over which costs are recovered Internal energy use, difference between gross and sent out capacity Average output divided by sent out capacity Reflects network losses incurred at the point of injection to transmission, average 8% Construction period years 3 Completed and commissioned in 36 months Sent out efficiency % 32 The conversion efficiency of gas into electricity including internal energy use Fixed O & M N/MW/Yr 2,400,000 12

13 Financial Assumptions for NESI Assumption Units Value Nominal Risk-Free Rate % 16.2 Nominal Cost of Debt % 25 Inflation Rate % 14 Exchange Rate N/US $ 1% above CBN Rate Real pre- tax WACC % 11% Electricity on Demand 13

14 Pricing Framework for T & D NERC adopts a building blocks approach Provides benefits of both price cap and incentive-based regulation. Simple accounting framework to aggregate industry costs Building blocks are Return on Capital Return of Capital Operating Costs Current approach provides regulated prices for each sector As industry develops and becomes more competitive direct tariff regulation will reduce 14

15 WHY BUILDING BLOCKS NESI has restructured into 18 companies, most to be privatised Each has different financing, rates of return and cost structures and accounting methods Building blocks permit NERC to apply government policy and provide incentives for new investment and efficiency improvements

16 FRAMEWORK FOR BUILDING BLOCKS VALUES In determining a value for each building block, NERC assumes: The initial value of transmission and distribution capital assets; The WACC to be achieved each year; A capex program for T & D developed from forecasted feasible growth; An appropriate method of depreciation; An efficient level of operating expenditure and overheads; and A rate of improvement in T & D losses

17 FINANCIAL ANALYSIS 2 building blocks are based on capex costofcapital,orrateofreturn;and a depreciation charge for declining capital value over time Assets depreciated over their economic life (technical life may be shortened by economic circumstances) Using ODRC valuation method, values are taken at current replacement cost and then depreciated over their age 17

18 Financial Analysis: WACC Blended cost of capital, aggregating returns to equity and debt, giving us a Weighted Average Cost of Capital(WACC) WACC recognises the different risk and return profiles peculiar to debt and equity capital WACC aggregates these returns in proportion costofdebtismoreorlessdirectlyobservable;but Equity returns need to be estimated NERC has adopted the widely-used Capital Asset Pricing Model (CAPM) Electricity on Demand 18

19 ASSET VALUATION METHODOLOGY NERC applies the following asset valuation methodology: Establish the purpose of the valuation, the extent of the assets to be valued, applicable valuation date and method of valuation Take inventory of assets Assess asset condition from data provided Establish probable service lives, and thus residual service lives of assets Establish residual values of the assets, if any, at end of service lives Pricing inventory based on the gross (present-day) replacement cost Determining re-valued depreciated replacement cost (net book value) in accordance with the appropriate formulae

20 TREATMENT OF DEPRECIATION ODRC used to calculate value TCN and Disco capital stock This value then depreciated each year to determine value of depreciation in the annual revenue requirement ODRC methodology involves: escalatingthecostofanassetfromtheyearofitspurchaseto the year of the tariff calculation at the applicable inflation rate optimising its capacity (i.e., assuming it is the size that is neededforthejobitisrequiredtodonow); apply depreciation over the economic life of the individual assets A depreciation schedule for regulatory purposes is applied to each asset The result reflects the remaining economic life of the asset

21 PREDICTING INVESTMENT REQUIREMENTS Capex projections for the next five years are based on existing and projected demand andthe needto buildt& D networks to improve coverage and quality of supply The following are considered: load-related expenditure: load growth, reinforcement; and non-load related expenditure, brought about by: Equipment becoming obsolete Maintenance cost becoming excessive Equipment becoming unreliable and spares are no longer obtainable Quality of service cost to meet minimum standards (at least 1% of gross replacement cost) Cost of immediate network rehabilitation

22 Transmission Use Of System Charge(TUOS) Transmission network users will pay for its use A connection charge for new generators: Generators would choose locations that minimise these charges A Transmission Use of System charge (TUOS) paid by distributor/retailers: chargedperunitofenergymeteredtothematthebulksupplypoints The TUOS charge is constructed using building blocks 22

23 Distribution and Retail Cost Profile Retail tariffs cover the following costs: Payment for electricity supplied into the distribution network TUOSchargeforMW/hdeliveredtobulksupplypoints Disco s cost of distributing through its network Retail costs: marketing, metering, billing and collection Capex for network reinforcements and new installations Overhead and administrative expenses 23

24 Methodology: Distribution and Retailing To project annual values for each of building block, NERC estimates: the initial value of distribution and retailing capital assets; WACCtobe achievedeachyear; capex developed from a forecast of feasible growth; an appropriate method of depreciation; an efficient level of operating expenditure and overheads; and improvement in distribution, billing and collection losses 24

25 End-User Tariffs in MYTO The MYTO model derives average electricity prices from tariffs based on cost generation and using building blocks for TCN and Discos(i.e., OPEX, return on capital and return of capital) The revenue requirement for the whole industry for a particular year is then divided by the forecasted sales where revenue is collected giving the average end-user tariff To avoid rate shock to consumers, part of the revenue is recovered from consumers, the Power Consumer Assistance Fund and FG subsidies over tariff period

26 Monitoring of Performance MYTO sets minimum capex expected from TCN and Discos Allowed revenue requirement based on the projected level of investment Operators must meet capex commitment aimed at meeting ATC&C Aggregate Technical, Commercial and Collection) losses Reports on work in progress and certificate of capital completion to be submitted quarterly 26

27 Incentives Provided to Operators MYTO incentivises outperforming projected performance built into the tariff path Operators keep gains available before the next major review Incentives available to operators under MYTO include: the capacity factor; internal power for use of station; sent out efficiency; higher level of technical and commercial losses(34%); cost of power, fuel, exchange and inflation risk eliminated through annual minor review; capacity payment for generators and fixed minimum charges for distributors 27

28 Major and Minor Reviews of MYTO MYTO ensures pass through of exchange rate, inflation and fuel price Wholesale price is reviewed annually whenever there are significant changes (+/- 5%) in these three variables Major review of the MYTO carried out every 5 years where all inputs (load growth, WACC, losses, fuel cost, etc, are reviewed and the Model updated accordingly 28

29 Tariffs for other fuel Sources NERC is developing feed-in tariffs for renewable and coal Our usual consultative process is currently ongoing and the key assumptions have been released for comments Upon conclusion, MYTO will be updated by incorporating the tariff for the different type of fuel sources 29

30 Major Risks Faced by the DISCOs RISK Collection Risk Power purchase risk Demand risk Operations cost risk MITIGANTS Sufficient capex for metering and collection equipment Two part tariff : Energy and Fixed/Minimum charges Power cost is a pass-through NERC honours all operative PPAs Tariff is based on a worst case scenario Opener when volume is below projection Cost reflective tariff required by Law Discos participate in the determination of efficient operating costs through stakeholder consultations Electricity on Demand 30

31 Major Risks Faced by the DISCOs..Cont.. RISK Capital cost risk Inflation risk Foreign exchange risk Regulatory risk MITIGANTS Real Rate of Return Rate of Return in line with international standards Taken care of in the annual minor review Taken care of in the annual minor review MYTO provides a 15-yearpath for price predictability NERC is firm and independent No arbitrary rule making Electricity on Demand 31

32 THANK YOU Contact us at: Adamawa Plaza, Plot 1099First Avenue, Off Shehu ShagariWay, Central Business District, Abuja Website: Electricity on Demand