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Generation Tariff Revision Proposal (2013-2016)
As per the Tariff Determination Regulation (Updated as of 14th July 2010),
Bhutan Electricity Act 2001
18 July 2013
Outline
Principles of TDR
Domestic Generation Tariff Trends (1986-2013)
Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff
Revision Proposal
Clarifications
Changes Proposed in 2013-16 Generation Tariff Revision Proposal
Cost of Supply Methodology
Proposed Generation Tariff for 2013-16
Principles of Tariff Determination Regulation (in accordance with Section 14.1 of the Electricity Act 2001)
TDR
Fairness to both service customers
and service providers
No unjust discrimination against service
providers or users
Reflect the actual cost of efficient
business operation
Conducive to efficiency
improvement in business
operation
Enhance efficient and adequate
supply to satisfy the domestic
demand
Transparency in the determination and presentation
of tariffs.
Domestic Generation Tariff Trends (1986-2013)
1986-1994
• CHPC Tariff Nu. 0.10/kWh
1994-2001
• CHPC Tariff Nu. 0.30/kWh
2001-2005
• CHPC Tariff Nu. 0.30/kWh
• KHPC Tariff Nu. 0.30/kWh
• BHPC Tariff Nu. 0.50/kWh
2005-2007
• CHPC Tariff Nu. 0.30/kWh, BHPC Energy Sold to CHPC
• KHPC Tariff Nu. 0.30/kWh
• THPA Energy Tariff 0.30/kWh
2007-2010
• Royalty Energy Tariff Nu. 0.30/kWh
• Non-royalty or Additional Energy Tariff Nu. 1.20/kWh
2010-2013
• Royalty Energy Tariff Nu. 0.13/kWh. From 2011, Royalty Energy Revenue did not accrue to Druk Green
• Non-royalty or Additional Energy Tariff Nu. 1.20/kWh
Particulars As per TDR/Tariff
Model
Druk Green 2010 Proposal
2010 Tariff Review Outcome.
Druk Green 2013 Proposal
1. Cost of Equity
12% 15%Effectively 6% , i.e. 12%on 50% of equity onlyciting the 60% grantand reasonable returnfrom export
15.5%
At par with normsin India
TDR Section 1.8 &Schedule C allowsrevision
2. Royalty EnergyProduction Cost
No provision
Production cost ofroyalty energyexcluding returnsneed to berecovered
No provisionallowed forrecovery ofproduction cost
Royalty energy tariffreduced from Nu.0.30 per kWh to Nu.0.13 per kWh and noroyalty revenueaccrual to DrukGreen
Total Energy net ofthe royalty used fortariff
Similar to norms in India
Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal
Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal
Particulars As per TDR/Tariff
Model
Druk Green 2010 Proposal
2010 Tariff Decision Outcome.
Druk Green 2013 Proposal
3. Energy Import Cost
No provision
Included in O&M costs
Import to be billedseparately with yearlyceiling of 49.5 GWh orNu. 92.07 million
Recovery of actual cost for full import
Wheeling charge also to be recovered
4. OtherCosts
Cost ofSupply
Allocated CO costs to plants
Net assets as per book of accounts
Only one-third CO costallowed, citing thatCO costs relate tonew projects & doesnot belong to anyplant
Nu. 1.236 billion worthasset handed to otheragencies disallowed
Full Corporate Officecost less costsegregated forspecific new projects
For assetstransferred to Govt.agencies, liabilitiesremain with DrukGreen
Feedbacks on 2010 Tariff Reviewand 2013-16 Generation Tariff Revision Proposal
Particulars As per TDR/Tariff Model
Druk Green 2010 Proposal
2010 Tariff Decision Outcome.
Druk Green 2013 Proposal
5. Investment Plans
Scrutiny by the BEA
Nu. 4.999 billion Most investmentsdisallowed
Only 1/3rd
COinvestment allowedciting that it is notrelated to plants.Thereafter, only 85%working out to Nu.2.462 billion allowed
Nu. 3.742 billion
6. Donation & Community Welfare Expenses
_ Actual underO&M expenses
Removed and notallowed to recover
Actual under O&Mexpenses
Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal
Particulars As per TDR/Tariff Model
Druk Green 2010 Proposal
2010 Tariff Decision Outcome.
Druk Green 2013 Proposal
7. O&M efficiency gains
BEA to determine
0% 2% 0%
8. Generation Tariff
_ Nu. 1.99 per kWhfor Additional Energy
Nu. 1.20 per kWh for Additional Energy
Nu. 1.99 per kWh
Nu. 0.84 per kWh for Royalty Energy
Nu. 0.13 per kWh forRoyalty Energy
Royalty revenues doesnot accrue to DrukGreen since 2011
Treatment of Equity as Grant
Druk Green owned by DHI, the commercial arm of the government & expected to
operate commercially and provide returns to the RGoB in the form of dividends
The Auditors certified treatment of grants received by RGoB as equity
RGOB as the ultimate shareholder has not given any indication to treat the equity as
grant
Therefore, the grants received for the projects by RGoB be treated as equity.
Clarifications
Grant given by Govts. of India and Austria
Grant received by RGoBand invested in the project
Completed projects handed over to Druk Green along with corresponding
equity and debt but no grants
Clarifications
Treatment of Royalty
TDR 2007 (Updated in 2010) Section 7.3 requires the royalty energy to be sold
by Generation Licensees at Royalty Price to implement transfer of subsidy from
Generation Licensee to customers
However, in line with EDP 2010 and BSHDP 2008 and based on comments of
BCCI, the proceeds from the royalty sales accrues to RGOB since January 2011.
Therefore, Since royalty energy proceeds accrues to RGoB and not Druk Green
anymore, the transfer of subsidy from Generation Licensee to customers does not
arise
Changes Proposed in 2013-16 Generation Tariff Revision Proposal –1. Higher Allowance of Cost of Equity
1. Higher Allowance of Cost of Equity
Allowance of higher CoE in keeping with TDR and also for following reasons;
1.1. No Grants Received by Druk Green
Druk Green did not receive any grant
Equity injection from MoF through DHI
Druk Green operates like any Corporate Entity answerable to shareholders
Only RE Assets received in form of grant cannot earn Return on Assets (TDR 6.6.2)
1.2. Export Revenues Subsidizing Domestic Tariffs
Beyond the scope of Act and TDR (EA 14.1.iv & TDR 1.5)
Linking returns from export to CoE for domestic tariff is an indirect subsidy
Subsidy through Royalty pricing or through other mechanism under the purview of Govt.
Curtailing CoE for domestic tariff does not allow Druk Green recover cost of supply
Changes Proposed in 2013-16 Generation Tariff Revision Proposal –1. Higher Allowance of Cost of Equity
1.3. Druk Green’s Declining Returns (Inclusive of Export)
Fall in profit despite Druk Green’s consistently better operational performance
Hydropower Benchmarking Study by PA Consultants, Norway;
Druk Green’s total cost per WMO is the least among other hydropowerplants in Asia and South America.
Average production is highest at 6.4 GWh compared to the group average of 3GWh per WMO
Operational KPIs of Druk Green
Increase due to Export Tariff of KHP & THP
KPIs Druk Green Average Remarks
Power Plant Availability (PPA)
97.66% BC Hydro, Canada 96% andNHPC, India 91%
Water Utilization Factor 99.96%
Changes Proposed in 2013-16 Generation Tariff Revision Proposal –1. Higher Allowance of Cost of Equity
Trends in Demand, Supply and Export
Druk Green’s revenue suffers due to twin effects of decreasing export and low domestic
tariff
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2010 2011 2012 2013 2014 2015 2016
En
ee
gy
(GW
h)
Generation
Export
Domestic Demand
Changes Proposed in 2013-16 Generation Tariff Revision Proposal –1. Higher Allowance of Cost of Equity
1.4. Challenges in Financing Opportunities for Hydropower Development
At existing tariff levels - uphill task to sustain the dividend expectation
At Druk Green’s current returns of 10-11%, it is unlikely to get investors/financiers
support for new projects and would not facilitate plough back of profit for
investment in new hydropower projects. The current returns will not enable
Bhutan to achieve the objective of economic self reliance through development
of a financially viable and reliable electricity industry (EA 3.1.iv).
1.5. Returns Based on Capital Asset Pricing Model (CAPM)
Expected return on equity = risk free rate + Beta (market return – risk free rate)
As reference case; NHPC’s Expected returns as per model– 16%
Beta 0.91
Interest rate of 10 years Indian Govt. bond 8% &
Average Indian market return since 1991 of 17%
Returns for the power sector in Bhutan should be comparable
Changes Proposed in 2013-16 Generation Tariff Revision Proposal –1. Higher Allowance of Cost of Equity
1.6. High Inflation Rates
Average inflation is 9%. At 12% CoE, real return is only 3% - not commensurate with risks
TDR permitted CoE may be appropriate for very low inflation mature economies
1.7. CoE as per Indian Electricity Regulatory Commission (CERC) Norms
15.5% post-tax
Comparison with India relevant because of integrated energy market and export
tariff based on CERC norms
1.8. Higher Average Returns for Listed Companies in Bhutan
Most listed companies have returns higher than 15%
1.9 . Indicative Generation Tariff of Upcoming Hydropower Projects (Using Tariff Model)
Changes Proposed in 2013-16 Generation Tariff Revision Proposal –1. Higher Allowance of Cost of Equity
1.10. Opportunity Lost from Export
Huge Opportunity loss due to domestic use of the additional energy
More than Nu. 1.3 billion during the last 3 years
Year
Druk Green
Sales to BPC
(GWh)
Royalty
Energy (GWh)
Additional
Energy (GWh)
Opportunity loss on
account of additional
energy (Mill Nu.)
2010 1,628.03 1,082.53 545.50 370.94
2011 1,683.72 1,044.30 639.42 441.20
2012 1,828.02 1,009.43 818.59 564.83
Total 5,139.77 3,136.26 2,003.51 1,376.97
Changes Proposed in 2013-16 Generation Tariff Revision Proposal
2. Recovery of Cost of Production of Royalty Energy
Tariff computed on 100% of the total energy volumes
Cost of production of 15% royalty is not recovered leading to subsidization
Royalty revenues no longer accrues to Druk Green since 2011
Realization of 12% CoE is impossible as can be seen from the computation considering
2012 Annual Accounts
Domestic sales – 5.22% Export sales – 11.74%
In India, CERC norms also allow the energy net of free energy in tariff computation
Therefore, total energy net of royalty energy be allowed in computation of tariff
Changes Proposed in 2013-16 Generation Tariff Revision Proposal
3. Recovery of Cost of Energy Import
BEA allows to invoice max. 49.5 GWh or Nu. 92.07 Million worth energy annually
Cost of import beyond the BEA ceiling could not be recovered in the past
No generation capacity augmentation in tariff period, import forecast
Therefore, recovery of cost of energy import and its wheeling charges be allowed
Changes Proposed in 2013-16 Generation Tariff Revision Proposal
4. Full Recovery of Other Costs
Corporate Office Costs to be allowed to recover fully
Druk Green formed to bring synergy and efficiency under a single company
structure
No separate company structure required for each plant
Specific costs pertaining to new projects accounted separately
Cost of assets handed to Govt. agencies to be allowed to recover
Creation of assets like schools necessary during project implementation
Some assets transferred to Government agencies
The Druk Green Plants continue to service liabilities
Therefore, Druk Green be allowed to include these costs in tariff model
Cost of Supply Methodology
Cost of Supply
Operating and Maintenance
Costs
Depreciation
Return on Fixed Assets
Power Purchases and Fuel Costs for
Electricity Generation
Cost of Losses & Non-Payment of Electricity Bills
Cost of Working Capital
Regulatory Fees, Duties or
Levies
Proposed Generation Tariff for 2013-16
Using the Tariff Determination Model and the proposed changes;
Cost of generation Nu. 1.99 per kWh is much higher than existing tariff of Nu. 1.2 per kWh
Increase in tariff for Druk Green proposed in line with the principles of TDR and also to
ensure steady revenues to the RGOB from the hydropower sector
Submitted to BEA to consider on commercial terms, consistent to norms in the region
Tariff Details Cost of generation (Nu. per kWh)
Basochhu Hydro Power Plant 2.95
Chhukha Hydro Power Plant 0.58
Kurichhu Hydro Power Plant 3.66
Tala Hydro Power Plant 2.25
Average Consolidated Tariff 1.99
Thank You!!!