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Costs and Prices of 2013: Are they reasonable ?

Dr Tilak Siyambalapitiya

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At the end of this session, you would be able to …………

• Visualize the sub-businesses within the power industry, and their stated costs for 2013

• Question: How reasonable are the cost components?

• Appreciate the correction mechanism

• Understand the cost of supply to each customer category

• Appreciate the subsidies and surcharges on each customer category

• Look at the past and visualize where Sri Lanka got it wrong

• Look into the future to examine the cost profiles.

Sub-businesses within the Electricity

Business

Generators

Transmission Network Distribution Network

Customers

Generators and transmission, distribution networks are all over

the country, but they can be represented as above.

Like to see the where they are ???

Where are the Power Plants, Transmission Lines ?

Too many distribution

lines to show on this map

PUC Publication: National Average Cost of Supply 2013

Costs of each sub-business

LKR/kWh

Generation (capacity) 2.75

Generation (energy) 15.57

Transmission 0.77 Transmission wires + system operation business

Distribution 2.72 Distribution wires and supply business

Total 21.80

Generation business

Generators

Transmission Network Distribution Network

Customers

So, 2.75 is really, really too high. Or is it ?

Is the Generation Capacity Cost Reasonable ?

Additions:

• Finance costs ?

• Maintenance costs ?

• Hydros produce less than 7008 kWh per year

• All 7008 kWh cannot be sold, owing to network losses

• IPPs need a return on equity

Subtractions:

• Depreciated old generators

• CEB generators do not need cost recovery, no return on equity ?

Consider

a power

plant of

one

kilowatt

Investment on this power plant = 1500 USD

Lifetime = 25 years

Annual electricity output = 8760*80%

= 7008 kWh

Cost of investment recovery = 1500/(25x7008)

= 0.009 USD/kWh

= 1.11 Rs/kWh

Is the Generation Capacity Cost Reasonable ?

1.11 Rs/kWh 2.75 Rs/kWh

Initial estimate

Actual Allowed cost

Annual maintenance costs 2% of investment

= 2%*1500

= 30 USD/year

Maintenance cost = 30/7008

= 0.00428 USD/kWh

= 0.00428*130

= 0.56 Rs/kWh

Therefore, cost now = 1.11 + 0.56

= 1.67 Rs/kWh

When 100 kWh is produced, only 89 kWh can be

sold to customers. The balance is lost.

So, capacity cost now = 1.67 x 100/89

= 1.88 Rs/kWh

Is the Generation Capacity Cost Reasonable ?

All Power Plants do not produce 7008 kWh per year: Some power plants, are for

Dry season backup, hydropower plants are used for peak-time duties. However, all

them have to be maintained.

Total power generating capacity = 3400 MW

Energy expected generation in 2013 = 11,000 GWh (million kWh)

Energy capability of total capacity = 3400 x 8760 x 80% = 23,800 GWh

Therefore, estimated capacity cost = 1.88 x 11000/23800

= 4.07 Rs/kWh

Therefore, on the face of it, the capacity cost of Rs 2.75 per kWh

sold seems reasonable. But ? ………

There are quite a lot of distortions in CEB power plant capacity

costs. Need to streamline them by signing PPAs between each

CEB generating plant and CEB transmission.

Generation Capacity Costs of IPPs and CEB

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

0 2 4 6 8 10 12 14 16

Cap

acit

y ch

arge

(LK

R/k

Wh

at

MG

EA)

Year of operation

West Coast PowerAsia Power

ACE PowerEmbilipitiya

Heladhanavi

ACE Power Horana

ACE Power MataraAES Kelanitissa

Colombo Power

Lakdhanavi

Expected typical profile

Avg for CEB Power Plants

Norochcholai estimate

(not published yet)

Conclusion on Generation Capacity Cost

• Presently: Rs 2.75 per kWh sold

• Acceptable ?: Yes, but certainly there is

room for improvement

• Target: Rs 2.00 per kWh sold is likely to be

possible,

- provided ALL generation is CEB-owned

- with no return on equity

- no IPPs

Are the Generation Energy (Fuel) Costs Efficient ?

2013

Primary Source Ownership Share Cost

Rs/unitHydro CEB 30% -

Small Renewables Private 7% 18.00

Coal CEB 15% 8.30

Oil CEB and Private 48% 23.41

Average 100% 13.74

• One litre of oil: Produces between 3 to 5 kWh of electricity

• One kilogram of coal: Produces about 2.5 kWh of electricity

• Coal price reflected above: USD 150 per tonne (correct ?)

• Oil prices reflected above: Rs 120 per litre of diesel, Rs 90 per litre of

fuel oil (correct ?)

• Can hydro produce more?

• What if oil prices decrease after these costs are allowed ?

• What if it rains heavily after these estimates are done ?

Fuel Costs (Rs/kWh)

Coal 8.30

Residual oil 23.50

Furnace oil 24.53

Diesel 25.94

Renewables 18.00

If Sri Lanka wants lower prices, what should we

produce electricity from ?

13

Are the Wire business + supply costs

efficient ?

Rs/unit

Transmission 0.77

Distribution 2.72

• What should be done ?

– Constant Monitoring

– Benchmarking

– Publishing results

– Awards for improved management of costs and losses (?)

– X-factor (improved efficiency factor)

– Presently, inflation adjustment is awarded

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Are the Allowed Losses Reasonable ?

• Allowed losses (technical + commercial)

Year

Total TL and all DL networks Policy target for Sri Lanka T&D

losses

Summarised from filed sales and losses Summarised from approved sales and losses

Sales to End-use

Customers (GWh)

Sales growth

Input to TL's

network (GWh)

Sri Lanka T&D Loss

Sales to End-use

Customers (GWh)

Sales growth

Input to TL's

network (GWh)

Sri Lanka T&D Loss

2009 8,351 8,371 - 9,754 14.2% 13.5%

2010 8,908 6.7% 10,634 16.2% 9,031 7.9% 10,503 14.0%

2011 9,460 6.2% 11,185 15.4% 9,667 7.0% 11,185 13.6% 2012 10,078 6.5% 11,917 15.4% 10,308 6.6% 11,903 13.4% 2013 10,736 6.5% 12,645 15.1% 10,989 6.6% 12,612 12.9% 2014 11,437 6.5% 13,424 14.8% 11,713 6.6% 13,375 12.4% 2015 12,184 6.5% 14,229 14.4% 12,485 6.6% 14,206 12.1% 12.1%

2016 12.0%

2012 Actuals

Distribution

Entity

Target Loss

(% of input)

Actual Loss

(% of input)

CEB R1 8.9% 6.6%

CEB R2 11.8% 9.3%

CEB R3 8.9% 7.8%

CEB R4 10.1% 4.9%

LECO 5.6% 6.6%

All distribution 10.7% 7.4%

CEB Transmission: Target 3.0%, Actual 4.4% in 2012

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Network Loss Management

– Are we really so efficient ?

• Bulk sales cause a loss of less than 1.5%

• Therefore retail sales should be causing a loss

exceeding 15%

• Engineering models say it should be 5% !!!

• So, although the loss performance is good, there is

substantial room for improvement

• Investments for loss improvement are included in

the allowed distribution revenue (Rs 2.72 per kWh)

Total Cost of Production and Delivery of Electricity: 2013

and estimate for 2014

2013 Rs/unit

Primary Source Ownership Share Cost

Rs/unit

Generation Capacity 2.75

Hydro CEB 30% - Fuel 13.74

Small Renewables Private 7% 18.00 Transmission 0.77

Coal CEB 15% 8.30 Distribution 2.72

Oil CEB and Private 48% 23.41 Network Loss Adjustment 1.82

Average 100% 13.74 Short-term Debt repayment 0.32

Total cost 22.12

2014

Primary Source Ownership Share Cost

Rs/unit

Generation Capacity 2.50

Hydro CEB 30% - Fuel 9.30

Small Renewables Private 7% 18.00 Transmission 0.77

Coal CEB 45% 8.50 Distribution 2.72

Oil CEB and Private 18% 23.41 Network Loss Adjustment 1.27

Average 100% 9.30 Short-term Debt repayment 0.32

16.87

Observation: Generation capacity costs are likely to increase when the PPAs for

Norochcholai and Upper Kotmale (CEB-GL to CEB-TL) become effective

Interpretation of System Costs: 2013

Generators

Transmission Network Distribution Network

Customers

Fixed Costs in Rs per kWh sold to end users

2.75 0.77 2.72

Fuel Costs in Rs per kWh

13.74 15.57

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Indicative Revenue Management Mechanism 2013:

Single Buyer Bulk Supply Transactions

Account

Generators (CEB, IPP,SPP) Shot-term

debt repayment

GOSL Subsidy

8,013 million

LKR

3,504 million

LKR

DL1 8,484 million LKR

DL2 8,920 million LKR

DL3 5,247 million LKR

DL4 4,167 million LKR

DL5 2,913 million LKR

TL 8435 million LKR

8,435 million LKR

xxxxxx million LKR

xxxxxx million LKR

xxxxxx million LKR

xxxxxxxx million LKR

xxxxxx million LKR

186,770 million LKR

xxxxx million LKR

xxxxxxx million LKR

xxxxxx million LKR

xxxxxx million LKR

xxxxxx million LKR

190,398 million LKR

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Role of the Bulk Supply Transactions Account (BSTA)

Single Buyer Bulk Supply Transactions

Account

Pay Transmission Licensee

Income from Sales to Distribution

Pay Generation Licensees: CEB, IPPs, SPPs

Receive Govt

Subsidies

Main Source of Income

Rainfall above

average, lower fuel

prices

Rainfall below

average, higher

fuel prices

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Revenue Correction Mechanism: Wire and Supply Businesses

• All five DLs must report profits (there is no reason for any DL to report losses): to realize this, annual accounts must be prepared and published

• The TL must report profits

• Annually: TL and DL allowed revenues are adjusted

– Upwards for inflation

– Downwards for required efficiency improvement (X-factor)

– Downward for return on investment planned but not done

– Upwards for any unforeseen investments (eg: substantial weather damage)

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Revenue Correction Mechanism: Bulk Supply Business

• Changes too rapid to wait for one year

• Once in six months:

For next six months (eg: Jul-Dec 2013)

– Forecast generation cost (based on storage, forecast inflows, fuel prices, economic dispatch)

For the past six months (eg: Jul-Dec 2012)

– Upwards/downwards if hydro contribution was lower/higher than expected in the Jul-Dec 2012 forecast

– Upwards/downwards if fuel prices were higher/lower than expected in the Jul-Dec 2012 forecast

– Any extraordinary situations the TL submits

– No correction for changes in network losses

• Customer tariffs changed once in six months

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From Costs to Pricing

The Professional Approach

• Calculate the cost of supply at

• Each voltage level

• At different times of day

• Cost of supply is blind to

• The income of user (rich or poor)

• Purpose of use (household, business, industry)

• Appliances used

• Adequate examples: Fuel pricing in Sri Lanka, LPG, all commodities including food

• Electricity is the only commercial in Sri Lanka good where the price is intentionally distorted at the point of sale

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Demand

Charge

Fixed Charge

(LKR/kVA.

month)

(LKR/month)

Households All day 15.00 - - 100

Day 15.00

Peak 18.00

off-peak 12.00

Day 10.00

Peak 13.00

off-peak 7.00

Day 9.00

Peak 12.00

off-peak 8.00

MV Bulk 1200 0.4 2000

LV Bulk 1500 0.5 1000

Other retail - - 100

Customers Energy charge

(LKR/kWh)

Reactive

power

Charge

(LKR/kVArh)

Tariff figures are only for illustration

Ideal Price Structure

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All customers are not located in the same Point of the

Network. They impose different burdens on the network

Therefore, comparing prices against the national

average cost (Rs 21.80 per kWh) is unfair, incorrect

About 44% of electricity sold in Sri Lanka is for bulk

customers, for whom the distribution and supply costs

are zero or lower

Generators

Transmission Network Distribution Network

Customers MV Bulk LV Bulk

Other

Retail

Households

LKR/kWh

Household average 27.86

Religious average 25.74

Other retail (Industry, Commercial) 20.40

Bulk supply at LV (medium industry, commercial) 17.73

Bulk supply at MV (large industry, commercial) 15.08

National average 21.80

Cost of supply in terms of Position in the

Distribution Network

Generators

Transmission Network Distribution Network

Customers

15.08 17.73 20.40 27.86

Latest Price Announcement: Households

But how much are they being asked to pay ?: Households

Prices announced in April, Mayday concessions not included

2013 figures not published as yet

Surcharges and Cross-Subsidies: 2011 (1)

Customer Category in year 2010 tariffs (and

kWh/month for households)

Subsidy or surcharge as a % of cost of supply

Volume of cross subsidy received or

provided (LKR million/year) Subsidised

customers

Customers paying a surcharge

LV Retail 0-30 80% (4,373) 31-60 77% (12,135) 61-90 70% (14,001) 91-120 40% (4,672) 121-180 20% (2,066) 181-600 29% 2,429 >600 122% 1,802

Sub Total 45% (33,016)

Other LV Religious 61% (614) General Purpose 1 36% 7,500 Government 1 3% Industrial 1 18% (558) Hotel 1 34% 7 Street Lighting 100% (2,310)

Sub Total 18% 4,024

2013 figures not published as yet

Surcharges and Cross-Subsidies: 2011 (2)

LV BULK General Purpose 2 87% 9,942 Government 2 38% Industrial 2 10% 1,947 Industrial 2 TOU 10% 214 Hotels 2 TOU 33% 9 Hotels 2 (GP) 36% 299 Hotels 2 (IP) 30% 195

Sub Total 38% 12,606

MEDIUM VOLTAGE General Purpose 3 89% 2,347 Government 3 35%

Industrial 3 14% 1,583 Industrial 3 TOU 29% 403 Hotels 3 40% 31 Hotel 3 TOU 41% 256

Sub Total 30% 4,619

Total 8% (11,767)

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The Cash Crisis in the Power Sector

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From a Presentation on 16 July 2010

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014 2015

Cu

mu

lati

ve

Ta

riff

in

cre

as

e

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

An

nu

al

Gro

ss

su

bs

idy

re

qu

ire

d (

Rs

mil

lio

n)

Scanario A1: Required tariff increase (% cumulative)

Scanario A2: Required tariff increase (% cumulative)

Scanerio A2: Annual gross subsidy required

Scanario A3: Annual gross subsidy required

In constant 2010

currency-no

inflation or fuel

price escalations

Red band is declining, significantly from 2014, and benefits should be given

to customers, when the methodology is implemented.

Are we coming out of the high cost regime ? Yes we are.

How ? By building lower-cost generation

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The Evolving Cost Structure

3.204.03 4.01 4.53 4.65 4.62

10.54 8.64 9.159.49

7.04

5.59

0.45

0.790.85

0.96

1.12

1.06

2.712.88

2.67

2.49

2.30

2.12

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

2010 2011 2012 2013 2014 2015

Ave

rag

e c

ost

of

sa

les

to

en

d-u

se

rs (

Rs/k

Wh

)

Distribution

Transmission

Generation Fuel

Generation capacity

In constant 2010 currency-no

inflation or fuel price

escalations

13.74

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The End