The inefficient electricity tariff structure

The tariff orders for the Financial Year (FY-18) from Karnataka Electricity Regulatory Commission (KERC) were released in the second week of April, an uncharacteristic delay for the commission. What prompted the delay was an impromptu revised Annual Revenue Requirement (ARR) from the Bangalore Electricity Supply Company (BESCOM) two days before the scheduled public hearing. Subsequently a second hearing was held to look into the revised submission and hence the delay.

A need for revision

It is quite surprising for BESCOM to have a ‘Eureka’ moment and propose a new tariff structure for High Tension (HT) industrial and commercial consumers in order to keep them from migrating to open access. BESCOM proposed to increase the fixed cost component and reduce the energy charges, which seems to be a criterion for these consumers to migrate to open access independent of BESCOM supply.IndHT2a

Between FY 14 and FY 16, the number of industrial clients under BESCOM area increased by over 15%. However, the net sales made to this category has fallen by nearly 10%. On the contrary the energy quantum procured through open access mostly on the day ahead short term market has more than doubled which explains BESCOM’s concern.

Why is this migration a concern?

The root cause of the problem lies in the cross subsidising effect brought in by the two part tariffs. In an efficient system the fixed costs incurred in setting up infrastructure to deliver power is recovered in this component and energy charge reflects the true cost of supplying a single unit of energy. The National Tariff Policy of 2016 envisages this too. In reality, this system is inefficient due to an inherent need to cross subsidise consumer classes. Residential tariff has to be lower compared to industrial and hence when the industrial clients migrate, the revenues disappear too.

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BESCOM incurs 33% of its expenditure in fixed costs and however recovers only 11% through the fixed cost component in electricity tariffs. Hence it seemed very sensible for BESCOM to propose an increase in fixed costs and reduce the energy component.

The proposal dint go through the commission this year because of its ad-hoc submission and high resistance from industrial consumers who have made long term bilateral commitments assuming a high energy charge. A decline in energy charge and increase in fixed component would make their deals unfavourable. Although, the proposal seems radical it is not the real solution but it could make the situation better from worse and hence is likely to be given a try the next time around by when BESCOM is expected to make a solid case.

BESCOM data from relevant ARR filings.

An Indian Utility Case Study

The role of policy in development has always been a topic of interest to me and it led me to pursue a masters degree. Now,  I have submitted my thesis titled ‘The Evolution of Electricity Retail Markets in a Low Carbon World: An Indian Utility Case Study’.

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The research for this topic involved reviewing case studies from other electricity markets especially considering the impact of solar rooftop adoption on electricity retail tariffs. The Indian utility considered for evaluation was Bangalore Electricity Supply Company (BESCOM). A detailed analysis of its past reports, Annual Revenue Requirement (ARR) filings, consumer and energy sales figures were analysed. It provided a solid reasoning to estimate the impact of existing rooftop solar PV policies and solar tariffs to the utilities.

A key part of the thesis turns out to be a new solar tariff proposed through this research. Under the Gross Metering regulations the solar tariffs are proposed to vary depending on the consumer. Although this could raise questions, it proves to be beneficial to the utility under Gross Metering who tend to increase tariffs under the pretext of revenue loss incurred. Also, considering the next phase of installing smart meters, flexible tariffs could be easily adopted and not to mention the declining solar system costs.

Since the report is under review I wouldn’t want to discuss the case in detail. However, I have presented key snapshots from the analysis in the slide deck below.

Comments/feedback/suggestions are welcome. Do drop a line if you need to know more about this research.

Where have the industrial buyers gone?

Continuing my recent trend on emphasising a need to restructure the electricity tariff structures in this post I present the case of missing industrial consumers.

I recently analysed the data of industrial consumers over the past decade for Bangalore Electricity Supply Company (BESCOM). I wasn’t entirely surprised with the decline in energy sales over the past few years considering BESCOM has been highlighting this every year before electricity tariffs are hiked. What is entirely surprising is the link between rise in consumers and drop in energy sale.

Summary

The data from the utility reports indicate that the number of industrial consumers have been rising over the past decade however between the period of 2013 to 2016 the total units sold to industrial consumers have dropped. In a recent filing [ARR, 2016-17], BESCOM attributes a loss of 1148MU energy sale due to consumer opting for power through open access which is an increase from 12% to 20% between 2013 to 2016. The loss is significant considering industrial consumers contribute to nearly 30% of BESCOM’s annual revenue [ARR, 2016-17]. Every retail tariff revision in this period has been attributed to the fall in revenue and widening deficits. Interestingly, tariff revisions by the utility during the same period indicate the annual increase has been consistent across all consumer segments. The negative effect of this is that the vulnerable consumers with low income and consumption are subjected to the same burden as others.

Why are industrial consumers crucial to Indian utilities?

  • The retail electricity tariff is different for industries and domestics users
  • Utility recovers most of the fixed cost incurred in maintaining the power infrastructure from billing the industrial consumers a premium
  • In short they have been cross subsidising power for the rest

“Large industrial electricity buyers who are likely to exit are also those keeping the system afloat by cross-subsidising other users such as farmers and households. If, because of open access they were to shift their power purchases to independent private generators, the finances of the public utility would become untenable, leading to declining quality of supply to poor, but politically important constituencies” Navroz K Dubash Senior Fellow Centre for policy research,Business Standard, 2011

 Industrial consumers have been on a love-hate relationship with the utilities for a long time.

“…distribution companies in Rajasthan told industrial consumers that they ought to fend fr themselves and that there is no more any obligation to serve them. … On the other hand, West Bengal has argued that there is no way that it can let go such consumers who bear the subsidy”- Pramod Deo, Chairperson, CERC, 2012

A classic economic equation of supply and demand is unlikely to be reflected in an electricity market, especially a deregulated market where there is an option for open access electricity.

Open Access

Incidentally BESCOM is not alone. A recent report has indicated that the Tamil Nadu utility has seen over 10% loss in industrial energy sale year on year for the few years. (read more)

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