Electricity Tariffs

The spike in power market prices

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“Wind and solar power projects are powered by natural sources and hence their tariffs should be low”, is a general statement you would have heard often. In the last couple of years in India, the penetration of renewable energy has seen an increase and the spot market prices, the rates at which electricity is bought and sold in the commodity market has seen a constant decline.  The major sellers in the electricity market are Independent Power Producers including wind and solar developers who are not tied with contracts to public utilities to sell power and on the other hand a buyer can be any electrical consumer with a contract demand of generally over 1MW. Like in any general market dynamics, the price of electricity in the open market is determined by the supply-demand scenario. In the last few years owing to increase in development of power projects particularly wind and solar power plants the supply side of the market was strengthened. On the contrary demand growth has not been able to match the supply scenario and hence the spot electricity market prices were declining. If you have been closely tracking the updates from Indian Power Ministry’s ‘Vidyut Pravah’, an online platform that shows the instantaneous power availability and prices for every 15 min time block, you would have seen prices between INR 2-3/unit i.e. below 5 Cents/kWh. Since September 2017 India has managed to achieve ‘One Grid, One price‘ with the spot market price same throughout the country for every individual time blocks.

Yearly price

Daily average price (2016 vs. 2017)

Weekly prices

Average weekly prices (2016 vs. 2017)

The daily average price was in fact lower in the summer of 2017 compared to 2016 while the prices have just gone one way ever since. A closer look in the months of September and October 2017 will reveal the prices have doubled year on year. During a few 15 min time blocks the spot price has also touched INR 7/kWh.

In the last few months however, the market prices have scaled new highs. They have doubled on average for every 15 min time block with peak price nearly tripling from the average for the same time last year. Why is this happening in spite of India’s Renewable Energy deployment increasing faster than ever?

Listen to this episode from Emerging Tech Radio to find out the reasons in detail.

The reasons range from increased buying from DISCOMs in the spot market moving from long term contracts to lack of availability coal across power plants in the country.

The complete playlist of Emerging Tech Radio podcast.

 

MoP consultation paper on Open Access

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Ministry of Power (MoP) recently invited comments on a consultation paper on issues related to Open Access (OA). Electricity Act (2003) which provides non-discriminatory Open Access (OA) to all consumers for use of evacuation infrastructure has been caught up with regulatory hurdles at every stage of implementation.  State utilities who are on the losing side as consumers migrate through OA have ensured the market mechanism fails to take-off.

The MoP committee which has come up with this consultation paper has categorized the issue along the tariff structure and consumer behaviour

Frequent shifting of Open Access consumers

The argument of frequent consumer shifting is accepted to an extent considering the fact, short term Open Access clients are unable to project their load demand to utilities. The proposal calls for OA clients to schedule for power requirement 24 hrs prior to seeking OA clearance to ensure state utilities are prepared to meet the demand.

Cross Subsidy Surcharge

Cross Subsidy Surcharge (CSS) has always been a major point of debate and there have been multiple revisions to the formula that calculates this charge. Owing to an increase in OA transactions CSS charges are already high. The proposal is to limit the CSS to 20% of consumer tariff and introduce category wise CSS. The proposal also calls for CSS based on time of day, peak, normal and off-peak which is quite interesting.

Additional Surcharge

Additional Surcharges are increasing across states after every tariff revisions owing to an increased capacity of stranded assets bound by long term Power Purchase Agreements (PPA). A calculation method based on a revised definition of stranded asset (based on capacity stranded on account of OA) and amortization of assets has been proposed to remove the potential double accounting of charges to consumers.

Stand-By charges

In recent times BESCOM has charged OA clients with a high temporary tariff on account of classifying the power sold to them under stand-by charges. Although the existing regulations at the state level forbid such charges, BESCOM has incurred the wrath of OA consumers for the past few months. The proposal calls for definition of stand-by charges based on a two part tariff with the upper limit set at 125% of the consumer tariff under the category.

Tariff design and rationalisation

In the end the paper clearly acknowledges the fact, the failed two-part tariff structure has lead to the overall collapse of the market mechanism and OA. A better structured tariff structure would have limited the damage of OA shift on the state utilities. (Read more about the inefficient electricity tariff structure from an earlier post)

Overall, the paper calls for a major revamp of the OA regulations and it brings out a need to align with the recommendations in the National Tariff Policy (NTP,2016). The consultation paper has been dubbed as anti Open Access by multiple stakeholders but I see this as a frank assessment of our tariff structures and gives an opportunity to rectify the basic flaws in the existing inefficient tariff structure.

Read more: MoP Consultation Paper

 

The inefficient electricity tariff structure

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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.