PPA Conference 2015 Paper Final

24TH PPA ANNUAL CONFERENCE 2015
MAJURO, MARSHALL ISLANDS, JULY 13–17
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Achieving Balance between Fuel and Non-fuel Tariffs
Ajith Fernando, Nikolasi Fonua, Michael Lani ‘Ahokava
Tonga Power Limited, Tonga
Abstract
Tonga’s electricity tariff is regulated through a strict regulatory framework under the Electricity Act 2007.
The electricity tariff in Tonga contains two components: Non-fuel Tariff (NFT) component (derived from
operational & capital expenses and shareholder dividends) and Fuel Tariff (FT) component (the cost of fuel
which is directly collected from the customer and passed through to the supplier). Under the regulatory
framework, the electricity tariff is reset through a process undertaken every five years to determine the new
NFT component for the next five years. Tonga Power Limited (TPL) is currently in the process of resetting its
NFT component for the 2016-2020 period through the Reset Process 2015.
Like other Pacific Island nations, Tonga faces the challenge of reducing its high electricity tariff caused by
rising oil prices as 92% of Tonga’s electricity is from diesel generation. In order to reduce Tonga’s high reliance
on imported diesel fuel, TPLs contribution is to implement three main strategies that would reduce fuel use
for power generation. These strategies require TPL to invest a substantial amount of money in capital
expenditures that leads to an increase of the NFT component. However, it is expected, in the long run, that
heavy investments on capital expenditure would largely reduce the FT component of the electricity tariff.
This paper attempts to examine whether continuous increase of NFT would eventually result in diminishing
of decreasing effect on the FT component.
1. Introduction
Tonga Power Limited is a 100% state owned enterprise whose mission is to provide reliable, safe, sustainable
and affordable electricity to the people of Tonga. TPL was established in July 2008 to act as the concessionaire
in Tonga’s concession based electricity regulation regime. TPL generates, distributes, and sells electricity to
around 20,000 commercial and domestic customers in Tongatapu, Vava’u, Ha’apai and ‘Eua.
Tonga Power’s core purpose is to fully support the government’s goals of reducing Tonga’s vulnerability to
oil price shocks, and achieving an increase in quality access to modern energy services in an environmentally
sustainable manner via its strategies and Business Plan and to be financially sustainable. The Business Plan
2015 identifies the following three major diesel fuel reduction strategies.
(a) Reducing distribution line losses from current level of 10% to 8% by 2020
(b) Improving generation fuel efficiency from current level of 4.0kWh/L to 4.1kWh/L by 2020
(c) Increasing renewable energy penetration from current level of 8% to 50% by 2020
The objective of the above strategic initiatives is to reduce FT component in the long run. The implementation
of these strategic initiatives however requires substantial amount of capital investments leading to increase
of the NFT component. The key to the Tariff Reset Process (2015) is the achievement of balance between
NFT and FT components.

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2. Theory
2.1 Price Regulation
A firm is a monopoly if it is the sole seller of its product/service and if its product/service does not have close
substitutes. TPL is a monopoly because the government of Tonga has given TPL the exclusive right to generate
and sell electricity to consumers in Tonga.
Because TPL, as a monopoly, can charge its consumers whatever the price they want, the government heavily
regulates electricity prices in Tonga. To protect the customers from the risk of exploitation, the Electricity
Commission (EC) was established by the Electricity Act 2007 as the regulator to ensure the activities
conducted by TPL are socially efficient and benefit all customers in Tonga. Ensuring a lowest possible tariff is
also one of the major objectives of the EC.
Figure 1: Natural Monopoly Price Setting
As shown in Figure 1, price regulation requires TPL to charge a price equal to the Average Total Cost (ATC) so
that TPL earns exactly zero economic profit. Yet the ATC price regulation leads to non-achievement of socially
efficient quantity of electricity generation (qe). This is because in order to generate a socially efficient quantity
of electricity (so that every household that demands electricity enjoys electricity), TPL should charge a price
equal to its marginal cost (TMC). However, MC Price regulation leads TPL to earn negative profits resulting in
TPL going out of business. Currently, TPL’s TATC is 80.15 seniti/kWh, qTPL is about 55GWh and TMC is estimated
to be around 42 seniti/kWh.
2.2 Tariff Setting Process
Tonga’s electricity tariff has two components:
(a) Non-fuel Tariff (NFT) component, and
(b) Fuel Tariff (FT) component

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NFT component of the electricity tariff enables TPL to recover all of its operational and capital expenditures
including the return (dividend) to the shareholder, the government. The NFT component is reviewed and
reset every five years whereas, the FT component of the electricity tariff represents the cost of fuel which
TPL recovers from the customer and directly passes through to the supplier. The FT component is reviewed
on a frequent basis whenever the fuel price increases or decreases.
Non-fuel Tariff Setting
TPL uses Rate-of-Return1
as the price setting methodology to set the NFT component. Under this method of
regulation, the EC examines TPL’s Regulatory Asset Value (RAV)2
, Cost of Capital (i.e. Rate of Return), overall
depreciation and the operational expenditures. The NFT component is determined in such a way that total
revenue needed is equal to the total expenditures so that the economic profit becomes zero. This
phenomenon is explained in the following formula.
𝑁𝑃𝑉(𝑁𝐹𝑇𝑥𝐷𝑒𝑚𝑎𝑛𝑑^ + 𝑁𝑇𝑅^) = 𝑁𝑃𝑉(𝑂𝑝𝑒𝑥^ + 𝐷𝑒𝑝𝑛^ + 𝑅𝐴𝑉^𝑥𝑅𝑂𝑅)
𝑁𝐹𝑇 =
𝑁𝑃𝑉(𝑂𝑝𝑒𝑥^ + 𝐷𝑒𝑝𝑛^ + 𝑅𝐴𝑉^𝑥𝑅𝑂𝑅 ) − 𝑁𝑃𝑉(𝑁𝑇𝑅^)
𝑁𝑃𝑉(𝐷𝑒𝑚𝑎𝑛𝑑^)
Where: ^ denotes a forecast (next regulatory period, normally five years)
NPV means Net Present Value of the values of that variable over each of the five years
Demand = demand for supply of electricity by TPL
NTR = Non- Tariff Revenue
Opex = Reasonable operating expenses
Depn = Depreciation of overall assets
RAV = Regulatory Assets Value is a value of TPL’s fixed assets as determined by the regulator
ROR = Post tax nominal Rate of Return required by the shareholder
The NFT, once set at the beginning of the five year regulatory period, will be adjusted for annual inflation
over the next five year period.
Fuel Tariff Setting
The higher the diesel fuel consumption the higher the FT component will be. The FT component is collected
from the customers and directly passed through to the fuel supplier. The FT component is reviewed
whenever the fuel cost increases ordecreases in the market and/or fuel savings due to renewable energy
generation is passed through to the customers. Thus, at the end of the tariff review period, the previous FT
component is adjusted to:
(a) account for new fuel price increase/decrease (fuel adjustment(1))
(b) Fuel savings from renewable energy (RE) (fuel adjustment(2))
1
Another commonly use price regulation methodology is Price-Cap Regulation where a firm’s tariff is adjusted by a
price cap index which reflects the inflation rate in the economy.
2
Regulatory Assets Value (RAV) is a value of TPL’s fixed assets as determined by the regulator

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The formula for the new FT component is shown below:
𝐹𝑇 𝑡ℎ𝑖𝑠 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝐹𝑇 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝐹𝑢𝑒𝑙 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡(1) + 𝐹𝑢𝑒𝑙 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡(2)
Where: Fuel Adjustment (1) is determined by the following formula, and
𝐅𝐮𝐞𝐥 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭(𝟏) 𝐭𝐡𝐢𝐬 𝐩𝐞𝐫𝐢𝐨𝐝 =
𝐍𝐏𝐕(𝐏𝐞𝐫𝐦𝐢𝐭𝐭𝐞𝐝 𝐅𝐮𝐞𝐥 𝐂𝐨𝐬𝐭^
^
)
𝐍𝐏𝐕 (𝐤𝐖𝐡𝐛𝐢𝐥𝐥𝐞𝐝^
^
)
− 𝐅𝐮𝐞𝐥 𝐂𝐨𝐦𝐩𝐨𝐧𝐞𝐧𝐭 𝐩𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐩𝐞𝐫𝐢𝐨𝐝
Fuel Adjustment (2) is determined by the following formula.
Fuel Adjustment (2)this period =
−Fuel Savings from RE
NPV(kWhbilled^
^
)
Where: ^ denotes a forecast (next 12 months)
NPV means Net Present Value of the values of that variable over next 12 months
Permitted Fuel Cost^ = allowed fuel costs by the regulator3
kWh billed^ = demand for electricity over next 12 months period
3. Methodology
The methodology used in the paper is to forecast NFT and FT components from first principles for the 2016-
2020 period. In calculating the NFT component, formula (A) shown in Section 2.2 was used. NFT component
was estimated at the Reset Process 2015. Operational expenditures, regulatory asset value (RAV),
depreciation vales, electricity demand and non-tariff revenue values were forecasted accurately in
accordance with the company’s five year budget. The NFT component calculation is not the main focus in
this paper because it is not directly concerned with any fuel savings. Therefore, attention was given mostly
to the determination of FT component where fuel reduction strategies were directly involved.
In determination of FT component, quantities of diesel reduction was estimated from three main strategic
initiatives: reduction of distribution line losses, enhancing generator fuel efficiencies with the proposed
generator replacement program, and increasing renewable energy (RE) penetration. In estimating diesel
reduction due to reduction in distribution line losses, a correlation analysis was conducted using past
distribution capex, line losses and fuel saving data. The strong correlative relationships between these
variables enabled estimation of the quantity of fuel reduction due to reduction of line losses from the
distribution capital expenditure program on improving the distribution network. Manufacturer’s fuel-
efficiency charts were used in estimating fuel efficiency values before and after generator replacement
programs. These ratios were then adjusted with electricity demand forecasts so as to allow translation to
quantities of diesel reductions. RE penetration was directly used to calculate diesel reduction using fuel-
efficiency ratios. They were then discounted for spill and load-factor effects. The total quantities of diesel
reduction from these strategic initiatives were then translated into reductions in FT for the 2016-2020 period.
3
after adjusting for allowed distribution line losses (kWh) and fuel efficiency (kWh/L) targets

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4. Analysis
4.1 Line Losses vs. Fuel Reduction
In this section how new investments on distribution capex impact on distribution line losses is examined.
Then the amount of fuel savings achieved due to the reduction of line losses from the distribution network
improvement program is estimated.
In order to understand how distribution capex expenditure relates to distribution line losses, a correlation
analysis was conducted between these two variables using past data since 2010. A strong correlation
(R2
=0.9224, P-Value<0.05), as shown in the Figure 2 was found.
Figure 2: Impact of Distribution Capex on Line Losses
The correlation equation predicts distribution capex requirement in order to achieve the yearly line loss
targets throughout the 2016-2020 regulatory period. As shown in the Table 1, TPL requires $27.7 million to
reduce line losses from the current level of 10% to 8% by 2020.
Table 1: Impact of distribution capex on line losses
Similarly, a relationship between line losses (%) and fuel losses (litres) was investigated using the past data.
Again, as shown in the figure 2, a statistically significant relationship (R2
=0.91, P-Value<0.05) was found.
Year Current 2016 2017 2018 2019 2020 Total
Line Loss Target 10.00% 9.50% 8.50% 8.25% 8.00% 8.00%
Capex
Requirement
$7,648,607 $6,117,880 $5,080,389 $4,471,121 $4,452,425 $27,770,422

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Figure 2: Impact of Line losses on Fuel Consumption
From the above relationship, fuel savings due to reduction in line losses from distribution capex investments
for the 2016-2020 period was estimated as shown in the Table 2. It is shown that $27.7 million distribution
capex investment yielded 2.3 million litres of diesel fuel saving.
Table 2: Impact of Distribution Capex on Fuel Savings
4.2 Fuel Efficiency vs. Fuel Reduction
In this section how new investments on generation capex impact on fuel efficiency is examined. Then the
amount of fuel savings achieved from the increase in fuel efficiency is estimated.
Figure 3 below illustrates TPL’s generator replacement program for all four island groups over the 2016-2020
period. The program is designed to achieve N-1 security4
to provide for the maximum peak demand in an
event of a loss of one of its generators. However, one of the by-products of this program is a small quantity
of fuel savings achieved due to generator fuel efficiency improvement.
4
N-1 security policy refers to TPL’s ability provide a reliable power supply (i.e. maximum peak demand) in an event of
an emergency leading to loss its largest generator.
Line Loss Target 10.00% 9.50% 8.50% 8.25% 8.00% 8.00%
Capex
Requirement
$7,648,607 $6,117,880 $5,080,389 $4,471,121 $4,452,425 $27,770,422
Fuel Savings (L) 361,107 435,427 491,511 521,772 539,139 2,348,956

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Figure 3: TPL Generator Replacement Program (All Islands)
Currently, TPL achieves a fairly high level of fuel efficiency (about 4.0 to 4.1kWh/L) due to introduction of
two brand new 2.7MW diesel generators. However, fuel efficiency is expected to decline over time due to
ageing by about 1% per annum between two overhauls (according to the manufacturer).
Using manufacturer’s fuel efficiency-load factor charts, variation of fuel efficiency ratios was calculated as
and when old generators are being replaced with new ones. As shown in Figure 4, fuel efficiency ratios with
generator replacement program was found to be stable at about 4.0kWh/L over the next five year period.
Figure 4: Impact of Generator Replacement Program on Fuel Efficiency

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Fuel savings due to generator replacement program, which otherwise would have been lost due to generator
ageing, is shown in Table 3. Fuel savings in the main island, Tongatapu, are greater than the outer islands as
85% of the electricity demand is supplied from Tongatapu. It is estimated that over the next five-year period,
about 774,943 litres of diesel fuel will be saved due to the generator replacement program.
Table 3: Island-wide Fuel Savings from Generator Replacement
Table 4 shows the summary of the capex investment on the generator replacement program, fuel
efficiencies achieved and amount of litres saved.
Table 4: Impact of Generator Replacement Program on Fuel Savings
4.3 Renewable Energy Penetration vs. Fuel Reduction
Figure 5 shows modelling of RE penetration scenarios conducted by AECOM NZ Limited in May, 2015. In
accordance with this study, TPL would not be able to achieve 50% RE penetration with solar energy alone. As
marked ‘Case 6’, a combination of solar and wind energy project portfolio is needed. The recommended
portfolio of projects is shown in Table 5.
Table 5: Portfolio of RE Projects to Achieve 50% RE Penetration
Year Tongatapu Outer Islands Total
2016 30,690 5,599 36,289
2017 62,828 20,821 83,649
2018 96,449 26,786 123,235
2019 162,842 32,771 195,613
2020 297,394 38,763 336,157
Total= 650,203 124,740 774,943
Fuel Efficiency (kWh/L) 4.10 4.00 4.04 4.01 3.99 3.99
Capex Requirement $2,300,250 $5,044,250 $1,290,000 $400,000 $3,703,000 $12,737,500
Fuel Savings (L) 36,289 83,649 123,235 195,613 336,157 774,943
Case Plant Involved Incremental kW Capacity Year Built
Peak Output
(kW)
Annual Energy
Output (MWh)
Likely Spill
(%)
Renewable
Energy %
1 Maama Mai 2012 1,300 2,040 0% 4.5%
2 Maama Mai + Vaini PV +1,000 PV 2015 2,300 3,348 1.0% 7.4%
3
Maama Mai + Vaini PV +
Lapaha Wind
+2,200 Wind 2017 4,500 8,748 16.0% 19.3%
4
Lapaha Wind + 300 kW PV
+300 PV 2017 4,800 9,140 17.0% 20.2%
5 4 MW PV + 4.4 MW wind +1,400 PV + +2,000 Wind 2018 8,400 16,615 23.0% 35.0%
6 8.6 MW PV + 6.6 MW wind +4,600 PV + 2,200 Wind 2019 15,200 29,000 30.0% 50.0%

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Figure 5: RE Penetration Scenarios with Spillage (AECOM, 2015)
In accordance with the ‘Case-6’ scenario, TPL will have to invest in 8.6 MW solar and 6.6MW wind (15MW
in total) plants to achieve 50% RE penetration. The proposed locations for the combination of solar and
wind farms are shown in Figure 6.
Figure 6: Proposed Locations for the Solar and Wind Projects in Tongatapu

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These added RE capacities can be directly converted in to fuel savings using the corresponding fuel efficiency
ratios. However, these fuel savings could have been incorrect if they were not adjusted for two effects: spill
effect and load factor effects.
Spill Effect
The maximum peak demand in Tonga is about 8MW. Since diesel generators should be run at least at 30%
load, 2.5MW should be set aside for diesel generators. Then only up to 5.5MW is all left for solar and wind
generation. Since the additional RE capacity added after year 2017 (i.e. Case 3) could be greater than the
average demand, there will be always spillage after Case 3. Table 6 shows likely percentage spillages from
each RE project. Greater the additional RE capacity greater the percentage of spill will be. The spillage is
estimated to be 30% when 15MW RE capacity is added by 2019.
Table 6: Fuel Savings from RE Adjusted for Spillage
Load Factor Effect
Load factor is defined as the average load divided by the peak load in a specified time period. The “duck
chart” in Figure 7 shows how the increase of spinning reserve (due to addition of RE) reduces the average
load (area below the generation load curve) with respect to the peak load. This phenomenon leads to the
reduction in the load factor and in turn the reduction in the fuel efficiency.
The reduction in fuel efficiency leads to additional fuel consumption by the diesel generators. Since this
additional fuel consumption is triggered by the addition of more and more RE, the original fuel savings by RE
must be adjusted for extra fuel consumed by diesel generators as losses. Table 7 shows reduction in fuel
efficiency ratios after addition of RE and fuel losses caused by the load factor effect.
Case Plant Involved Year Built
Fuel Savings
(L)
Likely
Spill (%)
Fuel Loss Due
to Spill (L)
1 Maama Mai 2012 496,350 0% -
2 Maama Mai + Vaini PV 2015 822,604 1.0% 8,226
3
Lapaha Wind
2017 2,149,386 16.0% 343,902
4
2017 2,262,376 17.0% 384,604
5 4 MW PV + 4.4 MW wind 2018 4,143,392 23.0% 952,980
6 8.6 MW PV + 6.6 MW wind 2019 7,250,000 30.0% 2,175,000

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Figure 7: Variation of Diesel Generator Load Profiles with additional RE Capacities
Table 7: The Fuel Loss Due to the Load Factor Effect
Figure 8: Fuel Losses Due to Both Spill and Load Factor Effects
Case Plant Involved Year Built
Fuel Savings
(L)
Fuel Efficiency
Before RE (kWh/L)
Fuel Efficiency
After RE (kWh/L)
Fuel Loss Due
to RE (L)
1 Maama Mai 2012 496,350 4.11 4.10 25,474
2 Maama Mai + Vaini PV 2015 822,604 4.07 4.00 183,924
3
Lapaha Wind
2017 2,149,386 4.04 3.95 297,785
4
2017 2,262,376 4.04 3.90 352,369
5 4 MW PV + 4.4 MW wind 2018 4,143,392 4.01 3.80 491,032
6 8.6 MW PV + 6.6 MW wind 2019 7,250,000 4.00 3.60 814,844

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Figure 8 shows the quantities of fuel losses from both spill and load factor effects. The losses are greater as
more and more RE is added to the energy mix. Table 8 shows the net fuel savings from proposed RE projects
in all four islands. Outer island net fuel savings from RE is very small because outer islands will have only
1.2MW RE capacity. It can be seen from Table 8 that the total fuel savings achieved will be about 4.8 million
litres by the year 2019. Diesel displacement from RE alone is about 35% of TPL’s overall annual diesel
requirements which is around 13 million litres.
Table 8: Net Fuel Savings from RE after Adjusting for Spill and Load Factor Effects
Table 9 shows capex investment requirement to build all the proposed RE plants. Most of the capital costs
are expected to be funded by donors. TPL’s contribution of TOP$ 4 million covers such capital costs as land
acquisition, fencing, grid connection, and security monitoring.
Table 9: Capital Requirement for all RE Projects
5. Results
5.1 Overall Fuel Savings
Table 10 shows the total fuel savings from all three strategic initiatives: reduction distribution line losses, fuel
efficiency improvements and increase in RE penetration. Total fuel savings achieved will be about 5.5 million
litres by the year 2019. Diesel displacement from all three strategic initiatives will be about 42% of TPL’s
overall annual diesel requirements of 13 million litres. Figure 9 shows the overall fuel saving split from all
three strategic initiatives.
Year 2016 2017 2018 2019 2020 Total
Fuel Saving (without spill
& load factor effect) (L)
814,599 2,262,376 4,143,391 7,250,000 7,250,000 21,720,366
Loss Due to Load Factor
Effect (L)
183,925 352,369 491,033 814,844 830,154 2,672,324
Loss Due to Spill Effect (L) 8,146 384,604 952,980 2,175,000 2,175,000 5,695,730
Net Fuel Savings (L) 622,528 1,525,403 2,699,378 4,260,156 4,244,846 13,352,311
Outer
Islands
Net Fuel Savings (L) 481,980 481,747 481,512 481,272 481,029 2,407,540
Total Fuel Savings (L) 1,104,508 2,007,150 3,180,890 4,741,428 4,725,875 15,759,851
Tongatapu
Year 2016 2017 2018 2019 2020 Total
Capex Requirement (TPL
Funded) TOP$
- 1M 1M 1.5M - 4M
Capex Requirement
(Grant Funded) NZD
- 12M 15M 30M - 56M
Net Fuel Savings (L) 1,104,508 2,007,150 3,180,890 4,741,428 4,725,875 15,759,851

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Table 10: Total Fuel Savings from Reduction in Line Losses, Fuel Efficiency Improvement and RE
Figure 9: Overall Fuel Savings from All Three Strategic Initiatives
5.2 Estimation of FT and NFT Components
As shown in Table 11, reduction of FT components due to the overall fuel savings is estimated using Fuel
Adjustment (1)5
of Formula (B) shown in Section 2.2. It can be noticed that greater FT reduction is achieved
towards the later years due to the addition of large size RE plants.
Table 11: Forecast of FT and NFT Components (without Storage)
5
Note that the Fuel Adjustment (2) is zero because it was assumed that current fuel price will stay the same over the
2016-2020 period as future fuel prices cannot be predicted. Thus the fuel adjustment due to fuel price
increase/decrease is zero.
Year 2015 2016 2017 2018 2019 2020 Total
Fuel Savings due to Line Loss
Reduction (L)
278,086 361,107 435,427 491,511 521,772 539,139 2,348,956
Fuel Savings due to Generator
Replacement Program (L)
26,685 36,289 83,649 123,235 195,613 336,157 774,943
Fuel Savings due to RE
Penetration (L)
953,612 1,112,320 2,006,915 3,180,651 4,741,186 4,725,876 15,766,948
Total Fuel savings (L) 1,258,383 1,509,716 2,525,992 3,795,397 5,458,571 5,601,173 18,890,848
Year Current 2015 2016 2017 2018 2019 2020 Formula
FT Reduction due to Fuel
Savings (seniti/kWh)
- 3.34 3.91 6.39 9.38 13.17 13.51
NFT Increase Due to Capex
Investments (seniti/kWh)
- 1.48 0.67 0.68 0.69 0.61 0.60
The Balance - 1.86 3.24 5.71 8.69 12.56 12.91
FT Component (seniti/kWh) 36.38 33.04 32.47 29.99 27.00 23.21 22.87
NFT Component (seniti/kWh) 43.77 45.25 45.70 46.16 46.62 47.09 47.56
Tonga Full Tariff (seniti/kWh) 80.15 78.29 78.17 76.15 73.62 70.30 70.43
B
A

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About 13 seniti/kWh FT reduction is seen with 50% RE penetration (i.e. 15MW RE penetration).
Similarly, as shown in Table 11, NFT is estimated using Formula (A) shown in Section 2.2. The initial NFT at
the start of the 2016-2020 period was estimated at 45.25 seniti/kWh6
during the Reset Process 2015. The
NFT component was then adjusted for 1.5% annual inflation increase throughout the five year period. The
results show that increase in NFT component reduces FT component largely without a diminishing effect.
This was because donor funded capital expenditure was not included7
in the Regulatory Asset Value (RAV)
which was a large component of the NFT calculation. Therefore, a large increase of NFT was not observed.
Table 11 also shows that the overall decrease of full electricity tariff in Tonga is about 10 seniti/kWh (decrease
from its current value of 80.15 seniti/kWh to 70.43 seniti/kWh in 2020) due to the overall fuel savings. Figure
10 shows the tariff path with and without RE. Tariff without RE shows a flat line because it is assumed that
the fuel price is constant throughout the 2016-2020 period as future fuel price cannot be predicted.
Figure 10: Tariff Path With and Without RE (Without Storage)
5.3 Effect of Storage
The effect of battery storage on the tariff reduction is also examined. Since the storage devices eliminate fuel
loses from both spill and load factor effects, the reduction of FT has seen a greater effect. Assuming, 6 hour
storage devices are sufficient to eliminate fuel losses from both spill and load factor effects, the reduction of
FT component is now arrived at about 20 seniti/kWh which is about 7 seniti/kWh increase as compared to
the 13 seniti/kWh case without storage devices. As shown in Table 12, full electricity tariff in Tonga is to be
reduced to 63.84 seniti/kWh by 2020 from the current level of 80.15 seniti/kWh.
6
The NFT component of 45.25 seniti/kWh is yet to be approved by the Regulator. The approved value may be slightly
different.
7
In accordance with the International Financial Reporting Standards (IFRS), donor funded assets are not recorded as
part of RAV.

15
Figure 11 shows the tariff path with storage devices.
Table 12: Forecast of FT and NFT Components (with Storage)
Figure 11: Tariff Path With and Without RE (With Storage)
6. Conclusion
In order to reduce its heavy reliance on imported diesel fuel, TPL embarks on three major fuel use reduction
strategies as highlighted in the Business Plan 2015. These three strategic initiatives together are expected to
decrease diesel use by about 5.5 million litres (42% of diesel displacement) by the year 2020. Fuel reduction
in turn is expected to decrease FT component by about 13 seniti/kWh (without storage) and 20 seniti/kWh
(with storage) by 2020. The relationship between the NFT and the FT component shows that the increase in
the NFT component continues to decrease the FT component without any diminishing effect resulting in an
overall tariff decrease.
References
AECOM NZ Ltd. (2015), Upgrade of Grids and Preparing the Utility for Operations with RE Plants-Stage 2,
Modelling of RE Penetration Scenarios, Auckland, New Zealand.
Year Current 2015 2016 2017 2018 2019 2020 Formula
FT Reduction due to Fuel Savings
(seniti/kWh)
- 4.30 4.40 8.30 13.00 20.40 20.10
NFT Increase Due to Capex
Investments (seniti/kWh)
- 1.48 0.67 0.68 0.69 0.61 0.60
The Balance - 2.82 3.73 7.62 12.31 19.79 19.50
FT Component (seniti/kWh) 36.38 32.08 31.98 28.08 23.38 15.98 16.28
NFT Component (seniti/kWh) 43.77 45.25 45.70 46.16 46.62 47.09 47.56
Tonga Full Tariff (seniti/kWh) 80.15 77.33 77.68 74.24 70.00 63.07 63.84
Estimated Battery Capacity
Required (MWh), 6 Hours
- 1.07 4.08 7.93 16.38 16.46
B
A

PPA Conference 2015 Paper Final

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PPA Conference 2015 Paper Final