Mcc tariff models dr harish ahuja


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Mcc tariff models dr harish ahuja

  1. 1. Electricity Tariff Models & Way Forward 8th November 2013 Chennai Dr Harish K Ahuja President Strategy & Corporate Affairs 08/11/2013 1
  2. 2. Structure Power sector Reforms : Fundamentals Tariff models: 3 models Cost of Service model : Basic regulatory economics, Approach , Advantage & Disadvantage Incentive regulations: Approach , Advantage & Disadvantage & limitations Hybrid Model : Approach & example Why competition works better than regulations & privitization Focal issues for taking discoms towards competitive mode. Some conclusions : Create Prosumers 08/11/2013 2
  3. 3. 08/11/2013 Moser Baer Projects Pvt Ltd 3 Private and Confidential – For Limited Circulation Only
  4. 4. Moser Baer Projects – Group Structure Moser Baer Projects Moser Baer (Projects Private Ltd. (MBPPL) Group • Key Investors: Blackstone, IFCI, GE • Hydro Clean Energy (Incl. Solar Farms) Coal Mining Thermal: Madhya Pradesh power project: 2,520 MW, Chhattisgarh power project, 1,320 MW • Thermal Solar: • • Domestic – 223 MW Commissioned International: 63 MW Commissioned • Hydro: North Eastern India and Nepal 2000 MW, Himachal Pradesh ~500 MW • Coal Mining: Chhattisgarh Company is committed to high quality, low cost and timely delivery of world class projects 08/11/2013 4
  5. 5. 08/11/2013 5
  6. 6. Economics of Power reforms 08/11/2013 6
  7. 7. Circle of Power Sector Economics Multi Buyer Multi Supplier Market Forces Generation Retail supply Discoms Transmission Distribution Natural MonopolyRegulation 08/11/2013 7
  8. 8. Unbundling and Competition Competition Regulation Regulation Competition 08/11/2013 8
  9. 9. Basic Elements of Power Reform To bring Multiple Players especially in competitive segments i.e. Generation and Retail supply Economic regulation SET UP Independent REGULATOR to check Monopoly Practices in Distribution/Transmission and avoid Market Power in generation Competition IN Generation and Retail supply segment • By Competitive wholesale Market • By Competitive Retail market 08/11/2013 9
  10. 10. Different Tariff Models 08/11/2013 10
  11. 11. Different components of Retail Tariff Power Purchase Cost - Genco- Deregulated Inter state transmission charge (POC)- PGCIL Intra state transmission charge - Transco Distribution Wheeling - Discom Cross subsidy Surcharge (Area Discom) Additional Surcharge ( Area Discom) Scheduling Charge( SLDC) Retail supply margin – Supplier - Deregulated SLDC) 08/11/2013 11
  12. 12. Basic Models Of Regulatory tariff 1. Cost of Service or Rate of Return Regulations 2. Incentive Regulations Price cap (RPI-X ) 3. Hybrid Approach 08/11/2013 12
  14. 14. The competitive firm short run supply curve 08/11/2013 14
  15. 15. A competitive firm –Long term supply curve 08/11/2013 15
  16. 16. 08/11/2013 16
  17. 17. Profit in long term in perfect competitive market Accounting Profit= Economic Profit + opportunity cost of capital(WACC) In Long Run for a firm in perfect competitive market , Economic Profit= 0 So Accounting Profit = Opportunity cost of Capital (WACC) 08/11/2013 17
  18. 18. Economic Value Addition EVA = Capital Employed ( ROCE –WACC) In Power sector – Only WACC is allowed WACC = Equity X ROE + Debt X ROD It is called ROCE approach also EVA in regulatory tariff setting is Zero Regulator in cost plus regulation allows only WACC treating firms are in a perfect competition and economic profit is zero 08/11/2013 18
  19. 19. Cost of Service Regulations Approach The Regulated Firm effectively submit a bill (ARR) for its operating expenses and capital Cost, including an After-Tax Return on its Investment. Equal or Exceed his cost of capital, and the Regulator passes this cost through in the tariff charged after due prudence check EA 2003 & National tariff policy covers cost + regulations to attract investments 08/11/2013 19
  20. 20. Cost + Regulations Advantages Credible approach to attract long term investments in capital starved power sector Reduces the expropriation risk on high cost sunk investments. Attract large quantum of investments in short span of time as investors are assured about recovery of operational & capital investments with reasonable returns (Average Total Cost) Disadvantages Information asymmetry between Regulator & Regulated firm Regulatory capture – Transfer of firms & market risk from company to consumers Rent seeking behavior – Gold platting of capital exp. Moral Hazard : promote inefficiency Good for only High Cost firmsv 08/11/2013 20
  21. 21. Understanding Incentive Regulations 08/11/2013 21
  22. 22. Incentive Regulations Approach The regulator defines ex ante a set of prices (or a weighted average of prices for different services )that the regulated firm will be allowed to charge consumer for the services . Price adjustments formula is tied to exogenous variables( for example, general inflation and an assumed rate of productivity growth) going forward. The prices are not tied directly to the regulated firm cost or profits. The applicability of tariff is for longer period 4-5 years 08/11/2013 22
  23. 23. RPI-X Advantages Promote Efficiency/motivation by offering upfront incentives for low cost firms. Moderate rent extraction. Tariff certainty for 3-4 years : Offer comfort to investors. Disadvantages Low tariff cap may create indirect penalties for poor quality. Weak in enforcing firms to pass on the savings/efficiency to end consumers. High Tariff cap may offer high rents to investors Social stress : poor may not seek quick remedy. Create Entry barrier for new investors 08/11/2013 23
  24. 24. Incentive regulations Prerequisite for adopting this approach Sound Regulator information system : Excellent information required for firms cost - not to fix price cap too low which may go below ATC. In India where electricity prices have been too low, a credible fixed-price contract that set prices high enough to yield attractive returns can be very effective in attracting investment funds. Setting a cap not too low or too high : Moral hazard vs lazy rat 08/11/2013 24
  25. 25. Best Approach : Hybrid The form of a profit sharing contract : The regulated firm can charge tariff partially responsive to changes in realized costs and partially fixed ex ante (more generally, by offering a menu of cost-contingent regulatory contracts) The basic idea here is to make it profitable for a firm with low cost opportunities to choose a relatively high powered incentive scheme and a firm with high cost opportunities a relatively low powered scheme. 08/11/2013 25
  26. 26. Hybrid approach R (revenue) = a ( Fixed component) + (1-b) C (contingent cost) b : Sharing parameter based on responsiveness of Firm’s efficiency Under a fixed price contract or price cap regulation: a = C* where C* is the regulator’s assessment of the “efficient” costs of the highest cost type and b=1 Under pure cost of service regulation where the regulator can observe the firm’s expenditures but not evaluate their efficiency: a=0 b=0 Under profit sharing contract or sliding scale regulation (Performance Based Regulaion 0<b<1 0 < a < C* 08/11/2013 26
  27. 27. 08/11/2013 27
  28. 28. Evolution of Tariff Models when power markets becomes more competitive 08/11/2013 28
  29. 29. Power Reforms : A Gradual & thoughtful Process Norway Sweden Singapore PJM Victoria state of Australia UK DELHI-In Reform Trajectory India 29
  30. 30. How to Address Focal issues while taking discoms to competition 08/11/2013 30
  31. 31. Focal issues - Discoms Bailout : What Next - Role of regulators! 1 ry 4 2 3 Privitization of supply/content side! 08/11/2013 - Unbundle Discoms : Wire & content! ! 31
  32. 32. Discom Bailout : what next 4 3 08/11/2013 1 2 32
  33. 33. Where is Competition •It is a established fact that neither regulations nor privatization works ,it’s the competition which serves the best of interests of electricity consumers ) Multi Buyer Multi Supplier Market Forces Generation Very Good Retail supply Open Access Transmission Good Average Distribution Poor Natural MonopolyRegulation 08/11/2013 33
  34. 34. 2 Unbunble Discoms! • Promote competition on Demand side (It is a established fact that neither regulations nor privatization works ,it’s the competition Wheeling Business Supply Business which serves the best of interests of electricity REGULATED consumers ) Competition/Deregulation • • • • Transparent Billing • Initiate horuly metering drive by directing discoms to put smart/ABT meters • Separate Wheeling & supply business. •Discoms & other retail Players •Let area discom supply company be default supplier for few more years i.e spot rates. • • . Promote direct subsidy to poor domestic& farmers through Smart cards. •Issue Guidilines for retail supplier on switching . • Promotion of renewable through regulatory cess in the begining till grid parity is achieved. •Allow more consumers to be open access/deregulated in next 8 years ie 300 KW, 36000Units per year • APDRP: Mainly to strenghten distribution & transmission network •Open Derivative markets in next 23 years to see price visibility. • 08/11/2013 Reduce cross subsidy Let Pension Funds & Insurance invest money in regulated wheeling business 34
  35. 35. 3 Supplier Privitization Of Discoms Past PPP model & Private discoms Delhi, Orissa, Surat, Mumbai,Ahemdabad, Noida, Calutta etc Chaturvedi Commitee :Mixed reactions Present Frenchaisee Bhiwandi, Agra,Jalgaon Shunglu commitee : Mixed reactions 08/11/2013 •FUTURE •No more transitory model. •Bring in more suppliers •Deregulated consumer can not be charged with regulated tariff • •SERC can not regulate Tariff for Deregulated consumers except CX & • wheeling charges •Even for charging power purchase cost explicit agreement of consumer necessary • Open access consumers do not need permission of Discoms to choose other suppliers, • •Just information is sufficient • Discoms though will be default supplier, but tariff would be mutually discussed. 35
  36. 36. 4 Role of Regulators • CERC • Move towards Price cap regulations instead of cost plus especially for interstate transmission : to avoid gold platting • Open Access – Building Concensus • • 08/11/2013 Effective ISO- POSCO Derivative markets to give long term price signals to attract investment SERC – • Tariff Fixation in regular intervals • Reducing Cross subsidy in +- 20% • Intrastate POC – not visible • Enforcing shedding. • Prescribe I cap – 18% reserve margin with supplier • Enforcing RPO/SPO : promoting prosumers • Promoting deguralations/open access: By putting in place timelines for diffrerent loads ; 0.5 MW,100 KWS/50 K units • Invest in ABT compliant meters to record houry consumption. • Promote direct subsidy to poor dom & farmers through Smart cards. • Promote use of solar pumps instead of seprate feede for agriculture Performance stds- No Load 36
  37. 37. Create Prosumers “Electricity for all” Electricity generated would meet the Prosumer’s growing electricity demand and the surplus units would be feed back to the grid Ensures political backing and support Allows for capital and interest subsidy to be directly given to the consumer Rational planning for long term power procurement” More prosumers will reduce power demand ,in turn will affect capacity addition. Saving in Transmission and Distribution cost R-APDRP (Part B) –Already in place R-APDRP Aims at - Renovation, modernization and strengthening the system With Net Metering, Discom can better serve energy deficit customers (industrial & commercial) & be more profitable, thus improving their financial health & reducing liabilities IT clubbed with Net Metering defined as a set of IT hardware, software and applications can reduce energy losses 08/11/2013 37
  38. 38. Thank You 08/11/2013 38