7. Circle of Power Sector Economics
Multi Buyer Multi
Supplier
Market Forces
Generation
Retail supply
Discoms
Transmission Distribution
Natural MonopolyRegulation
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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
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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)
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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
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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)
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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
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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
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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
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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
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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
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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
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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.
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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*
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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
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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.
•
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Reduce cross subsidy
Let Pension Funds & Insurance
invest money in regulated wheeling
business
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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
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•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.
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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
•
•
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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
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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
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