1. The document discusses strategies for setting tariffs for power plants. It explains that tariffs include fixed charges and variable charges based on electricity usage. 2. Regulatory bodies determine tariffs and ensure they efficiently allocate resources, satisfy fairness principles, and generate sufficient revenue for utilities. 3. The document provides examples of how to calculate the cost of electricity generation and the tariff rate based on total generation costs. It describes designing wholesale tariffs through determining revenue requirements and tariff structures.

1. ENERGY POLICY PROGRAM
POWER PLANT
TARIFF STRATEGIES
MARCH 2014

2. TOPIC 1: POWER PLANT
TARIFF STRATEGIES
USAID Energy Policy Program

3. USAID Energy Policy Program
INTRODUCTION
One of the most important questions that a power company must ask and
answer is what should they charge for providing electricity to the customer?
Average retail electricity prices are calculated by dividing utility revenue by
retail sales. It is the measured cost, or average revenue per kilowatt-hour, of
power sold. Electric utilities usually offer three primary classes of service:
residential, commercial, and industrial. The average price per kilowatt-hour
for residential consumers is generally higher than for any other sector due in
part to higher costs associated with serving many consumers who use
relatively small amounts of power. The industrial sector has the lowest
electricity prices due to the economies of serving a few consumers who use
relatively large amounts of electricity.

4. USAID Energy Policy Program
OBJECTIVES
At the conclusion of this topic, participants will be able to:
1. List the functions of the regulating bodies for setting tariffs.
2. Give the definition of a tariff as explain in this training.
3. Explain the difference between a fixed charge and variable charge.
4. Explain what a tariff should accomplish.
5. List the steps for designing wholesale tariffs.
6. Describe the two part tariff system.
7. Discuss the steps for setting up a two part tariff system.

5. FUNCTION OF TARIFF REGULATING BODY
National Electric Power Regulatory Authority Pakistan (NEPRA) is responsible
for the regulation of power plant tariffs in Pakistan.
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The functions of the regulating bodies include:
• Issue and revoke electricity distribution licenses
• Regulate the electrification drive
• Determine electricity distribution competency
• Regulate electricity tariffs and structures
• Regulate electricity service standards
• Settle disputes between suppliers and customers
• Approve expropriation of network assets

6. USAID Energy Policy Program
TARIFFS EXPLAINED
A tariff is the amount charged for providing energy under a contract. It includes
both fixed and variable charges.
Fixed charges are not based on how much energy you use. It is normally
separately identified on your bill, and is often called the ‘daily supply charge’ or
‘service to property’ charge. It can be displayed as a daily rate on your bill (e.g.
in ‘rupees per day’), but may appear as a single figure for a billing period.
Variable charges or ‘consumption charge’ is normally the amount you pay for
each unit of electricity and/or gas you use. It is listed on your bill as rupees per
kilowatt hour (PKR/kWh).

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COST OF ENERGY SUPPLY
As an example, consider the cost of owning and running a car. The various
costs can be converted to an average cost per km per month.

8. USAID Energy Policy Program
FIGURE 2: ELECTRICITY USE COSTS

9. FIGURE 3: NETWORK CONNECTION COSTS EXAMPLE
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10. USAID Energy Policy Program
TARIFF GOALS
A tariff should accomplish the following:
1. Energy tariffs should firstly allocate resources efficiently among different
sectors of the economy and within the energy supply industry.
2. The tariff should satisfy fairness principles such that costs are allocated
among customers according to the burden they place on the energy
system.
3. The energy tariff should raise sufficient revenue to meet the financial
requirements of the utility and finally, the tariff should be simple enough to
facilitate billing with available technology while ensuring that customers
understand the billing process.

11. ELECTRICITY COST CALCULATION EXAMPLE
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On Wednesday, April 8, 2014
Fuel Used = 1038.8 Tons
Fuel Price = 70,913.77 Rupees/Ton
Net Generation = 3,598,12 kWh
Fuel Cost = 1038.8 Tons * 70,913.77 Rupees/Ton
= 73.7 * 106 Rupees
Net Generation = 3,598,712 kWh
Electricity Cost = 73.7 * 106 Rupees / 3,598,712 kWh
= 20.50 Rupees/kWh

12. TARIFF CALCULATION EXAMPLE
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On Wednesday, April 8, 2014
Fuel Cost = 73.7 * 106 Rupees
Transmission Cost (10% fuel cost) = 0.25 * 106 Rupees
Administration Cost (20% fuel cost) = 0.5 * 106 Rupees
O & M Cost = 1.0 * 106 Rupees
Other Costs = 3.0 * 106 Rupees
Total Cost = 78.45 * 106 Rupees
Net Generation = 3,598,712 kWh
NEPRA Cost = 78.45 * 106 Rupees / 3,598,712 kWh
= 21.80 Rupees/kWh
Electricity Cost = 73.7 * 106 Rupees / 3,598,712 kWh
= 20.48 Rupees/kWh
Tarrif = 21.80 – 20.48 = 1.32 Rupees/kWh

13. USAID Energy Policy Program
TARIFF DESIGN
The tariff structure together with the tariff rates make up the tariff. This,
together with other charges becomes the tariff package, which when applied to
the customer consumption profile gives the electricity cost.

14. USAID Energy Policy Program
WHOLESALE TARIFFS
The process of designing wholesale tariffs contains several aspects:
1. The determination of the appropriate revenue requirement (total annual
costs).
2. The use of various technical data.
3. The design of the tariff structure. Generally, the tariff process includes four
steps.

15. USAID Energy Policy Program
FIGURE 5: TARIFF PROCESS

16. USAID Energy Policy Program
TWO PART TARIFF SYSTEM
Two-part tariffs shall be applied to those companies whose participation in the
electric energy and capacity balance is instructed by the system operator on
instant basis. This tariff charges a customer for the amount of energy
consumed as well as the rate at which this energy is consumed.
This structure recovers variable costs through a constant consumption charge
(e.g. c / kWh) and a capacity cost charge (proportional to rate of use) (e.g. R /
kW). This tariff requires metering that is able to log the maximum rate of use in
addition to the normal energy metering function.

17. FIGURE 6: EXAMPLE OF SYSTEM LOADS AND DIVERSITY
CHART
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18. FIGURE 7: MONTHLY PEAK GENERATION PLUS NET IMPORTS
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19. FIGURE 8: ENERGY GENERATION PLUS NET IMPORTS
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20. SETTING UP A TWO PART TARIFF SYSTEM
There are several requirements that must be addressed before two-part tariffs
can be designed and adopted.
Organization and Infrastructure -XYZ Company is responsible for providing the
information and data needed to develop and implement two-part wholesale
tariffs. It is recommended that a review of the organization and the current
infrastructure be conducted to identify areas where changes will be needed in
order to develop and implement the two-part tariffs.
Data Analysis Equipment and Capabilities:
Metering - The hourly metering installation at all distribution company points of
delivery (connection points) needs to be in place
Software and Data Acquisition Systems - Data acquisition systems and
software must be in place and able to record all metering data from each point
of connection.
Billing Changes - Billing systems may need to be modified to allow for the
billing of both the capacity element and the energy portion of the monthly bills.
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21. FIGURE 9: DEMAND-SIDE MANAGEMENT ACTIVITIES
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