Under AEC liberalization, Thailand's energy sector is expected to undergo reforms including third party access to transmission and distribution networks and competition in retail segments. This will require unbundling of tariffs within the electricity supply chain.
The document analyzes tariff setting mechanisms for key parts of Thailand's electricity supply industry under AEC, including EGAT generation, EGAT transmission, MEA/PEA distribution, MEA/PEA retail supply, and EGAT single buyer. It recommends a cost of service approach for each, with a hybrid incentive-based regulation/return on assets model for generation, transmission and distribution, and a cost pass-through model for the single buyer and retail supply. The proposals aim
Economic Impacts of Electricity Price Increases in South Africa, Stephen La...Stephen Labson
slEconomics has undertaken this review with the purpose of highlighting what we see as some of the more significant issues associated with electricity pricing in South Africa and its impact on the economy.
“Impacts of Electricity Access to Rural SMEs”ijmvsc
This study was intended towards evaluating the impact of electricity availability on the operation and
performance of SMEs in the rural areas of Bangladesh. The results are based on a study from a survey
carried out in two electrified villages in Paikgacha, Khulna. The study detected favorable changes on the
production costs, profit margin, development and modernization of business, women empowerment,
quality of life, and human development due to the electrification. The findings of the paper will help the
stakeholders in number of areas including developing grid electricity services, supporting rural
electrification programs, developing the updated framework for micro enterprise development and also
overall reduction of poverty in the rural and disadvantaged areas of Bangladesh
Eastern Winds examines the frontier of wind power development in Europe. The report deals with the prospects for wind power in central and eastern Europe, tackles financing and provides an in-depth analysis of 12 emerging wind power markets. Eastern Winds is also a tool for decision-makers highlighting bottlenecks, regulatory challenges and providing policy recommendations. The report features: 1- In depth analysis of central and eastern European markets: first wave (Bulgaria, Romania, Turkey, Hungary, Poland) second wave and future markets covering - Power market overview, wind energy sector, supply chain, legal framework, opportunities and challenges. 2- Analysis of the wind power sector’s growth in the region - high growth in the more mature markets but boom and bust effect - and projections up to 2020. 3- Wind energy financing - Requirements of private banks when financing projects in emerging markets, profiles of International Financial Institutions active in the region and EU funding. 4- Policy recommendations
The document discusses opportunities for SK Energy to enter the wind power market in China. It analyzes the market size and growth potential of China's wind industry. Government policies strongly support the development of renewable energy like wind power. The wind power market in China is large but development has been uneven across regions. There is potential for SK Energy to partner with players in the industry to take advantage of opportunities in both developed and developing wind power markets in China.
energy crisis introduction (Autosaved)Faizan Ahmed
- Pakistan has faced chronic electricity shortages since the mid-2000s due to a combination of factors. Demand grew significantly but investment in generation did not keep pace, and existing plants were not upgraded for efficiency. Tariffs were kept artificially low for political reasons, preventing full recovery of costs. This contributed to the problem of "circular debt" where fuel suppliers were not paid due to utility arrears. By 2011, the electricity deficit exceeded 7,000 MW at times and the circular debt had ballooned to over Rs. 500 billion, severely impacting the economy and social stability. Alternative energy sources will be needed to resolve the crisis.
Assessing the Impact of Tamil Nadu’s Electricity Tariff Policy on TANGEDCO’S ...AurovilleConsulting
This document analyzes the impact of electricity tariff policies in Tamil Nadu on the financial performance of TANGEDCO, the state-owned electricity utility. It finds that TANGEDCO has accumulated significant losses and debt due to several factors, including a tariff structure with cross-subsidies that results in revenue being lower than costs. Energy charges for many consumer categories, especially those designated as "low tension", are below the cost of supply, contributing to TANGEDCO's losses. The existing policies have also led to higher-paying industrial and commercial customers migrating to other states or procuring power from other sources, further reducing revenues and undermining the cross-subsidy system.
Before we kick-off a new line-up of insightful studies and conversations on energy this 2021, we take a snapshot of the previous working papers which were featured last year.
These studies were produced under the Access to Sustainable Energy Programme-Clean Energy Living Laboratories (ASEP-CELLs) project implemented by the Ateneo School of Government (ASOG), and funded by the European Union.
To receive updates on our latest events and publications, please subscribe to our mailing list through this link: http://bit.ly/ASEPCELLsMailingList
This document provides an ex-post critical evaluation of energy policies in Malaysia from 1970 to 2010. It analyzes key policies through the lens of historical institutionalism, tracing their origins and impacts. The analysis reveals three notable successes: 1) establishing PETRONAS as the national oil company, 2) reducing reliance on oil by growing natural gas production, and 3) creating an oil and gas industry ecosystem. However, dependence on non-renewable resources remains high despite renewable potential. The policies have had mixed results in shaping Malaysia's energy mix.
Economic Impacts of Electricity Price Increases in South Africa, Stephen La...Stephen Labson
slEconomics has undertaken this review with the purpose of highlighting what we see as some of the more significant issues associated with electricity pricing in South Africa and its impact on the economy.
“Impacts of Electricity Access to Rural SMEs”ijmvsc
This study was intended towards evaluating the impact of electricity availability on the operation and
performance of SMEs in the rural areas of Bangladesh. The results are based on a study from a survey
carried out in two electrified villages in Paikgacha, Khulna. The study detected favorable changes on the
production costs, profit margin, development and modernization of business, women empowerment,
quality of life, and human development due to the electrification. The findings of the paper will help the
stakeholders in number of areas including developing grid electricity services, supporting rural
electrification programs, developing the updated framework for micro enterprise development and also
overall reduction of poverty in the rural and disadvantaged areas of Bangladesh
Eastern Winds examines the frontier of wind power development in Europe. The report deals with the prospects for wind power in central and eastern Europe, tackles financing and provides an in-depth analysis of 12 emerging wind power markets. Eastern Winds is also a tool for decision-makers highlighting bottlenecks, regulatory challenges and providing policy recommendations. The report features: 1- In depth analysis of central and eastern European markets: first wave (Bulgaria, Romania, Turkey, Hungary, Poland) second wave and future markets covering - Power market overview, wind energy sector, supply chain, legal framework, opportunities and challenges. 2- Analysis of the wind power sector’s growth in the region - high growth in the more mature markets but boom and bust effect - and projections up to 2020. 3- Wind energy financing - Requirements of private banks when financing projects in emerging markets, profiles of International Financial Institutions active in the region and EU funding. 4- Policy recommendations
The document discusses opportunities for SK Energy to enter the wind power market in China. It analyzes the market size and growth potential of China's wind industry. Government policies strongly support the development of renewable energy like wind power. The wind power market in China is large but development has been uneven across regions. There is potential for SK Energy to partner with players in the industry to take advantage of opportunities in both developed and developing wind power markets in China.
energy crisis introduction (Autosaved)Faizan Ahmed
- Pakistan has faced chronic electricity shortages since the mid-2000s due to a combination of factors. Demand grew significantly but investment in generation did not keep pace, and existing plants were not upgraded for efficiency. Tariffs were kept artificially low for political reasons, preventing full recovery of costs. This contributed to the problem of "circular debt" where fuel suppliers were not paid due to utility arrears. By 2011, the electricity deficit exceeded 7,000 MW at times and the circular debt had ballooned to over Rs. 500 billion, severely impacting the economy and social stability. Alternative energy sources will be needed to resolve the crisis.
Assessing the Impact of Tamil Nadu’s Electricity Tariff Policy on TANGEDCO’S ...AurovilleConsulting
This document analyzes the impact of electricity tariff policies in Tamil Nadu on the financial performance of TANGEDCO, the state-owned electricity utility. It finds that TANGEDCO has accumulated significant losses and debt due to several factors, including a tariff structure with cross-subsidies that results in revenue being lower than costs. Energy charges for many consumer categories, especially those designated as "low tension", are below the cost of supply, contributing to TANGEDCO's losses. The existing policies have also led to higher-paying industrial and commercial customers migrating to other states or procuring power from other sources, further reducing revenues and undermining the cross-subsidy system.
Before we kick-off a new line-up of insightful studies and conversations on energy this 2021, we take a snapshot of the previous working papers which were featured last year.
These studies were produced under the Access to Sustainable Energy Programme-Clean Energy Living Laboratories (ASEP-CELLs) project implemented by the Ateneo School of Government (ASOG), and funded by the European Union.
To receive updates on our latest events and publications, please subscribe to our mailing list through this link: http://bit.ly/ASEPCELLsMailingList
This document provides an ex-post critical evaluation of energy policies in Malaysia from 1970 to 2010. It analyzes key policies through the lens of historical institutionalism, tracing their origins and impacts. The analysis reveals three notable successes: 1) establishing PETRONAS as the national oil company, 2) reducing reliance on oil by growing natural gas production, and 3) creating an oil and gas industry ecosystem. However, dependence on non-renewable resources remains high despite renewable potential. The policies have had mixed results in shaping Malaysia's energy mix.
Recovery of cost of electricity supply in the nigerian power sectorAlexander Decker
This document summarizes a research study analyzing cost recovery in Nigeria's power sector. The study examined how increases in electricity tariffs through the Multi-Year Tariff Order (MYTO) in 2008 and 2012 affected operational cost recovery, revenue generation, and power generation. The researchers found that while full cost recovery was not achieved in some years, the level of recovery was significant. Revenue increased significantly after MYTO was implemented in 2008. However, increased tariffs did not have a significant impact on power generation. The study recommends setting tariffs to allow private operators to recover costs and make profits when they take over the sector. Efforts should also be made to reduce transmission and distribution losses and ensure regular supply to increase demand.
The document provides a political economy analysis of the binding constraints to renewable energy investment in Ghana. It identifies the main constraints as the financial instability of the off-taker, faulty power sector regulation, and lack of access to appropriate finance. Potential policies to address these include privatizing the revenue arm of the power sector, establishing a competitive off-taker market, and creating renewable energy financial instruments. However, stakeholders have differing views on these policies and their implementation faces challenges such as ideological opposition, lack of political will, and concerns over cost increases.
Eskom is applying for new electricity tariffs for the 2014-2018 period (MYPD3). Key points:
- Eskom needs higher tariffs to cover rising costs of primary energy (especially coal), operating costs, maintaining and replacing aging power plants, and financing new generation capacity.
- The application proposes average annual increases of 13% for Eskom's costs and 3% more to support new independent power producers, for a total average increase of 16% per year.
- The increases are aimed to move tariffs closer to full cost recovery while balancing affordability. Protection for low-income households is proposed through lifeline tariffs and cross-subsidies from larger users.
The cross subsidy of electricity price in ChinaAI Publications
A new-round electric power system reform and electric power deregulation reform is on going in China. Of which, the transmission and distribution price reform has generated great impacts on electric power companies. Under this background, how to tackle cross subsidy of electricity price has become a burning issue in China. In this paper, the cross subsidy of electricity price in China is reviewed. Firstly, three categories of cross subsidy of electricity price are introduced; Secondly, the reasons for cross subsidy of electricity price are discussed in details; Thirdly, the impacts of cross subsidy of electricity price are analyzed; Finally, several policy implications are proposed for tackling the issues of cross subsidy of electricity price in China. This paper can provide references for policy decision-making of related government administration..
Barriers, Drivers and Policy Options For Improving Industrial Energy Efficien...CSCJournals
Energy demand in Pakistan is far greater than its indigenous energy supply, leading to prevailing energy crises in the country. The industrial sector, as one of the largest consumers of energy in Pakistan has significant potential for widespread adoption of energy efficiency measures. However, past policies and plans on energy efficiency have not been widely adopted by the industrial sector of Pakistan. This paper identifies and addresses policy-related implementation and institutional gaps. A questionnaire used to collect data from the target group, selected from concerned government organizations, industry and academics in Pakistan. The results indicates the existence of economic, technical and organizational barriers to industrial energy efficiency and highlights stakeholders opinion about policy tools that can be adopted for promoting industrial energy efficiency in Pakistan. Based on results analysis, the paper explores key barriers and drivers to industrial energy efficiency in Pakistan. The paper also investigates that there is great scope for adoption of voluntary policy tools linked with incentive-based mechanism in energy intensive industries of Pakistan.
The renewable energy target solar administrative reportLuiz Cruz
The document discusses the progress and developments of renewable energy in Australia in 2016. Some key points include:
- Investment in both small and large-scale renewable energy installations continued strongly in 2016, with increased confidence in the large-scale renewable energy target. Over $4 billion in new renewable energy projects were committed.
- The small-scale renewable energy scheme saw a continued rise in average system sizes, driven by strong growth in commercial solar installations. Overall installation rates were high in the fourth quarter of 2016.
- 2016 saw some new challenges in regulating the renewable energy market as technologies advanced and new business models emerged that were not anticipated when legislation was originally drafted.
- With only a few years until the 2020
The document summarizes a World Bank assessment of Bulgaria's power sector following a crisis in January 2013. Key issues identified include:
1) Public distrust in energy companies and oversight due to perceived corruption.
2) An unsustainable cost structure driven by flat demand, poorly regulated renewables growth, and inefficient incentives.
3) Declining affordability as social assistance benefits have decreased by a third since 2003.
Comprehensive reforms are needed to improve governance, eliminate distortions, address financial liabilities, and increase social assistance to restore public confidence, financial viability, and affordability.
Assessment of Energy Losses and Cost Implications in the Nigerian Distributio...Dr. Hachimenum Amadi
Energy shortages is the major challenge facing the industrial sector in Nigeria. This paper assessed the energy shortages due to technical losses in the Nigerian distribution network and the cost implications. The study was carried out based on network data collected over the period 2011-2015 from three electricity distribution companies (DisCos) drawn from the three major industrial cities of Nigeria. These data were simulated on the Electrical Transient Analysis program (ETAP) Version 12.6. The calculated energy losses for these cities for the said period are 108,959.87 MWH, 149,256 MWH and 72,743.08 MWH respectively. The corresponding revenue losses are N2,434,164,012, N3,538,754,758.8 and N1,699,751,530.1 respectively. The paper suggested remedial measures to reduce energy losses, mitigate losses arising from unannounced electricity cuts as well as achieve a more efficient and reliable electricity distribution network. The outcome of this research provides a data bank for policy makers and future researchers in the areas of electricity generation, transmission and distribution.
Neil McCulloch, The Policy Practice
Presentation given at “Unlocking Investment in Africa’s Renewables: What are the Binding Constraints?” event, organised by the Institute of Development Studies and held on 19 January 2017 at the Wellcome Collection, London. For more information, please visit http://www.ids.ac.uk/events/unlocking-investment-in-africa-s-renewables-what-are-the-binding-constraints.
Why enincon‟s report upon “ Power Distribution Tariffs in India 2018”?
With power distribution reforms gained momentum soon after the application of EA 2003 (where it was believed to be coined in mid 90‟s) , Indian power distribution utilities came along way since then. With, introduction of reforms and multiple cognitive steps undoubtedly the power distribution sector stands improved by leaps from the erstwhile levels. Having said that, it indeed still represents the weakest link of the power generation, transmission and distribution chain
Presented by Rose M. Baker and David L. Passmore at the Annual Users Conference of Regional Economic Models, Inc., “Regional Economies: the Building Block of the Global Community," in La Jolla, California, 22 October 2007.
Edwin Nateminya, Integral Advisory
Presentation given at “Unlocking Investment in Africa’s Renewables: What are the Binding Constraints?” event, organised by the Institute of Development Studies and held on 19 January 2017 at the Wellcome Collection, London. For more information, please visit http://www.ids.ac.uk/events/unlocking-investment-in-africa-s-renewables-what-are-the-binding-constraints.
Circular debt in Pakistan's energy sector has reached approximately 1.4 trillion PKR. It refers to the cash shortfall faced by the Central Power Purchasing Agency to pay power supply companies. This causes issues throughout the energy supply chain from generators to fuel suppliers. The primary causes are poor governance among entities, delays in tariff determination, and incomplete payments from the government. Secondary causes include high transmission losses, an unfavorable generation mix, and court decisions delaying payments. All stakeholders including private consumers, regulators, the government and DISCOs share some blame.
The document is a statement from E.ON AG responding to the European Commission's Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy. E.ON welcomes many of the Green Paper's goals but expresses concerns that some proposals contradict the principle of open and competitive energy markets. Specifically, E.ON is worried that targets for renewable energy and energy mixes could distort investments. E.ON calls for removing barriers to integrated energy markets in Europe and for allowing market forces rather than political mandates to drive investment and innovation.
This report on “Energy Efficiency in India: PAT Scheme - Success and Failures”, prepared by Tata Strategic Management Group, has a holistic view on the current state of energy efficiency and energy management in India. The focus of this report is on identifying key challenges faced by designated consumers in implementation of PAT Cycle I and how a collaborative effort in the right direction could ensure fast adoption of EE and robust energy management in India. It would gear India towards reducing energy intensity of the future growth, one of the prime objectives under NAPCC
This document summarizes Taiwan's energy sector challenges. Taiwan imports over 99% of its energy needs and relies heavily on fossil fuels like coal and petroleum. This dependence raises issues around energy affordability, environmental responsibility, and energy security. To address these non-market issues, Taiwan is pursuing policies to improve energy efficiency, develop renewable energy, and mitigate energy dependence. However, challenges remain around incentivizing renewable adoption, balancing stakeholder interests regarding nuclear power, and reducing reliance on imports given Taiwan's limited domestic energy resources.
This document summarizes Vietnam's green growth policies and initiatives, with a focus on renewable energy development. It outlines Vietnam's national green growth strategy and action plan, as well as support mechanisms introduced for waste-to-energy and biomass power. Specific recommendations are provided to further promote renewable energy, including implementing tax incentives for solar energy, allowing energy service companies, setting a higher wind power feed-in tariff, providing standard power purchase agreements, and developing pre-packaged wind power projects.
Presentation given at “Unlocking Investment in Africa’s Renewables: What are the Binding Constraints?” event, organised by the Institute of Development Studies and held on 19 January 2017 at the Wellcome Collection, London. For more information, please visit http://www.ids.ac.uk/events/unlocking-investment-in-africa-s-renewables-what-are-the-binding-constraints.
The document discusses the 14th Capacity Building Programme for Officers of Electricity Regulatory Commissions organized by IIT Kanpur from March 1-3, 2021. It covers the historical background of electricity regulation in India, key principles from the Electricity Act 2003, the hybrid framework for tariff setting, components of the Aggregate Revenue Requirement, and principles for determination of power purchase costs, O&M expenses, depreciation, interest costs, and return on equity under multi-year tariff regulations.
Stage 1 of the roadmap focuses on developing standards, protocols, and codes of conduct. Key actions include developing grid interconnection standards, cybersecurity standards, and codes of conduct for customer data and utility-owned distributed energy resources. The objectives are to ensure safe, reliable, and secure grid operations and protect customer data and access to the grid. Challenges include interfacing with national organizations and integrating standards into state regulations.
Recovery of cost of electricity supply in the nigerian power sectorAlexander Decker
This document summarizes a research study analyzing cost recovery in Nigeria's power sector. The study examined how increases in electricity tariffs through the Multi-Year Tariff Order (MYTO) in 2008 and 2012 affected operational cost recovery, revenue generation, and power generation. The researchers found that while full cost recovery was not achieved in some years, the level of recovery was significant. Revenue increased significantly after MYTO was implemented in 2008. However, increased tariffs did not have a significant impact on power generation. The study recommends setting tariffs to allow private operators to recover costs and make profits when they take over the sector. Efforts should also be made to reduce transmission and distribution losses and ensure regular supply to increase demand.
The document provides a political economy analysis of the binding constraints to renewable energy investment in Ghana. It identifies the main constraints as the financial instability of the off-taker, faulty power sector regulation, and lack of access to appropriate finance. Potential policies to address these include privatizing the revenue arm of the power sector, establishing a competitive off-taker market, and creating renewable energy financial instruments. However, stakeholders have differing views on these policies and their implementation faces challenges such as ideological opposition, lack of political will, and concerns over cost increases.
Eskom is applying for new electricity tariffs for the 2014-2018 period (MYPD3). Key points:
- Eskom needs higher tariffs to cover rising costs of primary energy (especially coal), operating costs, maintaining and replacing aging power plants, and financing new generation capacity.
- The application proposes average annual increases of 13% for Eskom's costs and 3% more to support new independent power producers, for a total average increase of 16% per year.
- The increases are aimed to move tariffs closer to full cost recovery while balancing affordability. Protection for low-income households is proposed through lifeline tariffs and cross-subsidies from larger users.
The cross subsidy of electricity price in ChinaAI Publications
A new-round electric power system reform and electric power deregulation reform is on going in China. Of which, the transmission and distribution price reform has generated great impacts on electric power companies. Under this background, how to tackle cross subsidy of electricity price has become a burning issue in China. In this paper, the cross subsidy of electricity price in China is reviewed. Firstly, three categories of cross subsidy of electricity price are introduced; Secondly, the reasons for cross subsidy of electricity price are discussed in details; Thirdly, the impacts of cross subsidy of electricity price are analyzed; Finally, several policy implications are proposed for tackling the issues of cross subsidy of electricity price in China. This paper can provide references for policy decision-making of related government administration..
Barriers, Drivers and Policy Options For Improving Industrial Energy Efficien...CSCJournals
Energy demand in Pakistan is far greater than its indigenous energy supply, leading to prevailing energy crises in the country. The industrial sector, as one of the largest consumers of energy in Pakistan has significant potential for widespread adoption of energy efficiency measures. However, past policies and plans on energy efficiency have not been widely adopted by the industrial sector of Pakistan. This paper identifies and addresses policy-related implementation and institutional gaps. A questionnaire used to collect data from the target group, selected from concerned government organizations, industry and academics in Pakistan. The results indicates the existence of economic, technical and organizational barriers to industrial energy efficiency and highlights stakeholders opinion about policy tools that can be adopted for promoting industrial energy efficiency in Pakistan. Based on results analysis, the paper explores key barriers and drivers to industrial energy efficiency in Pakistan. The paper also investigates that there is great scope for adoption of voluntary policy tools linked with incentive-based mechanism in energy intensive industries of Pakistan.
The renewable energy target solar administrative reportLuiz Cruz
The document discusses the progress and developments of renewable energy in Australia in 2016. Some key points include:
- Investment in both small and large-scale renewable energy installations continued strongly in 2016, with increased confidence in the large-scale renewable energy target. Over $4 billion in new renewable energy projects were committed.
- The small-scale renewable energy scheme saw a continued rise in average system sizes, driven by strong growth in commercial solar installations. Overall installation rates were high in the fourth quarter of 2016.
- 2016 saw some new challenges in regulating the renewable energy market as technologies advanced and new business models emerged that were not anticipated when legislation was originally drafted.
- With only a few years until the 2020
The document summarizes a World Bank assessment of Bulgaria's power sector following a crisis in January 2013. Key issues identified include:
1) Public distrust in energy companies and oversight due to perceived corruption.
2) An unsustainable cost structure driven by flat demand, poorly regulated renewables growth, and inefficient incentives.
3) Declining affordability as social assistance benefits have decreased by a third since 2003.
Comprehensive reforms are needed to improve governance, eliminate distortions, address financial liabilities, and increase social assistance to restore public confidence, financial viability, and affordability.
Assessment of Energy Losses and Cost Implications in the Nigerian Distributio...Dr. Hachimenum Amadi
Energy shortages is the major challenge facing the industrial sector in Nigeria. This paper assessed the energy shortages due to technical losses in the Nigerian distribution network and the cost implications. The study was carried out based on network data collected over the period 2011-2015 from three electricity distribution companies (DisCos) drawn from the three major industrial cities of Nigeria. These data were simulated on the Electrical Transient Analysis program (ETAP) Version 12.6. The calculated energy losses for these cities for the said period are 108,959.87 MWH, 149,256 MWH and 72,743.08 MWH respectively. The corresponding revenue losses are N2,434,164,012, N3,538,754,758.8 and N1,699,751,530.1 respectively. The paper suggested remedial measures to reduce energy losses, mitigate losses arising from unannounced electricity cuts as well as achieve a more efficient and reliable electricity distribution network. The outcome of this research provides a data bank for policy makers and future researchers in the areas of electricity generation, transmission and distribution.
Neil McCulloch, The Policy Practice
Presentation given at “Unlocking Investment in Africa’s Renewables: What are the Binding Constraints?” event, organised by the Institute of Development Studies and held on 19 January 2017 at the Wellcome Collection, London. For more information, please visit http://www.ids.ac.uk/events/unlocking-investment-in-africa-s-renewables-what-are-the-binding-constraints.
Why enincon‟s report upon “ Power Distribution Tariffs in India 2018”?
With power distribution reforms gained momentum soon after the application of EA 2003 (where it was believed to be coined in mid 90‟s) , Indian power distribution utilities came along way since then. With, introduction of reforms and multiple cognitive steps undoubtedly the power distribution sector stands improved by leaps from the erstwhile levels. Having said that, it indeed still represents the weakest link of the power generation, transmission and distribution chain
Presented by Rose M. Baker and David L. Passmore at the Annual Users Conference of Regional Economic Models, Inc., “Regional Economies: the Building Block of the Global Community," in La Jolla, California, 22 October 2007.
Edwin Nateminya, Integral Advisory
Presentation given at “Unlocking Investment in Africa’s Renewables: What are the Binding Constraints?” event, organised by the Institute of Development Studies and held on 19 January 2017 at the Wellcome Collection, London. For more information, please visit http://www.ids.ac.uk/events/unlocking-investment-in-africa-s-renewables-what-are-the-binding-constraints.
Circular debt in Pakistan's energy sector has reached approximately 1.4 trillion PKR. It refers to the cash shortfall faced by the Central Power Purchasing Agency to pay power supply companies. This causes issues throughout the energy supply chain from generators to fuel suppliers. The primary causes are poor governance among entities, delays in tariff determination, and incomplete payments from the government. Secondary causes include high transmission losses, an unfavorable generation mix, and court decisions delaying payments. All stakeholders including private consumers, regulators, the government and DISCOs share some blame.
The document is a statement from E.ON AG responding to the European Commission's Green Paper on a European Strategy for Sustainable, Competitive and Secure Energy. E.ON welcomes many of the Green Paper's goals but expresses concerns that some proposals contradict the principle of open and competitive energy markets. Specifically, E.ON is worried that targets for renewable energy and energy mixes could distort investments. E.ON calls for removing barriers to integrated energy markets in Europe and for allowing market forces rather than political mandates to drive investment and innovation.
This report on “Energy Efficiency in India: PAT Scheme - Success and Failures”, prepared by Tata Strategic Management Group, has a holistic view on the current state of energy efficiency and energy management in India. The focus of this report is on identifying key challenges faced by designated consumers in implementation of PAT Cycle I and how a collaborative effort in the right direction could ensure fast adoption of EE and robust energy management in India. It would gear India towards reducing energy intensity of the future growth, one of the prime objectives under NAPCC
This document summarizes Taiwan's energy sector challenges. Taiwan imports over 99% of its energy needs and relies heavily on fossil fuels like coal and petroleum. This dependence raises issues around energy affordability, environmental responsibility, and energy security. To address these non-market issues, Taiwan is pursuing policies to improve energy efficiency, develop renewable energy, and mitigate energy dependence. However, challenges remain around incentivizing renewable adoption, balancing stakeholder interests regarding nuclear power, and reducing reliance on imports given Taiwan's limited domestic energy resources.
This document summarizes Vietnam's green growth policies and initiatives, with a focus on renewable energy development. It outlines Vietnam's national green growth strategy and action plan, as well as support mechanisms introduced for waste-to-energy and biomass power. Specific recommendations are provided to further promote renewable energy, including implementing tax incentives for solar energy, allowing energy service companies, setting a higher wind power feed-in tariff, providing standard power purchase agreements, and developing pre-packaged wind power projects.
Presentation given at “Unlocking Investment in Africa’s Renewables: What are the Binding Constraints?” event, organised by the Institute of Development Studies and held on 19 January 2017 at the Wellcome Collection, London. For more information, please visit http://www.ids.ac.uk/events/unlocking-investment-in-africa-s-renewables-what-are-the-binding-constraints.
The document discusses the 14th Capacity Building Programme for Officers of Electricity Regulatory Commissions organized by IIT Kanpur from March 1-3, 2021. It covers the historical background of electricity regulation in India, key principles from the Electricity Act 2003, the hybrid framework for tariff setting, components of the Aggregate Revenue Requirement, and principles for determination of power purchase costs, O&M expenses, depreciation, interest costs, and return on equity under multi-year tariff regulations.
Stage 1 of the roadmap focuses on developing standards, protocols, and codes of conduct. Key actions include developing grid interconnection standards, cybersecurity standards, and codes of conduct for customer data and utility-owned distributed energy resources. The objectives are to ensure safe, reliable, and secure grid operations and protect customer data and access to the grid. Challenges include interfacing with national organizations and integrating standards into state regulations.
Distributed energy resources (DERs) can provide net benefits to the electric system (e.g., congestion relief) and broader society (e.g., emission reductions). However, despite these advantages, the deployment of high penetrations of DER has proved challenging. Against this backdrop, the electric utility is often singled out as a fundamental barrier to deployment of DER assets. To overcome the perceived electric utility shortcomings, many stakeholders conclude that a completely new model is needed for the electric industry.
ScottMadden disagrees with this assessment and instead believes electric utilities maintain natural advantages that can be leveraged to deploy renewables and DER assets as well or better than some models being offered. In our 51st Phase II Roadmap, ScottMadden proposes leveraging the natural advantages of the electric utility in order to accelerate the deployment and penetration of DER assets.
For more information, please visit www.scottmadden.com.
This document outlines principles for economic regulation established by the UK government. It discusses the importance of economic regulation in ensuring efficient infrastructure and services. The principles are aimed at providing clarity on roles and responsibilities, reinforcing regulator independence, ensuring stable yet adaptable regulation, and accountability. The government commits to embedding these principles in its policymaking on economic regulation.
This document summarizes an agenda and presentations for a workshop on enhancing regulation of water and energy infrastructure in Southeast Asia. The workshop included presentations on conceptual frameworks for effective regulation, initial regulatory status reports for Vietnam's energy and water sectors, and next steps for case studies and stakeholder interviews in selected countries. Key regulatory challenges identified for Vietnam's sectors included low tariffs restricting investment and improving coverage, and lack of capacity and enforcement at some provincial levels.
The document discusses principles for tariff design in India, focusing on time-of-day (ToD) tariffs. It outlines key tariff principles like economic efficiency, protection of consumers, and sustainability. It also discusses the evolution of tariff regulation in India and the multi-year tariff framework. The document provides details on categorizing costs as controllable and uncontrollable in tariff setting. It explains the methodology for determining ToD tariffs, including identifying peak/off-peak hours and assessing the costs and benefits of shifting demand between time periods.
This document provides an overview of regulatory investment incentives for electricity and gas networks. It discusses major sector trends driving investment needs, such as increasing renewable energy and demand growth. Investments are classified as either market-based or reliability-focused. Regulatory approaches to incentivizing efficient investments are examined, including revenue caps, cost-benefit analysis of projects, and allowing a return on a regulated asset base. Practical examples from countries like the UK, Germany and Norway are also reviewed. The presentation aims to help regulators design frameworks that ensure adequate and efficient network investment.
The document discusses how global fuel prices affect electricity generation in Malaysia. It explains that while Malaysia's main fuels for power generation are coal, natural gas, and LNG, crude oil only contributes a small amount. Coal and LNG prices fluctuate globally but natural gas is secured domestically at a subsidized price. The ICPT mechanism passes fuel cost changes to consumers every six months by adjusting electricity tariffs. A recent tariff reduction of 2.25 sen/kWh reflected the continued decline in global coal prices. The goal is to eventually reflect the actual cost of generation without subsidies.
This session explains the nature of economic regulation. It discusses the central question why some parts of the electricity value chain remain regulated and are not subject to competition.
Furthermore, four main issues regarding an adequate regulatory regime are addressed:
· Areas: Where should be regulated?
· Scope: What should be regulated?
· Type: How should be regulated?
· Institutions: Who should regulate?
Special emphasis is put on the types of regulation respectively the different forms of price control and their effects (advantages / disadvantages) – including incentive regulation. A short overview on the current legislation and application of price control in the EU completes the session.
Introduction to network regulation - Investment IncentivesLeonardo ENERGY
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slEconomics., Electricity sector tariff reforms in Thailand. Stephen Labson 2014
1. Contact Dr Stephen Labson
slabson@slEconomics.com
www.slEconomics.com
slEconomics
Economics Consulting in Utilities and Infrastructure
2. slEconomics
Economics Consulting in Utilities and Infrastructure
slEconomics is a boutique consulting firm - established in 2004
specializing in economics, strategy and finance in utilities and
infrastructure. Our consultants have advised major corporations,
governments and regulators in Australia, Africa , Asia and North
America .
3. Thailand is a signatory to the ambitious blueprint for ASEAN economic integration which is meant to be
rolled out during 2015. While the complete implementation of ASEAN Economic Community (AEC) may
take longer than originally called for, it remains a motivating factor in domestic and regional policy
development.
In the energy sector AEC liberalisation is expected to have a significant impact on the structure of
domestic and regional electricity markets, which will in turn have implications for tariff controls
pertaining to regulated components of the Thai ESI. Moreover, the competitive dynamics of AEC
liberalisation make this an opportune time to refine existing regulatory frameworks and underlying tariff
setting mechanisms so as to maintain the competitive position of the Thai ESI and provide customers
reliable electricity supply at fair and cost reflective prices.
With the above in mind, during 2014 Thailand’s Ministry of Energy engaged slEconomics Pty Ltd (as part
of an international consortium) to review tariff setting mechanisms within the context of AEC
liberalisation. This Review summarises the approach utilised in undertaking our analysis and key
recommendations as presented to a public forum held in Bangkok 30 June 2014.
4. Under AEC liberalisation it is expected to drive reforms in Thailand's energy sector with 3rd party access
to transmission and distribution networks and competition for defined retail segments envisioned for
the short to medium term. Unbundling of tariffs within the electricity supply chain is seen as a pre-
condition for implementation of effective 3rd party access.
The unbundling of tariffs necessitates a re-assessment of the forms of tariff regulation best applied to
each activity in the electricity supply chain and the methodologies employed in setting regulated tariffs.
The research summarised here focuses on unbundling of tariffs under AEC and the concomitant design
and implementation of tariff setting mechanisms needed to enable effective 3rd party access.
The structure of our report as follows:
In section I. we reference key government policy drivers and objectives under which tariff setting
mechanisms would be developed and briefly summarise the more prominent assumptions utilised in
our analysis.
In section II. we then explain the methodology employed in evaluation of the various options and the
recommended tariff setting mechanisms resulting from our analysis.
A brief summary of some of the more significant implementation issues is provided in section III.
We have also provided an annexure that outlines our recommendations on how allowed returns and
associated financial metrics could be used in setting tariff levels on the basis of financial sustainability. 4
5. 5
Section Contents Page
1. Our broad approach 6
2. Proposed tariff setting mechanisms 17
3. Implementation of proposals 24
Annexure Allowed returns and financial criteria used to establish tariff levels 32
slEconomics Pty Ltd
6. Key working assumptions
Methodology for assessing unbundled tariff setting mechanisms
slEconomics Pty Ltd 6
7. Optimal design of tariff setting mechanisms is dependent on the market structure to which it is applied.
With the proposed structure of theThai ESI being evaluated in a separate study for the Ministry of Energy,
we have relied on a set of working assumptions under which our recommendations would apply.
In particular, the scenarios envisioned over the short to medium term provide for 3rd party access to
transmission and distribution networks, and competition for defined retail segments.With this in mind we
have examined three possible scenarios under which tariffs would be set (i.e. to facilitate 3rd party access).
Scenario 1
EGAT Generation / Transmission and
System Operator, System Planner,
Single Buyer
MEA Distribution &Retail supply.
PEA Distribution & Retail Supply.
Scenario 2
EGAT Generation
EGAT Transmission & System
Operator, System Planner, Single
Buyer
MEA Distribution & Retail supply.
PEA Distribution & Retail Supply.
Scenario 3*
EGAT Generation
EGAT Transmission & System Operator
EGAT System Planner, Single Buyer
MEA Distribution
MEA Retail supply.
PEA Distribution
PEA Retail Supply.
8. In consideration of the preceding three market scenarios our analysis sets as a working assumption that
ring-fenced regulatory accounts and tariff setting mechanisms would apply to the following entities
over the short to medium term (i.e. scenario 3).
EGATGeneration (i.e. EGAT self generation only)
EGATTransmission & System Operator
EGAT Single Buyer
MEA Distribution
PEA Distribution
MEA Retail Supply
PEA Retail Supply
NB.We wish to emphasize that these working assumptions are likely to diverge from what eventuates in
fact .We have undertaken our analysis having consideration of this policy uncertainty and have aimed to
provide recommendations that are largely robust to a range of market scenarios.
9. In undertaking our analysis we have been mindful of fundamental
aspects of legislation and policy that would determine the overall
objectives and criteria under which tariffs are to be set in Thailand.
Sections 64 and 65 of the “Energy Industry Act, B.E. 2550” are of
particular relevance in that:
Section 64 The Minister shall, with consent of the National Energy
Policy Council, establish the policy and guidelines for setting of tariff on
energy industry operation.
Section 65 Subject to the policy and guidelines approved by the NEPC,
the Commission shall establish the criteria for setting of tariffs of
licensees of each category, based on the following guidelines:
1) should reflect the actual cost and take into account the reasonable return
on investment of efficient energy industry operation;
(2) should be at the level ensuring efficient and adequate energy procurement
to meet energy demand of the country;
(3) should incentivise licensees to improve efficiency in energy industry
operation;
(4) take into account fairness to both energy consumers and licensees;
(5) take into account the assistance to the underprivileged power consumers or
the electricity supply to decentralize development to provincial areas;
(6) have a clear and transparent tariff calculation and make it public: and
(7) constitute no unjust discrimination against energy consumers or those who
wish to use energy.
9
•Relevant policies of the Royal Thai Government (as cited above).
•Existing tariff setting mechanisms applied to EGAT, MEA and PEA
•International experience and best practice tariff setting
•The context of Thailand’s participation in AEC liberalisation initiatives.
Starting with these key energy policy
objectives and criteria our
recommendations have been formulated
having regard to:
•Relevant policies of the Royal Thai
Government (as across).
•Existing tariff setting mechanisms applied
to EGAT, MEA and PEA
•International experience and best practice
tariff setting
•The context of Thailand’s participation in
AEC liberalisation initiatives.
10. Three fundamental principles of regulatory design guide our
evaluation of tariff mechanisms:
1. Design of control mechanisms aligned to the underlying
cost structure of the activity.
2. Determination of scope and role of efficiency incentives
and pass though arrangements based on efficient
allocation of risks:
1. Targeting incentives to areas in which management
has direct control, and where efficiency benefits can
be measured.
2. Limiting windfall gains and losses due to external
events.
1. Allocating residual risks to the party that can best
manage them.
3. Design of ‘fit for purpose’ tariff mechanisms where
administrative costs are commensurate with regulatory
benefits achieved.
These principles play an important role in
areas such as:
•Form of regulation (e.g. Return on
Assets;CPI – X;Cost plus margin, etc)
•Duration of the tariff control period.
•Application of cost adjustment
mechanisms.
•Scope and role of efficiency incentives .
•Use of ex post expenditure reviews.
•Cost of capital, asset valuation, and
return on investment.
11. •With fundamental regulatory objectives and
criteria established regulatory design matrices
provide a compact representation of the
regulated sub-sector.
•These matrices are then mapped to
associated tariff setting mechanisms for each
sub-sector.
•Domestic and International experience is
utilised to define a workable set of options.
•Tariff mechanisms are identified for each
sub-sector.
Tariff objectives
Regulatory design
criteria
Sub-sector information
Domestic and
international experience
Choice of tariff
mechanism
* For a detailed discussion of our regulatory design methodology see Stephen Labson, Regulatory Design Toolkit for Essential
Infrastructure, for the Essential Services Commission South Australia.
12. Regulatory design matrices highlighting key characteristics of each unbundled activity as they relate to
the design of regulatory controls were assessed. Key characteristics considered included:
Level of capitalised assets
Cash flow and liquidity
Long term supply agreements / lease arrangements
Level of costs subject to material level of forecast error e.g fuel unit cost and volumes
Proportion of uncontrollable costs to total
O&M costs to total expenditures
Correlation of energy demand with economic growth
Regulatory accounting and reporting required for unbundled tariff controls
Governance and oversight issues
Legislation and institutions
slEconomics Pty Ltd 12
13. slEconomics Pty Ltd 13
Key characteristics EGAT Generation EGAT TSO EGAT Single Buyer MEA /PEA
Distribution
Networks
MEA / PEA Retail
Supply
Capitalised assets Asset intensive.
Long lived, highly
depreciated assets
Large ‘lumpy’
investment profiles
Asset intensive
Long lived, highly
depreciated
Minor fixed assets Asset intensive
Long lived, highly
depreciated
Modest fixed assets
Cash flow and
liquidity
Stable cash flows /
limited default
payments
Stable cash flow
NB Assuming TO
/ SO only
Counter party
arrangements
potentially lead to
cash flow and
liquidity
constraints.
Stable cash flow
(NB assuming ring-
fenced network
activities – not
retail sales)
Subject to customer
default
Long term supply
agreements / lease
arrangements
Fuel supply
arrangements under
long term contracts.
Ancillary Services
agreements and
some IT under
licence
Portfolio of supply
agreements and
sales / purchases.
O&M and related
agreements
Supply agreements
for on-sale of power
to end users
Regulatory Design Matrix A
14. slEconomics Pty Ltd 14
EGAT Generation EGAT TSO EGAT Single Buyer MEA /PEA Distribution
Networks
MEA / PEA Retail
Supply
Costs subject to
material level of
forecast error e.g fuel
unit cost and volumes
Relatively predictable
network costs
Ancillary service costs
s.t. forecast error
Costs subject to
forecast error
Relatively predictable
network costs
Subject to forecast
error e.g. energy units
purchased and Ft pass
through
High proportion
uncontrollable costs to
total
Low proportion
uncontrollable cost to
total for network
High proportion
uncontrollable costs
to total
Low proportion
uncontrollable cost to
total
High proportion
uncontrollable cost to
total
O&M Network O&M;
SO procurement of
Ancillary Services
Relatively limited
ability to manage
costs
Network O&M; Labor and systems
costs
Demand subject to
economic growth
Relatively stable usage
(based on maximum
loads)
Driven by external
factors
Dependent on charging
system
End use variance s.t.
demand drivers.
Regulatory Design Matrix B
15. slEconomics Pty Ltd 15
Cost characteristics EGAT Generation EGAT TSO EGAT Single Buyer MEA /PEA
Distribution
Networks
MEA / PEA Retail
Supply
Regulatory
accounting and
reporting required
for unbundled tariff
controls
Cost separation
and asset valuation
for EGAT own
generation direct
costs- allocation of
common costs
Cost separation and
asset valuation for
TO/SO direct costs -
allocation of
common costs
Cost separation
direct costs.
Allocation of
common costs.
Cost separation
and asset
valuation for
direct network
costs - allocation
of common costs
Cost separation
and asset
valuation for
direct retail supply
costs - allocation
of common costs
Governance and
oversight?
Establishment and
administration of
regulatory
approach - EGAT
Generation
Establishment and
administration of
regulatory
approach - EGAT
TO/SO
Internal /external
governance
structures to define
controls
Establishment
and
administration of
regulatory
approach –
networks only
Establishment and
administration of
regulatory
approach – retail
supply
Legislation and
institutions
TBD – aim is for
minimal change in
legislation and
institutions .
As across As across As across As across
Regulatory Design Matrix C
16. • As noted in previously, the evaluation process provided a short list of alternative tariff setting mechanisms
based on local and global experience. The following broad forms of control were evaluated within the
context of Thailand’s policy objectives, local and global experience with these types of controls, and
unique characteristics of theThai ESI.
Rate of Return
Cost of service / return on assets
Incentive Based Regulation (e.g. RPI-X price or revenue caps)
Performance Based Regulation
Benchmarking (or ‘yardstick’ ) regulation
Regulation by contract
Caveats:
• In practice tariff mechanisms utilise a combination of approaches which have been considered in our
analysis..
• There is not a ‘one-size-fits-all’ tariff mechanism, as each perform differently when applied to various
sectors of the ESI
17. Proposed tariff setting mechanisms for:
EGAT Generation (i.e. EGAT self generation only)
EGAT TSO
MEA and PEA Distribution
MEA and PEA Retail Supply
EGAT Single Buyer
slEconomics Pty Ltd 17
18. In transition to AEC liberalisation ring-fenced regulatory accounts would be maintained and separate
tariff controls would apply to each of the following regulated sub-sectors of the ESI.
EGATGeneration (i.e. EGAT self generation only)
EGATTSO
MEA and PEA Distribution
MEA and PEA Retail Supply
EGAT Single Buyer
Our analysis suggests that a cost of service approach be applied to each of the five sub-sectors of the
Thai ESI.Within this context our proposal is as follows:
Hybrid IBR / Return on Assets approach applied in setting annual revenue allowances and tariffs for
EGATGeneration; EGATTSO; and MEA and PEA Distribution networks.
Cost pass through mechanisms applied in setting allowed revenue and tariffs for EGAT SB; and
MEA, PEA.
slEconomics Pty Ltd 18
19. Efficient cost of supply is determined
building up from:
opex;
return on assets;
regulatory depreciation;
tax (or tax equivalents).
These ‘building blocks’ make up the
regulated entity’s revenue allowance, which
is then translated into tariffs.
Cost of Service Building Blocks
Allowed revenue is determined on the basis of efficient cost of
supplywiththeprimarybuildingblocksinclusive:
Operatingcoststoberecoveredforprudentcostofsupply
ReturnonRegulatoryAssetBase(RAB)(i.e.RoAxRAB)
Depreciationonregulatedassets
(NB corporate tax expenditures recovered by use of pre tax return
onassets,orentersasaseparatecostitem).
Tariffs set to achieve the revenue allowance based on forecast sales.
Utilising the evaluation approach we have recommended a cost of service approach to tariff
setting for generation, transmission and distribution networks.
20. Tariff mechanisms Recommendations
Form of tariff control Hybrid IBR / Return on Assets.
•Annual revenue allowance based on efficient cost of service.
•Incentive mechanisms for controllable costs; cost adjustment mechanisms for variances in defined
expenditures; and benchmarked rate of return on Regulatory Asset Base (RAB).
Efficiency incentives •Incentive mechanisms based on fixed revenue allowance and consideration of efficiency carry-over to
subsequent tariff control period.
•NB. Relatively greater use of IBR mechanisms forTransmission and Distribution network activities (as compared
toGeneration) based on relative controllability of costs.
Expenditure review Ex ante benchmarking of efficient costs in setting fixed revenue allowances with ex post review only in
exceptional cases.
Cost adjustment
mechanisms
Fuel cost adjustment on a periodic basis (i.e. during the tariff control period).
Adjustments for variances in capital costs and other expenditures to be determined.
Duration of tariff control Recommend 2-3 years to adjust to unanticipated events and allow for refinement of tariff mechanisms
RegulatoryAsset Base
(RAB)
Starting RAB based on depreciated cost of regulatory assets - rolled forward each year adjusting for capital
additions, regulatory depreciation, and disposals.
Recognition of assets in
the RAB
Allowed capital expenditure recognised in the RAB (as forecasted) on commissioning, adjusted to actual costs in
the following control period subject to prudency review.
Return on Capital WeightedAverage Cost of Capital benchmarked to peer group comparators / risk adjusted basis
Tariff ‘smoothing’ •Tariffs and charges set to achieve the annual revenue allowance based on forecast demand. Smoothed
adjustments within the control period on NPV basis.
21. Factors unique to retail supply require its own form of tariff control. E.g.:
• Relatively low levels of fixed assets limiting the applicability of Return on Assets approaches to
recovery of invested capital (e.g. invested capital might be in the form of IT and billing systems,
processes, specialisied labour, prudential requirements, etc).
• Substantial aggregation of non-controllable ESI costs - e.g. IPPs, SPPs,VSPPs and renewables
(various programs); social balancing/subsidy scheme, National UniformTariff Policy, funding to
Power Development Fund, etc.
• Substantive cash flow and liquidity risk as compared to fixed assets and retained earnings
We have recommended a cost plus margin approach for retail supply given that the fixed asset base
does not well reflect capital invested in the sector.
The specific activities that would earn a margin would need to be determined, and benchmarking of
margin levels would need to be carried out.
22. What is generally referred to as a “Single Buyer” may in practice cover a range of functions: e.g.
•Single Buyer – where literally applied provides a statutory monopoly on the purchase and sale of power.
•Central Buyer – that might have significant power procurement responsibilities, but not a complete
monopoly in regard to power purchase and on-sale.
•Market aggregator – e.g. aggregating bulk power supplies in sale to suppliers.
•IPP trader / administrator - responsible for trading and administration of pre-existing PPAs, and/or new
power purchases.
Establishing the Single Buyer as an unbundled activity will require:
•Integration of legacy contracts
•Governance arrangements e.g. Board structure, directors fiduciary duties, etc.
•Funding arrangements e.g. cost recovery mechanisms; prudential requirements, reserve accounts; cross
party liability; indemnity; guarantees.
23. Tariff mechanisms Recommendations
Form of tariff control Cost pass through with performance based incentives
•For Single Buyer annual cost allowance based on approved budgets provided on defined activities (To
be determined). Governance structures developed to ensure prudency in expenditures.
•For MEA and PEA Retail Supply – Regulated revenue allowance / weighted average price cap with pass
through of allowed costs.
Efficiency incentives Performance, Service Quality, and Cost to Service incentive mechanisms to be determined.
Expenditure review Ex ante benchmarking of efficient costs in approval of annual budgets and revenue proposals, with ex
post reviews as needed.
Cost adjustment
mechanisms
•Full cost pass through for prudent cost of services.
•NB Consideration of short term cash requirements and use of related party transfers; intra-year
adjustment mechanisms or banking facilities for variable cash flow requirements.
Duration of control period Recommend 2-3 years for retail. Annual for Buyer.
Return Benchmarked margin, peer group comparators / risk adjusted basis.
24. slEconomics Pty Ltd 24
Creation of unbundled regulatory accounts
and standardised report templates
Promulgation of detailed tariff setting
methodologies
Establishment of regulatory powers to
facilitate tariff unbundling
25. It is likely that legislative amendments will be required if implementing the recommendations set out in
our review. In drafting such amendments a range of issues will ideally be considered such as:
Role and scope of regulatory powers
Level of independence provided to the regulator
Objectives of which the regulator is to have regard to in setting tariffs
Duties of the regulator, perhaps with prescribed conditions for tariff setting (i.e. requirements to consult with
stakeholders, produce a tariff methodology, duration of tariff control periods, etc).
Defined powers (or limitations) of ministerial directive on components of the tariff setting process.
Appeal of regulatory decisions - e.g. use of overarching legislation pertaining to due process, establishment of special
purpose appellate board emepowered to review the logic and basis of a regulatory decision, etc
Administration of duties - e.g. organisational and governanc
e structures, makeup of the regulator, budgets, regulators term, termination of officials, etc.
The items listed above are illustrative of the types of legislative amendment that may be required to facilitate unbundled
tariff setting.Of course the broader initiatives that might arise fromAEC liberalisation pertaining to industry and market
structure would likely call for more substantive legislative amendment, but are beyond the scope of this study.
25
26. Our review has focused on the broad frameworks in which tariffs might be set – but stops well short of
the detailed codification of rules that would be needed to implement these recommendations. A
detailed tariff methodology would ideally be developed, comprised of guiding principles and explcit rules
addressing matters such as:
the definitions and formulas used in setting the regulatory revenue allowance and tariffs;
how the annual revenue allowance and tariffs are to respond to changes in original estimates;
the criteria under which operational and capital expenditure is to be recovered through revenue;
how incentive mechanisms are to work; administrative rules for adjusting allowed revenue and
tariffs during a tariff control period;
rules regarding re-opening of the determination; and rules regarding reporting to the regulator.
It is common for regulators to develop and publish a tariff setting methodology to formalise the many
rules of which it is comprised. In doing so the integrity of the regulatory process is enhanced by providing
a transparent, objective and predictable basis under which regulated tariffs will be set.
slEconomics Pty Ltd 26
27. Our review has focused on the broad frameworks in which tariffs are set, but stops well short of codifying the rules needed
to implement these recommendations. For the cost of service frameworks recommended in our study the tariff setting
methodology would typically address issues such as:*
Qualifying costs - including the criteria under expenditures are to be assessed in terms of efficient costs of supply; ex
ante expenditure review, and conditions under which ex post expenditure reviews would be carried
Cost adjustment mechanisms - inclusive the methodology for calculating allowed adjustments and administrative
issues such as how and when tariff adjustments are to be made, review procedures, etc.
Regulatory assets – including criteria for qualifying assets (i.e. assets that enter the RAB) and conditions under which
assets might be optimised out of the RAB; starting value of the RAB and methodology to be used in calculation;
treatment of capital additions and method for depreciating regulatory assets.
Incentive mechanisms - with detailed discussion of approach, methodology and administration pertaining to each
mechanism (e.g. carry-over of incentive benefits across tariff periods, benefit sharing between suppliers and
customers, measurement, validation and reporting for service quality incentives; etc)
Return on capital – setting out the methodology to be used in calculation of the cost of capital and amounts to be
recovered from tariffs.
Approach and working models used in calculating revenue allowances and tariffs inclusive assumptions on external
parameters driving costs and revenue such as projected sales volumes, GDP, CPI, exchange rates, etc.
Duration of the tariff control period and conditions under which the tariff determination might be re-opened and the
scope of such re-opener (i.e. specific expenditures items, or a review of the determination I its entirety).
*NB This is a short list of the more prominent matters that would be covered by the methodology which we have provided for ease of reference and is only indicative
of the coverage we would recommend. 27
28. Unbundled regulatory/financial accounts will be required for generation, transmission, distribution,
retail, and buyer entities inclusive:
• Comprehensive build-up of costs for regulated and non-regulated business activities (recent actuals
and projected) and description of cost drivers.
• Planned capital expenditures.
• Forecast sales volumes (units) for services subject to tariff control.
• Depreciated asset values to set the Regulatory Asset Base (RAB) for Generation, TSO, Distribution
assets.
• WeightedAverage Cost of capital (by sub-sector)
This requires a separate set of books. i.e. ‘Regulatory Accounts’ that are independently audited and
reconciled to statutory financial reports.
29. For the purposes of regulatory accounting and tariff setting a valuation methodology will need to be
established and uniform procedures applied inclusive:
Detailed valuation of capital assets (ideally supported by an asset register)
Assumed life of each asset group for the purpose of calculating the depreciated value.
Description of any averaging used in aggregating various depreciation schedules.
Methodology for capitalisation of costs (capitalisation policy).
Cost allocation methodology for tariff / non-tariff activities.
Valuation of starting asset base
For example:
•Historic cost
•Indexed historic cost
•Replacement value / modern equivalent
•Etc
Choice dependent on objective to reflect current market prices or original investment.
30. For sales that are not subject to the basic tariff setting mechanism (e.g. cross-border sales) one could
either :
A. Treat them as part of the ‘regulatory till’ which is ultimately bundled with tariff based costs and
revenues; or
B. Ring-fence activities out of the regulatory till and calculate the revenue allowance from tariff sales
on fully allocated costs.
Under (A) tariff customers share the risk and return brought about by non-tariff activities, and there
would be an argument for regulatory oversight to apply (although not an area regulators typically
maintain a strong level of capacity in).
This option is better suited to situations where it is not feasible to fully dis-aggregate costs and
where a high degree of regulatory oversight is not required (i.e. potential adverse outcomes to
customers less than a given materiality standard).
Under (B) costs are fully allocated between tariff and non-tariff activities, and risk and return on non-
tariff activities is carried by the operator. There is not such a strong argument for regulatory oversight
of non-tariff activities.
Option (B) is best employed where a high proportion of costs and benefits are directly attributable
to the ring-fenced activity., and becomes less attractive significant common costs need to be
allocated due to weaknesses inherent to the methodology.
Where these matters can not be sufficiently resolved alternative forms of unbundling (e.g. Structural,
legal, etc. may be warranted. )
31. Similar to Thailand's experience with the Ft, the broad trend globally has been to apply fuel cost
adjustment mechanisms allowing for recovery of reasonable generation cost of supply.*
This is in recognition that fuel costs are to a large degree outside of the control of the utility, and
often diverge from forecasts made at the on-set of a tariff control.
Where the reasonableness of costs has been established, periodic fuel cost adjustments are made
that account for both variations in fuel prices and fuel mix in line with actual dispatch of various
types of generating plant.
In unbundling tariffs the Ft may need to be re-calibrated to recover fuel costs directly accruing to EGAT
generation. At that stage a more general review of the Ft may be warranted with a focus on efficiency
incentive mechanisms and risk allocation.
Components of the Ft not directly related to EGAT generation costs would be recovered through the
unbundled tariff to which it most directly accrues to.
* see slEconomics, Fuel Cost Adjustment – International Experience. Dec 2006
32. • Allowed returns and financial criteria used to establish tariff levels:
• Return on capital
• Financial sustainability and tariff levels
33. We understand that EPPO has previously considered both Return on Invested Capital (ROIC) and the
WeightedAverage Cost of Capital (WACC) in tariff setting While the two measures are broadly related
to each other, there are some important differences.
ROIC measures the efficiency of a firm in investing capital in profitable investments, and is often used
when examining the financial performance of a firm.
However, when setting the return on capital and tariffs the WACC provides several advantages in that
it:
Allows for disaggregation and benchmarking of its constituent components of the cost of debt,
cost of equity, and capital structure (i.e. proportions of debt and equity).
Can be applied on a pre-tax or post- tax basis to accommodate various regulatory approaches.
Can be used for the various sub-sectors of the ESI by benchmarking to sub-sector comparators (i.e.
generation, transmission, and distribution networks).
With the above in mind we recommend that the WACC be used in setting tariffs for the unbundled
activities of generation, transmission and distribution*
34. 34
WACC
Cost of equity
Cost of debt
Gearing
Tax rate
Cost of equity – Capital Asset Pricing Model (CAPM) referenced to
domestic macro-economic variables and international sector
benchmarks.
Cost of debt – Benchmarked to Thai bond rates and mid-
investment grade corporate borrowings 5-7 year maturity .
Gearing – Notional values based on efficient capital structure.
Tax rate - Statutory rate of corporate tax.
TheWACC allows for consistent approach to estimating the cost of capital while adjusting for sector specific risk
characteristics.
Pre Tax WACC = [ Rd x D] + [ (Re/(1-t)) x E]
• Rd = pre tax cost of debt
• Re = post (company) tax cost of equity
• t = corporate tax rate
• E = proportion of equity (%of total value)
• D = proportion of debt (%of total value)
35. Empirical and conceptual analysis suggests that the weighted average cost of capital varies between
electricity generation, transmission and distribution activities given the differing risk characteristics
generally attributed to these activities ( thus risk and expected return).
With the above in mind we recommend risk adjusted values be used in setting tariffs for the unbundled
activities having regard for financial risk characteristics generally attributed to generation, transmission
and distribution sectors.
An illustration of benchmark values for generation, transmission and distribution is provided below:
35
36. The values complied below are provided to illustrate theWACC approach . NB. They are not estimates or
recommended values .
WACC parameters Generation Transmission Distribution Comments
Nominal risk free rate 3.76% 3.76% 3.76% Thai 10Y as of June 25 2014
Debt premium 2.25% 2.25% 2.25% Thai Bond Market Association >5 year spread on BBB corporates
Nominal cost of debt* 6.0% 6.0% 6.0% Cost of debt = nominal risk free rate + debt premium
Asset Beta 0.50 0.32 0.38 Indicative values from market and regulatory benchmarks
Equity Beta 1.00 0.79 0.84 Harris-Pringle transformation using benchmark gearing levels
MRP 8.1% 8.1% 8.1% Deloitte, 2013 valuation report for emerging markets
Nominal return on equity 11.9% 10.1% 10.6% Return on equity = Risk free rate + (equity beta x MRP)
Gearing 50% 60% 55% Industry benchmarks
Tax 20% 20% 20% CIT rate for 2014 KPMG Global Survey
Inflation 2.60% 2.60% 2.60% Actual year on year May 2014
Nominal pre tax WACC* 10.4% 8.7% 9.3% [Debt% x Cost of Debt] + [Equity% x ((Cost of Equity / (1-tax))]
Real pre tax WACC* 7.6% 5.9% 6.5% Nominal pre tax WACC adjusted for inflation
•Figures rounded
•Compiled by slEconomics Pty Ltd
37. IPART, one of Australia’s leading state based utility regulators describes the use of credit metrics in
setting tariffs in terms of “financeability tests” as follows:
“We use the financeability test as a check on the reasonableness of the proposed revenue or price path.
We expect a utility will be financially sustainable over the life of the assets given that the building block
model allows a utility to recover its efficient costs. However, in some circumstances a utility may
encounter short term financial sustainability issues. This can be due to differences in the timing of the
recognition of expenses and income.”
And used in EPPO’s 2000 and 2005 review of tariffs; e.g.
2000 2005
EGAT MEA PEA EGAT MEA PEA
Debt service coverage ratio >1.3 >1.5 >1.5 >1.3 >1.5 >1.5
Debt/Equity <1.5 <1.5 <1.5 <1.5 <1.5 <1.5
Source: Electricity tariff restructuring reports, NEPO, 2001 and EPPO, October 2005. As reported by Sirasoontorn, op cit.
38. The ability to service debt is central to the financeability of a business. Interest coverage is perhaps
one of the more intrinsically significant and transparent indicators at hand.
An often used indicator is Funds FromOperations (FFO) interest coverage. This financial ratio is seen
as a strong choice in testing for financeability in that it:
corresponds closely to cash multiples available for debt service;
is used extensively by practitioners in similar applications;
is reasonably straight forward to calculate; and
considerable data is at hand in which to benchmark threshold levels to comparator utilities.
Three other indicators are also seen as helpful in application of the financeability test:
Short term liquidity
Repayment of principal
Ability to pay dividends
A set of indicators is provided on the slide that follows:
39. *Threshold values are illustrative values only based on investment grade credit ratings
Definitions (except FFO dividend coverage) from Moody’s Investor Services “Rating Methodology: Global Regulated Electric
Utilities”
Indicator Definition Description Threshold
values*
FFO Interest
Coverage
(Cash Flow from Operations – Changes in Working Capital +
Interest Expense) / (Interest Expense + Capitalized Interest
Expense)
Cash available to service
interest payments.
>2.7
FFO to
Gross Debt
(Cash Flow from Operations – Changes in Working Capital) /
(Total debt + operating lease adjustment + underfunded
pension liabilities + basket-adjusted hybrids + securitizations +
guarantees + other debt-like items)
Cash available to pay down
principal (after interest,
before payment of dividend).
>13%
RCF to
Gross Debt
(Cash Flow from Operations – Changes in Working Capital –
Common and Preferred Dividends) / (Total debt + operating
lease adjustment + under-funded pension liabilities + basket-
adjusted hybrids + securitizations + guarantees + other debt-
like items)
Cash available to pay down
principal (after payment of
interest and dividend).
>9%
FFO
Dividend
Coverage
(Cash Flow from Operations – Changes in Working Capital) /
dividend payments
Cash available to service
interest and pay dividend
>2.2
40. With a workable set of financial indicators defined, our recommended methodology for use in
evaluation of tariff levels is as follows:
1. Determine threshold values (or ranges) of financial indicators consistent with target credit ratings
(i.e. stand-alone investment grade ratings).
2. Apply projected cash flows and balances for the tariff period into a set of notional financial
statements, including profit and loss, balance sheet and cash flow statement.
3. Calculate projected financial ratios for each activity using the pro forma financial statements
above.
4. Compare the results against threshold values to assess the financial sustainability of the operator
given proposed tariff levels.
41. slEconomics Pty Ltd 41
slEconomics
Economics Consulting in Utilities and Infrastructure
Contact Dr Stephen Labson
+61 (0) 412 599 693
slabson@slEconomics.com
www.sleconomics.com