Generation Tariff Revision Proposal (2013-2016) · 2019. 6. 21. · As per the Tariff Determination Regulation (Updated as of 14th July 2010), Bhutan Electricity Act 2001 18 July

Generation Tariff Revision Proposal (2013-2016)

As per the Tariff Determination Regulation (Updated as of 14th July 2010),

Bhutan Electricity Act 2001

18 July 2013

Outline

Principles of TDR

Domestic Generation Tariff Trends (1986-2013)

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff

Revision Proposal

Clarifications

Changes Proposed in 2013-16 Generation Tariff Revision Proposal

Cost of Supply Methodology

Proposed Generation Tariff for 2013-16

Principles of Tariff Determination Regulation (in accordance with Section 14.1 of the Electricity Act 2001)

TDR

Fairness to both service customers

and service providers

No unjust discrimination against service

providers or users

Reflect the actual cost of efficient

business operation

Conducive to efficiency

improvement in business

operation

Enhance efficient and adequate

supply to satisfy the domestic

demand

Transparency in the determination and presentation

of tariffs.

Domestic Generation Tariff Trends (1986-2013)

1986-1994

• CHPC Tariff Nu. 0.10/kWh

1994-2001


2001-2005


• KHPC Tariff Nu. 0.30/kWh

• BHPC Tariff Nu. 0.50/kWh

2005-2007

• CHPC Tariff Nu. 0.30/kWh, BHPC Energy Sold to CHPC

• KHPC Tariff Nu. 0.30/kWh

• THPA Energy Tariff 0.30/kWh

2007-2010

• Royalty Energy Tariff Nu. 0.30/kWh

• Non-royalty or Additional Energy Tariff Nu. 1.20/kWh

2010-2013

• Royalty Energy Tariff Nu. 0.13/kWh. From 2011, Royalty Energy Revenue did not accrue to Druk Green

• Non-royalty or Additional Energy Tariff Nu. 1.20/kWh

Particulars As per TDR/Tariff

Model

Druk Green 2010 Proposal

2010 Tariff Review Outcome.


1. Cost of Equity

12% 15%Effectively 6% , i.e. 12%on 50% of equity onlyciting the 60% grantand reasonable returnfrom export

15.5%

At par with normsin India

TDR Section 1.8 &Schedule C allowsrevision

2. Royalty EnergyProduction Cost

No provision

Production cost ofroyalty energyexcluding returnsneed to berecovered

No provisionallowed forrecovery ofproduction cost

Royalty energy tariffreduced from Nu.0.30 per kWh to Nu.0.13 per kWh and noroyalty revenueaccrual to DrukGreen

Total Energy net ofthe royalty used fortariff

Similar to norms in India

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal


Particulars As per TDR/Tariff

Model


2010 Tariff Decision Outcome.


3. Energy Import Cost

No provision

Included in O&M costs

Import to be billedseparately with yearlyceiling of 49.5 GWh orNu. 92.07 million

Recovery of actual cost for full import

Wheeling charge also to be recovered

4. OtherCosts

Cost ofSupply

Allocated CO costs to plants

Net assets as per book of accounts

Only one-third CO costallowed, citing thatCO costs relate tonew projects & doesnot belong to anyplant

Nu. 1.236 billion worthasset handed to otheragencies disallowed

Full Corporate Officecost less costsegregated forspecific new projects

For assetstransferred to Govt.agencies, liabilitiesremain with DrukGreen

Feedbacks on 2010 Tariff Reviewand 2013-16 Generation Tariff Revision Proposal

Particulars As per TDR/Tariff Model




5. Investment Plans

Scrutiny by the BEA

Nu. 4.999 billion Most investmentsdisallowed

Only 1/3rd

COinvestment allowedciting that it is notrelated to plants.Thereafter, only 85%working out to Nu.2.462 billion allowed

Nu. 3.742 billion

6. Donation & Community Welfare Expenses

_ Actual underO&M expenses

Removed and notallowed to recover

Actual under O&Mexpenses


Particulars As per TDR/Tariff Model




7. O&M efficiency gains

BEA to determine

0% 2% 0%

8. Generation Tariff

_ Nu. 1.99 per kWhfor Additional Energy

Nu. 1.20 per kWh for Additional Energy

Nu. 1.99 per kWh

Nu. 0.84 per kWh for Royalty Energy

Nu. 0.13 per kWh forRoyalty Energy

Royalty revenues doesnot accrue to DrukGreen since 2011

Treatment of Equity as Grant

Druk Green owned by DHI, the commercial arm of the government & expected to

operate commercially and provide returns to the RGoB in the form of dividends

The Auditors certified treatment of grants received by RGoB as equity

RGOB as the ultimate shareholder has not given any indication to treat the equity as

grant

Therefore, the grants received for the projects by RGoB be treated as equity.

Clarifications

Grant given by Govts. of India and Austria

Grant received by RGoBand invested in the project

Completed projects handed over to Druk Green along with corresponding

equity and debt but no grants

Clarifications

Treatment of Royalty

TDR 2007 (Updated in 2010) Section 7.3 requires the royalty energy to be sold

by Generation Licensees at Royalty Price to implement transfer of subsidy from

Generation Licensee to customers

However, in line with EDP 2010 and BSHDP 2008 and based on comments of

BCCI, the proceeds from the royalty sales accrues to RGOB since January 2011.

Therefore, Since royalty energy proceeds accrues to RGoB and not Druk Green

anymore, the transfer of subsidy from Generation Licensee to customers does not

arise

Changes Proposed in 2013-16 Generation Tariff Revision Proposal –1. Higher Allowance of Cost of Equity

1. Higher Allowance of Cost of Equity

Allowance of higher CoE in keeping with TDR and also for following reasons;

1.1. No Grants Received by Druk Green

Druk Green did not receive any grant

Equity injection from MoF through DHI

Druk Green operates like any Corporate Entity answerable to shareholders

Only RE Assets received in form of grant cannot earn Return on Assets (TDR 6.6.2)

1.2. Export Revenues Subsidizing Domestic Tariffs

Beyond the scope of Act and TDR (EA 14.1.iv & TDR 1.5)

Linking returns from export to CoE for domestic tariff is an indirect subsidy

Subsidy through Royalty pricing or through other mechanism under the purview of Govt.

Curtailing CoE for domestic tariff does not allow Druk Green recover cost of supply


1.3. Druk Green’s Declining Returns (Inclusive of Export)

Fall in profit despite Druk Green’s consistently better operational performance

Hydropower Benchmarking Study by PA Consultants, Norway;

Druk Green’s total cost per WMO is the least among other hydropowerplants in Asia and South America.

Average production is highest at 6.4 GWh compared to the group average of 3GWh per WMO

Operational KPIs of Druk Green

Increase due to Export Tariff of KHP & THP

KPIs Druk Green Average Remarks

Power Plant Availability (PPA)

97.66% BC Hydro, Canada 96% andNHPC, India 91%

Water Utilization Factor 99.96%


Trends in Demand, Supply and Export

Druk Green’s revenue suffers due to twin effects of decreasing export and low domestic

tariff

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010 2011 2012 2013 2014 2015 2016

En

ee

gy

(GW

h)

Generation

Export

Domestic Demand


1.4. Challenges in Financing Opportunities for Hydropower Development

At existing tariff levels - uphill task to sustain the dividend expectation

At Druk Green’s current returns of 10-11%, it is unlikely to get investors/financiers

support for new projects and would not facilitate plough back of profit for

investment in new hydropower projects. The current returns will not enable

Bhutan to achieve the objective of economic self reliance through development

of a financially viable and reliable electricity industry (EA 3.1.iv).

1.5. Returns Based on Capital Asset Pricing Model (CAPM)

Expected return on equity = risk free rate + Beta (market return – risk free rate)

As reference case; NHPC’s Expected returns as per model– 16%

Beta 0.91

Interest rate of 10 years Indian Govt. bond 8% &

Average Indian market return since 1991 of 17%

Returns for the power sector in Bhutan should be comparable


1.6. High Inflation Rates

Average inflation is 9%. At 12% CoE, real return is only 3% - not commensurate with risks

TDR permitted CoE may be appropriate for very low inflation mature economies

1.7. CoE as per Indian Electricity Regulatory Commission (CERC) Norms

15.5% post-tax

Comparison with India relevant because of integrated energy market and export

tariff based on CERC norms

1.8. Higher Average Returns for Listed Companies in Bhutan

Most listed companies have returns higher than 15%

1.9 . Indicative Generation Tariff of Upcoming Hydropower Projects (Using Tariff Model)


1.10. Opportunity Lost from Export

Huge Opportunity loss due to domestic use of the additional energy

More than Nu. 1.3 billion during the last 3 years

Year

Druk Green

Sales to BPC

(GWh)

Royalty

Energy (GWh)

Additional

Energy (GWh)

Opportunity loss on

account of additional

energy (Mill Nu.)

2010 1,628.03 1,082.53 545.50 370.94

2011 1,683.72 1,044.30 639.42 441.20

2012 1,828.02 1,009.43 818.59 564.83

Total 5,139.77 3,136.26 2,003.51 1,376.97


2. Recovery of Cost of Production of Royalty Energy

Tariff computed on 100% of the total energy volumes

Cost of production of 15% royalty is not recovered leading to subsidization

Royalty revenues no longer accrues to Druk Green since 2011

Realization of 12% CoE is impossible as can be seen from the computation considering

2012 Annual Accounts

Domestic sales – 5.22% Export sales – 11.74%

In India, CERC norms also allow the energy net of free energy in tariff computation

Therefore, total energy net of royalty energy be allowed in computation of tariff


3. Recovery of Cost of Energy Import

BEA allows to invoice max. 49.5 GWh or Nu. 92.07 Million worth energy annually

Cost of import beyond the BEA ceiling could not be recovered in the past

No generation capacity augmentation in tariff period, import forecast

Therefore, recovery of cost of energy import and its wheeling charges be allowed


4. Full Recovery of Other Costs

Corporate Office Costs to be allowed to recover fully

Druk Green formed to bring synergy and efficiency under a single company

structure

No separate company structure required for each plant

Specific costs pertaining to new projects accounted separately

Cost of assets handed to Govt. agencies to be allowed to recover

Creation of assets like schools necessary during project implementation

Some assets transferred to Government agencies

The Druk Green Plants continue to service liabilities

Therefore, Druk Green be allowed to include these costs in tariff model

Cost of Supply Methodology

Cost of Supply

Operating and Maintenance

Costs

Depreciation

Return on Fixed Assets

Power Purchases and Fuel Costs for

Electricity Generation

Cost of Losses & Non-Payment of Electricity Bills

Cost of Working Capital

Regulatory Fees, Duties or

Levies

Proposed Generation Tariff for 2013-16

Using the Tariff Determination Model and the proposed changes;

Cost of generation Nu. 1.99 per kWh is much higher than existing tariff of Nu. 1.2 per kWh

Increase in tariff for Druk Green proposed in line with the principles of TDR and also to

ensure steady revenues to the RGOB from the hydropower sector

Submitted to BEA to consider on commercial terms, consistent to norms in the region

Tariff Details Cost of generation (Nu. per kWh)

Basochhu Hydro Power Plant 2.95

Chhukha Hydro Power Plant 0.58

Kurichhu Hydro Power Plant 3.66

Tala Hydro Power Plant 2.25

Average Consolidated Tariff 1.99

Thank You!!!

Documents

Generation Tariff Revision Proposal (2013-2016) · 2019. 6. 21. · As per the Tariff Determination Regulation (Updated as of 14th July 2010), Bhutan Electricity Act 2001 18 July