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Reinventing the idea of single part tariff for power distribution to domestic consumers: Does it make sense!

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Prior to 1992, a single part tariff based on  cost plus on actual basis was in place in India’s power sector according to schedule 6 of Electricity supply act 1948.  Single part tariff, though outdated due to several issues, is being reconsidered by some of the regulatory bodies to bring in transparency to the system along with making it more accessible to customer.

Prior to 1997,  the rationale for a single part average tariff in transmission and distribution was that it is not cost effective or technically possible to segregate the various cost elements in the system. Unbundling tariffs would require system load studies on a dynamic basis to identify the nature and direction of flows to various constituents of the system. However, it was agreed upon that some form unbundling would better allocate costs and result in efficient outcomes. At that point of time, technology and operational constraints were major hindrances in implementing multi part tariff.

The reconsideration of introducing the single part tariff  is to have a balanced approach where in customers interest can be taken care of in terms of actual usage of power with due consideration given to quality of power supplied. At the same time, it will be ensured that the distribution companies (discoms) recover their fixed cost incurred in laying down the necessary infrastructure. Utilities will prefer to have such a mechanism as it will reduce their risk of lower sales and hide much inefficiency. On the other side, it will reduce customer control with no incentive to reduce power consumption and increase efficiency at customer end. While prima facie, the idea of introducing single part tariff on the basis of minimum contracted load seems lucrative for the domestic consumers at short term, the impact of this on medium term and long term needs to be evaluated in details. The value chain of electricity comprises from generation to distribution with consumer being at the receiving end of the services. Besides economic contribution, electricity plays a major role in sustainable living for the common people. Hence the tariff setting process and its implications in calculation of final electricity cost plays a crucial role for each and every customer at large.

As the customers segment is fragmented and not homogeneous to each and every states, the applicability of such a system and its overall viability remains a question mark. While it may be designed for a set of customers, say domestic customers where there is predictability on the power consumption to a larger extent, designing such a system for other customers like agricultural and industrial nay be worrisome.

Consumers are majorly concerned about the electricity bills and the services they are getting from the utilities. They are least concerned about the operation of the distribution utilities and the way discoms function which is best left to the utilities and regulators to decide upon.

What it ails for the costumers at large?

The existing system of billing does not reflect various components of the fixed cost and the methodology on how the price fixing is done for arriving at the fixed cost per  MW per month basis. Consumers often fail to understand the rationale behind the fixed price fixation. The arbitrary nature of price fixation for the fixed cost component has been always a bone of contention between the consumers and the utilities. It is perceived that the fixed cost component should be gradually declined while the assets are depreciating over a time period. Also, if there is no significant up-gradation of the assets owing to the increased contracted load or demand, it should be diminishing in nature only with O&M component forming the major part of the recovery.

Giving a break up of fixed charges and rationale for price increase would have been a good idea for the regulator to consider. Discoms need to clearly show these components to keep a track of its own spending for planning and revenue generation. In the absence of such a system, there may be an attempt to hide various other inefficiencies in the grab of higher fixed cost component in the distribution segment to mop up higher revenues for the distribution companies.  DERC (Delhi Electricity Regulatory Commission) in a recent judgment hiked the fixed charges for high electricity consumers (under domestic category) above 2 kW contracted load. While consumers with 3kW, 4kW and 5kW would pay a fixed charge of INR 105, INR 140 and INR 175 per month, there will be a reduction of fixed charges for consumers with contracted load of 1kw ( INR 40 to INR 20 per month) and there is no change for consumers of 2kW contracted load. This is irrespective of electricity usage by consumers. The rationale for such a decision needs to be evaluated in details. It seems that it is an indirect way to pass on the cost without directly revising tariffs for the consumers.

Consumers are also worried about power quality and availability. The regulator is right when it says there is valid concern from consumers for not getting power for 24×7 but paying for the fixed cost for power outages and unavailability. Linking of the fixed cost at pro rata basis to the actual hour of power supplied will be definitely a good move from the regulator.

Though this system would sensitize the costumer to actually use less power and contract lesser load for its requirement, fixing a cap of contracted load from the regulator will not help them. In the same time, discoms would like to recover a certain amount from the customer and will not allow for a lesser demand from the customer. In these circumstances, it would be prudent to think of a system where in an annual connection load fee (bare minimum that would suffice to the discoms additional charges that cannot be passed on via fixed charges or variable charges) that can be collected over 12 months with monthly consumption charges.

Similarly for a consumer, who is consuming a higher amount of energy will end up spending the actual amount under the existing system. On the contrary, the consumer may want to game the system with showing less contracted capacity and consuming more units of energy and eventually stressing out the grid. The penalty system might not be deterrence to this in comparison with overall fixed charges asked for. This will result in frequent tripping if the single point contracted load is less than the actual withdrawal.

It will only create chaos at the short term and in the long term bulk domestic consumers would like to shift to stand alone systems or captive power systems. They may also switch to have their own roof top solar as an alternative. In this way, utility will have a greater risk in losing their loyal costumer which will dent their business perspective.

What is in store for the distribution Utilities?

The operational efficiency and management of power procurement and distribution at the utility remains a major concern for most of the utilities in India. Due to inaccurate demand prediction from the consumers, they fail to secure long term power procurement orders. Also, utilities show it as an excuse for not getting into fresh procurement contracts. Instead, they prefer to go for short term power procurement from traders or power exchanges at a high cost and pass on the burden to consumers. Regulators need to be more careful to this aspect so that additional unplanned burden should not be passed on to the consumers. In other way, utilities prefer in heavy load shedding in summer seasons or at the peak hours of operations. Sometimes, due to pressure from various sources (mostly political), they tend to overdraw from the grid, resulting a heavy penalty on the utility. It also jeopardizes the grid system security.

The lack of long term planning for system up gradation and securing future power procurement comes from the faulty demand forecasting at the consumer level. As consumers seem to show less contracted capacity but actually draw more than their contractual capacity, it puts both the grid system and its security at a higher risk. The proposed model will no doubt will put additional revenue to the pockets of power distribution utilities in short term as costumers will end up paying a higher amount. In long term, it will act as a catalyst to push inefficiency to the system and there is also risk of  good performing discom going the other way around.  It would be very difficult to assess the demand on annual basis and vague estimations of ARR (Annual Revenue requirement) might be a possibility.

Despite severe power outages, several regions in India show power surplus owing to the faulty data and information fed into the system. The proposed system will aggravate the situation further. This will project a false scenario that there is less demand from the consumer side and hence the power procurement planning may be effected. It may act as a blessing in disguise for the discoms to continue the ill practice of manipulating data at the demand end. Also, the transparency in the operations of distribution utilities stands a chance of being compromised. This is a structural issue; with government owned discoms play hardball showing that there is reduced shortage at their end while for private discoms this would be an opportunity lost in the system planning.

As far the domestic consumers are concerned, the solar roof-tops are anticipated to gain huge momentum as cost of power consumption shall not vary as per the rated or designated load but as per connections. With huge levels of discrepancies observed at load estimations of the country as utilities manipulate the data for drawl and injection, the single part tariff will act as a blessing in disguise for the discoms to continue the ill practice.

The Challenges for the Regulator:

On the regulators side also, there will be implementation challenges in fixing minimum contracted load for an individual consumer or to a group society at large. Whether it will be done by the utility or to be left with individual consumers or group housing society remains a question mark as of now?  But regulators can come with a proposition to charge extra tariff where demand exceeds contracted amount to balance out for the grid stability and compensate the discoms provided services are provided.

The setting of proper benchmarks for contracted capacity for such a scenario would be a difficult task.  Will it be based on income level of the person for an individual level or the life style it demands based on the appliances at the households? Similarly in the case of a society, where there are people from various income levels, electricity consumption level, life styles, it would be difficult to assess their demand and put strict contracted load criteria. This would also result in discrepancies and putting a benchmark on consumption level would be difficult. Averaging out may distort the overall balance towards either side (consumer or the utility). Also, the seasonal requirement adjustment of the fixed cost would be a big concern.  Only changing the fixed component up and down without any proper framework would serve no purpose and it will be an eye wash only.

The utility needs to find out how much volume the consumer demands in terms of power consumption for a specific time for the experiment to succeed. Also, it needs to access the overall effect on the revenue streams from these consumers. Smart metering at consumer end can be an option where in “Time of Day” consumption can be tracked with power outage time to check on quality of power supplied. Besides this, it may be a boomerang for the utility as consumers are very sensitive to price and they will not allow such a system to be experimented with. One can also assume the political slugfest that may be created out of this.  It would be better for the regulator to keep pressing for the technological interventions and installation of smart meters or pre-paid meters.

A comprehensive study may also be carried out after installation of smart meters to study the load profile in details and planning can be made thereafter accordingly. This can be taken by the regulators itself rather than passing it to the discoms. Regulators need to be sensitive on this issue as any changes made at the consumer level has a cascading effect on the entire value chain of electricity that is from distribution to generation. The effect on the other segments also needs to be studied in details before making any changes down the line. Any changes in the regulation should not be seen as a going back to the pre reformed era without proper evaluation of both sides of the string.

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“Oil for development” budget, challenges and opportunities

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Iran has recently announced that its next fiscal year’s budget is going to be set with less reliance on oil revenues.

Last week, Head of the Country’s Budget and Planning Organization (BPO) Mohammad Baqer Nobakht said “In the next year’s budget – it starts on March 19, 2020 – oil revenues will be only spent for development projects and acquisition of capital asset, and not even one rial is going to go to government expenditures and other areas.”

At first glance, the idea is very appealing and it seems if the government manages to pull it off, it will be a significant step for Iran in its movement toward an oil-independent economy. However, it seems that cutting oil revenues from the budget and allocating them only to a specific part of the country’s expenditures is not going to be an easy task.

Although, BPO has already suggested various substitute sources of revenue to replace those of oil, some experts believe that the offered alternatives are not practical in the short-term.

So, how successful will the government be in executing this plan? What are the challenges in the way of this program? What are the chances for it to become fully practical next year?

To answer such questions and to have a clearer idea of the notion, let’s take a more detailed look into this [so called] ambitious program. 

The history of “oil for development”

It is not the first time that such a program is being offered in Iran. Removing oil revenues from the budget and allocating it to development projects goes way back in Iran’s modern history.

In 1927, the Iranian government at the time, decided to go through with a plan for removing oil revenues from the budget, so a bill was approved based on which oil incomes were merely allocated to the country’s development projects.

This law was executed until the year 1939 in which the plan was once again overruled due to what was claimed to be “financial difficulties”.

Since then up until recently, Iran has been heavily reliant on its oil revenues for managing the country’s expenses. However, in the past few years, and in the face of the U.S. sanctions, the issue of oil being used as a political weapon, made the Iranian authorities to, once again, think about reducing the country’s reliance on oil revenues.

In the past few years, Iran’s Supreme Leader Ayatollah Seyed Ali Khamenei has repeatedly emphasized the need for reducing reliance on oil and has tasked the government to find ways to move toward an oil-independent economy.

Now that Iran has once again decided to try the “oil for development” plan, the question is, what can be changed in a program that was aborted 80 years ago to make it more compatible with the country’s current economic needs and conditions.

The substitute sources of income

Shortly after BPO announced its decision for cutting the oil revenues from the next year’s budget, the Head of the organization Mohammad-Baqer Nobakht listed three alternative sources of income to offset oil revenues in the budget planning.

According to the official, elimination of hidden energy subsidies, using government assets to generate revenue and increasing tax incomes would be the main sources of revenues to compensate for the cut oil incomes.

In theory, the mentioned replacements for oil revenues, not only can generate a significant amount of income, but they could, in fact, be huge contributors to the stability of the country’s economy in the long run. 

For instance, considering the energy subsidies, it is obvious that allocating huge amounts of energy and fuel subsidies is not a good strategy to follow.

In 2018, Iran ranked first among the world’s top countries in terms of the number of subsidies which is allocated to energy consumption with $69 billion of subsidies allocated for various types of energy consumption including oil, natural gas, and electricity.

Based on data from the International Energy Agency (IEA), the total amount of allocated subsidies in Iran equals 15 percent of the country’s total GDP.

The budget that is allocated for subsidies every year could be spent in a variety of more purposeful, more fruitful areas. The country’s industry should compete in order to grow, people must learn to use more wisely and to protect the environment.

However, practically speaking, all the above-mentioned alternatives are in fact long term programs that take time to become fully operational. A huge step like eliminating hidden subsidiaries cannot be taken over a one or event two-year period.

The development aspect

One big aspect of the government’s current decision is the “development” part of the equation.

A big chunk of the country’s revenues is going to be spent on this part and so the government is obliged to make sure to choose such “development” projects very wisely.

Deciding to allocate a huge part of the country’s income on a specific sector, makes it more prone to corruption, and therefore, a plan which is aimed to help the country’s economy could become a deteriorating factor in itself if not wisely executed.

The question here is, “Is the government going to spend oil money on all the projects which are labeled as ‘development’ even if they lack the technical, economic and environmental justification?”

So, the government needs to screen development projects meticulously and eliminate the less vital ones and then plan according to the remaining truly-important projects.

Final thoughts

Even if the “oil-free” budget is a notion that seems a little ambitious at the moment, and even if there are great challenges in the way of its realization, but the decision itself is a huge step toward a better future for Iran’s economy. Although realizing this plan seems fairly impossible in the short-term, it surely can be realized with proper planning and consideration in the long term.

Sooner or later Iran has to cut off the ties of reliance on oil incomes and start moving toward a vibrant, dynamic and oil-free economy; a journey of which the first step has been already taken.

From our partner Tehran Times

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Growing preference for SUVs challenges emissions reductions in passenger car market

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Authors: Laura Cozzi and Apostolos Petropoulos*

With major automakers announcing new electric car models at a regular pace, there has been growing interest in recent years about the impact of electric vehicles on the overall car market, as well as global oil demand, carbon emissions, and air pollution.

Carmakers plan more than 350 electric models by 2025, mostly small-to-medium variants. Plans from the top 20 car manufacturers suggest a tenfold increase in annual electric car sales, to 20 million vehicles a year by 2030, from 2 million in 2018. Starting from a low base, less than 0.5% of the total car stock, this growth in electric vehicles means that nearly 7% of the car fleet will be electric by 2030.

Meanwhile, the conventional car market has been showing signs of fatigue, with sales declining in 2018 and 2019, due to slowing economies. Global sales of internal combustion engine (ICE) cars fell by around 2% to under 87 million in 2018, the first drop since the 2008 recession. Data for 2019 points to a continuation of this trend, led by China, where sales in the first half of the year fell nearly 14%, and India where they declined by 10%.

These trends have created a narrative of an imminent peak in passenger car oil demand, and related CO2 emissions, and the beginning of the end for the “ICE age.” As passenger cars consume nearly one-quarter of global oil demand today, does this signal the approaching erosion of a pillar of global oil consumption?

A more silent structural change may put this conclusion into question: consumers are buying ever larger and less fuel-efficient cars, known as Sport Utility Vehicles (SUVs).

This dramatic shift towards bigger and heavier cars has led to a doubling of the share of SUVs over the last decade. As a result, there are now over 200 million SUVs around the world, up from about 35 million in 2010, accounting for 60% of the increase in the global car fleet since 2010. Around 40% of annual car sales today are SUVs, compared with less than 20% a decade ago.

This trend is universal. Today, almost half of all cars sold in the United States and one-third of the cars sold in Europe are SUVs. In China, SUVs are considered symbols of wealth and status. In India, sales are currently lower, but consumer preferences are changing as more and more people can afford SUVs. Similarly, in Africa, the rapid pace of urbanisation and economic development means that demand for premium and luxury vehicles is relatively strong.

The impact of its rise on global emissions is nothing short of surprising. The global fleet of SUVs has seen its emissions growing by nearly 0.55 Gt CO2 during the last decade to roughly 0.7 Gt CO2. As a consequence, SUVs were the second-largest contributor to the increase in global CO2 emissions since 2010 after the power sector, but ahead of heavy industry (including iron & steel, cement, aluminium), as well as trucks and aviation.

On average, SUVs consume about a quarter more energy than medium-size cars. As a result, global fuel economy worsened caused in part by the rising SUV demand since the beginning of the decade, even though efficiency improvements in smaller cars saved over 2 million barrels a day, and electric cars displaced less than 100,000 barrels a day.

In fact, SUVs were responsible for all of the 3.3 million barrels a day growth in oil demand from passenger cars between 2010 and 2018, while oil use from other type of cars (excluding SUVs) declined slightly. If consumers’ appetite for SUVs continues to grow at a similar pace seen in the last decade, SUVs would add nearly 2 million barrels a day in global oil demand by 2040, offsetting the savings from nearly 150 million electric cars.

The upcoming World Energy Outlook will focus on this under-appreciated area in the energy debate today, and examines the possible evolution of the global car market, electrification trends, and consumer preferences and provides insights for policy makers.

While discussions today see significant focus on electric vehicles and fuel economy improvements, the analysis highlights the role of the average size of car fleet. Bigger and heavier cars, like SUVs, are harder to electrify and growth in their rising demand may slow down the development of clean and efficient car fleets. The development of SUV sales given its substantial role in oil demand and CO2 emissions would affect the outlook for passenger cars and the evolution of future oil demand and carbon emissions.

*Apostolos Petropoulos, Energy Modeler.

This commentary is derived from analysis that will be published on 13 November 2019 in the forthcoming World Energy Outlook 2019. IEA

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A Century of Russia’s Weaponization of Energy

Todd Royal

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In 1985 a joint meeting between U.S. President Ronald Reagan, and former Soviet leader, Mikhail Gorbachev conveyed this enduring sentiment during the height of the Cold War, “a nuclear war cannot be won and must never be fought.” This sentiment began moving both countries, and the world away from Mutually Assured Destruction (M.A.D.); and soon thereafter the Cold War ended. With the rise of Vladimir Putin, and the return of the Russian strongman based on the Stalin-model of leadership, Russia now uses and wields Russian energy assets, as geopolitical pawns (Syrian and Crimean invasions) the way they once terrorized the world with their nuclear arsenal.

Russia will remain a global force – even with an economy over reliant on energy – and Putin being the political force that controls the country. What makes the Russian weaponization of energy a force multiplier is “its vast geography, permanent membership in the UN Security Council, rebuilt military, and immense nuclear forces,” while having the ability to disrupt global prosperity, and sway political ideologies in the United States, Europe, Middle East, Asia, and the entire Artic Circle.

Putin understands that whoever controls energy controls the world – mainly fossil fuels – oil, petroleum, natural gas, coal, and nuclear energy to electricity is now added to this dominating mix. Now that Stalin has taken on mythological status under Putin’s tutelage, Joseph Stalin once said“The war (WWII) was decided by engines and octane.”Winston Churchill agreed with Stalin on the critical importance of fuel: “Above all, petrol governed every movement.”

The most devastating war in human history, and one that killed millions of Russians continues driving Putin’s choice to make energy the focal point of their economy, military, and forward-projecting foreign policy. This began the modern, energy-industrial complex that mechanized and industrialized energy as a war-making tool that still affects people-groups, countries, and entire regions of the world.

Russia, then the U.S.S.R. (former Soviet Union), and now current Russia have always thought of energy as a way for their government to dominate their countrymen, traditional spheres of influence (Ukraine, Georgia, Moldova, Ukraine, Estonia, Latvia, Lithuania, Belarus, Central Asia), and a strategic buffer zone against land-based attacks that came from Napoleon and Hitler’s armies that still haunts the Russian psyche.

The timeline of Russia from the 1917, violence-fueled Russian Revolution that brought the Bolsheviks to power, the rise and death of Stalin in 1953, World War II in-between, the Cold War that began March 5, 1946 in Winston Churchill’s famous speech declaring “an Iron Curtain has descended across the Continent,” has been powered by energy.

This kicked off the Cold War until the collapse of the Soviet Union in 1991. During this epoch in history the Soviets promoted global revolution using their economy and military that ran on fossil fuels and nuclear weaponry. In 1999 Vladimir Putin becomes Prime Minister after Boris Yeltsin resigns office, and the rebirth of the Soviet Union, and weaponization of energy continues until today under Putin’s regime.

What Russia now promotes foremost over all objectives: “undermining the U.S.-led liberal international order and the cohesion of the West.”Russia’s principal adversaries in this geopolitical tug-of-war over energy and influence are the U.S., the European Union (EU), and North Atlantic Treaty Organization (NATO). All of these variables are meant to bolster Russia and Putin’s “commercial, military, and energy interests.”

This geopolitical struggle doesn’t take place without abundant, reliable, affordable, scalable, and flexible oil, and natural gas. This is likely why Russia has begun a massive coal exploration and production (E&P) program that has grown exponentially since 2017 according to Russia’s Federal State Statistics Service.

The entire Russian economy is now based on rewarding Putin’s oligarchical cronies, and ensuring Russian energy giants Rosneft and Gazprom can fill the Kremlin’s coffers to annex Crimea and gain a strategic foothold in the Middle East via the Syrian invasion. This economic system is now referred to as “Putinomics.” Using energy resources to fund global chaos, and wars while rewarding his favorite oligarchs and agencies that do the Kremlin’s bidding.

Russia is now in a full-fledged battle with western powers, and its affiliated allies over the fossil fuel industry. While the rest of the world is attempting to incorporate renewable energy to electricity onto its electrical grids, and pouring government monies into building momentum for a carbon-free society, Russia is going the opposite direction.

Moscow’s energy intentions are clear, and have been for over one hundred years. Currently, there Syrian foothold has allowed them to entrench themselves back into the Middle East. This time they aren’t spreading revolutionary communism, instead it is Putin-driven oil and natural gas supplies through pipelines and E&P rights acquired in “Turkey, Iraq, Lebanon, and Syria.”

Russia has a clear pathway to block U.S. liquid natural gas (LNG) into Europe, and a land bridge from the Middle East to Europe almost guarantees Russian natural gas is cheaper, more accessible, and maintains that Europe looks to Russia first for its energy needs. By cementing their role as the “primary gas supplier and expands its influence in the Middle East,” the U.S., EU, and NATO’s military dominance are overtaken by natural gas that Europe desperately needs to power their economies, and heat their homes in brutal, winter months.

To counter Russian energy influence bordering on a monopoly over European energy needs, the current U.S. administration should make exporting natural gas into LNG a top “priority.” Work with European allies in Paris, Berlin, and NATO headquarters to operationally thwart Moscow’s “Middle East energy land bridge.” Global energy security is too important by allowing Russian influence to continue spreading.

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