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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  Single part tariff, though outdated due to several issues, is being reconsidered by some of the regulatory bodies to bring in transparency to the system along with making it more accessible to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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Energy

OPEC’s big test: A choice between right and wrong

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As the Organization of Petroleum Exporting Countries (OPEC) prepares to meet later this week in Vienna, tension is rising among some of the cartel’s biggest members on what is said to be one of OPEC’s biggest decisions since its establishment.

On June 22, OPEC members along with Russia are going to gather once again to decide whether it is time to end a deal which has held their oil production at a certain level for near 18 months and pushed the oil prices to significant highs.

Although in making the historical deal in 2016, all members came to gather as a unanimous voice to save the market from clashing, this time the situation is far from what it was in the past.

On one side, under the U.S. influence [either in the form of alliance or sanctions] Saudi Arabia and non-OPEC-member Russia, which had a significant role in reaching the deal, are said to be willing to ease the production cap and use some of their spare capacities.

On the other side, less privileged OPEC members like Iran, Venezuela, Iraq, Angola, Libya and Nigeria whose production levels have been under pressure by different geopolitical and economic factors like U.S. sanctions and budget deficit need the prices to stay at current levels.

Since the beginning, all sides of the deal stuck with the pact and fully complied with what was decided for their production levels. Shortly after, since the U.S. shale production wasn’t able to offset the production cuts that OPEC and non-OPEC nations made, oil prices rose significantly through 2017 up to 2018 and that made the Trump administration worried about the effect of higher prices on Trump’s political stance.

The U.S. president repeatedly voiced his dissatisfaction with OPEC through social media accusing the cartel of driving up the oil prices, this consequently caused some turbulence in the market and resulted in Saudi Arabia’s reaction. As U.S. ally, they raised their production levels slightly to appease Trump and keep the prices from further rising.
It is said, though, that U.S. and Saudi Arabia have been discussing ending the OPEC/non-OPEC pact long before this week’s meeting and Saudi is going to propose what is in fact a U.S.-induced decision in Vienna.

In accordance with Saudi Arabia, Russians whose economy has been under pressure by the U.S. sanctions also seem to be intrigued by the idea of taking some of the market share that the supply losses from Venezuela and Iran is going to present.

However, Iran as one of the OPEC founders, believes that the organization should not sacrifice its members’ interests for the sake of U.S. agendas.

After writing to OPEC and calling for the organization’s support for members targeted by sanctions, Iran, along with Venezuela and Iraq, is going to veto Saudi Arabia and Russia’s proposal at the June 22 meeting.

Iran’s representative to OPEC, Hossein Kazempour Ardebili, told Bloomberg on Sunday that “Three OPEC founders are going to stop it.”

“If the Kingdom of Saudi Arabia and Russia want to increase production, this requires unanimity. If the two want to act alone, that’s a breach of the cooperation agreement,” the official said.

Iran believes that OPEC and Russia not only do not need to appease Trump, who sanctions two OPEC founders and also Russia, but they should stand against such arrogant attitudes.

All and all, considering the current global oil market which is almost balanced and well-supplied and the global economy which is stepping toward a stronger and more resilient position, hurting the oil supply and demand circle is not going to be a good idea.

It will be wiser for OPEC to abide by its basic values for protecting its members and make the right choice which is keeping the deal at least up to the end of 2018.

First published in our partner MNA

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Europe leads the global clean energy transition

MD Staff

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An ambitious political agreement on increasing renewable energy use in Europe was reached today between negotiators from the Commission, the European Parliament and the Council. Today’s deal means that two out of the 8 legislative proposals in the Clean Energy for All Europeans package (adopted by the European Commission on 30 November 2016) have been already agreed by the co-legislators. On 14 May, the first element of the package, the Energy Performance in Buildings Directive, was adopted. Thus, progress and momentum towards completing the Energy Union is well under way and the work started by the Juncker Commission, under the priority “a resilient Energy Union and a forward-looking climate change policy” is delivering its promises.

The new regulatory framework includes a binding renewable energy target for the EU for 2030 of 32% with an upwards revision clause by 2023.Thiswill greatly contribute to the Commission’s political priority as expressed by President Juncker in 2014 for the European Union to become the world number one in renewables. This will allow Europe to keep its leadership role in the fight against climate change, in the clean energy transition and in meeting the goals set by the Paris Agreement. The rules agreed today serve also to create an enabling environment to accelerate public and private investment in innovation and modernisation in all key sectors. We are making this transition to a modern and clean economy taking into account the differences in the energy mix and economic structures across the EU. Beyond updating and strengthening our energy and climate legislation, the EU aims at developing enabling measures that will stimulate investment, create jobs, improve the skills of people, empower and innovate industries and ensure that no citizen, worker or region is left behind in this process.

Commissioner for Climate Action and Energy Miguel Arias Cañete said: “Renewables are good for Europe, and today, Europe is good at renewables. This deal is a hard-won victory in our efforts to unlock the true potential of Europe’s clean energy transition. This new ambition will help us meet our Paris Agreement goals and will translate into more jobs, lower energy bills for consumers and less energy imports. I am particularly pleased with the new European target of 32%. The binding nature of the target will also provide additional certainty to the investors. I now call on the European Parliament and the Council to continue negotiating with the same commitment and complete the rest of the proposals of the Clean Energy for All Europeans Package. This will put us on the right path towards the Long-Term Strategy that the Commission intends to present by the end of this year”.

Main achievements:

  • Sets a new, binding, renewable energy target for the EU for 2030 of 32%, including a review clause by 2023 for an upward revision of the EU level target.
  • Improves the design and stability of support schemes for renewables.
  • Delivers real streamlining and reduction of administrative procedures.
  • Establishes a clear and stable regulatory framework on self-consumption.
  • Increases the level of ambition for the transport and heating/cooling sectors.
  • Improves the sustainability of the use of bioenergy.

Next steps

Following this political agreement, the text of the Directive will have to be formally approved by the European Parliament and the Council. Once endorsed by both co-legislators in the coming months, the updated Renewable energy Directive will be published in the Official Journal of the Union and will enter into force 20 days after publication. Member States will have to transpose the new elements of the Directive into national law 18 months after its entry into force.

Background

The Renewable Energy Directive is part and parcel of the implementation of the Juncker Commission priorities to build “a resilient Energy Union and a forward-looking climate change policy”. The Commission wants the EU to lead the clean energy transition. For this reason the EU has committed to cut CO2 emissions by at least 40% by 2030, while modernising the EU’s economy and delivering on jobs and growth for all European citizens. In doing so, the Commission is guided by three main goals: putting energy efficiency first, achieving global leadership in renewable energies and providing a fair deal for consumers. By boosting renewable energy, which can be produced from a wide variety of sources including wind, solar, hydro, tidal, geothermal, and biomass, the EU lowers its dependence on imported fossil fuels and makes its energy production more sustainable. The renewable energy industry also drives technological innovation and employment across Europe.

The EU has already adopted a number of measures to foster renewable energy in Europe. They include:

  • The EU’s Renewable energy directive from 2009 set a binding target of 20% final energy consumption from renewable sources by 2020. To achieve this, EU countries have committed to reaching their own national renewables targets. They are also each required to have at least 10% of their transport fuels come from renewable sources by 2020.
  • All EU countries have adopted national renewable energy action plans showing what actions they intend to take to meet their renewables targets.

As renewables will continue to play a key role in helping the EU meet its energy needs beyond 2020, Commission presented on 30 November 2016, as part of the Clean Energy for All Europeans, package, its proposal for a revised Renewable Energy Directive.

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A Clean, Secure Future: Reshaping Turkey’s Energy Sector

MD Staff

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Turkey has limited fossil-fuel reserves other than coal, but has huge potential in renewable resources, including hydroelectric, solar and wind power, among others. As the demand for energy grows, it has become increasingly important for Turkey to diversify its energy sources and increase national contribution, while also pursuing greater efficiency to manage the growth in demand.

Between 2012 and 2015, The Islamic Development Bank (IsDB) provided financing for the energy sector, supporting four renewable-energy development projects and six energy-efficiency projects. The IsDB extended a Financing Facility approach which worked through an implementing partner: The Turkiye Sinai Kalkinma (TSKB, known in English as the Industrial Development Bank of Turkey).

The combined costs of the projects amounted to US$641.2 million of which IsDB provided US$100 million. All ten projects are already proving to be mightily successful with the energy efficient projects having already decreased its greenhouse emissions by 1,006,000 tonnes, surpassing their target of decreasing emissions by 300,000 tonnes.

A New Approach in Islamic Financing

This was the first time IsDB used Restrictive Mudarabah financing. Under this mode of financing, The IsDB provides capital to Mudarib (in this case, TSKB) to invest in business enterprises, as per the agreed criteria. This approach eliminated the need for IsDB to enter into individual financing agreements for each sub-project being financed and gave a lot of freedom to TSKB as the local executing agency.

Hydroelectric Dams

Two of the hydroelectric dams supported by the facility: Goktas I and Goktas II lie in a valley deep in the mountains north of Adana. The projects combined capacity, once both dams are operational will be 276MW. Additonally a 52KM road, built under the Facility to provide access to these dams has helped to open up the entire region as well as three new bridges crossing the Zamanti River. These have had a significant effect on people living in the area as previously isolated settlements are now connected to larger towns and cities. This means that people can access hospitals, schools and other services more quickly. The construction company: Bereket Enerji responsible for the dams created over 450 jobs during the construction phase of the project and this almost doubled during peak construction times. Mr Ahmet Yilmaz, from Boztahta Village, who works as a general foreman spoke of the benefits of the project. “Previously people were mostly goat herders or seasonal workers in a nearby chrome mine. But the salaries in construction are much higher”.

Solar Panel Projects

The facility has also supported smaller projects that allow companies to generate their own electricity. One beneficiary was Prokon, an engineering manufacturing company located just outside Ankara. In March 2013, Prokon installed 2,040 solar panels on the roof of its workshop. Solar power has huge potential in Turkey especially as the panels generate around 75-95 MW during the peak months of July and August. Between April 2013 and February 2016, Prokon generated around 1,835 MWh from the panels in total. The process has been so successful that Prokon now sells energy back to the National Grid. Prokon have also pursued development of other solar powered equipment such as solar-tracking systems that enable panels to rotate and ‘follow’ the sun thereby generating more power.

Re-using Heat to Reduce Costs

Batisoke, Cimento, a cement company that installed a waste heat recovery system at its plant near Aydin is an example of the country managing its growing demand for energy. This system recycles the heat produced by the clinker-producing process to generate electricity. The successful installation means that the system now provides a significant chunk of the plant’s electricity needs. By reducing costs, the company has become a national energy competitor.

Cheaper, More Efficient Steel Production

The facility has also supported projects in the steel sector. Turkey was the world’s eighth-largest steel-producing nation in 2014 (with around 34 million tonnes). One company taking the lead is Koc Celik, who installed an oxygen-burning system at its plant in Osmaniye. The system increases the amount of oxygen entering the furnace during the melting process making the chemical energy processes involved more efficient. Electricity use has fallen from around 400 kilowatt hours (kWH) per tonne to less than 340(kWH) and the project itself provided 25 new jobs for local people.

The ten projects in the facility have had a huge combined impact. Together, the renewable-energy projects have a capacity of 370 MW and have made significant reductions in greenhouse gas emissions. These changes are making companies involved more internationally competitive while contributing towards global efforts to fight climate change. If future projects can build on this success, Turkey can look forward to a cleaner, more secure and efficient energy future.

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