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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  Single part tariff, though outdated due to several issues, is being reconsidered by some of the regulatory bodies to bring in transparency to the system along with making it more accessible to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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Price Cap on Russian Oil: The Mechanism and Its Consequences

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G7 countries are working hard to coordinate a sanctions regime to cap prices on Russian oil and oil products. The United States is already drafting a mechanism for applying these sanctions, which its allies and partners will use as a guideline. The new sanctions in the form of legal arrangements are expected to be formalised very soon. How will this mechanism work, and what consequences can this lead to?

An unprecedented range of economic sanctions has been used against Russia since the beginning of the special military operation in Ukraine in February 2022. Their primary aim was to deal the largest possible economic damage to force Moscow to revise its policy and to undermine its resources provision. Since energy exports are extremely important for funding the Russian economy, sanctions against its oil and gas sector were more than just predictable. However, the United States, the EU and other initiators had to act cautiously, because Russia is a major player on the global market. US restrictions on the export of Iranian oil had little impact on the global market, whereas blocking sanctions against Russian oil companies could lead to uncontrollable price hikes. This could accelerate inflation, which was growing fast on the back of COVID-19 and other factors.

Nevertheless, the sanctions noose on the oil sector was tightening. Some sectoral sanctions have been applied since 2014, such as restrictions on loans and on the supply of products, services, technologies and investment in the Arctic shelf oil projects. Blocking sanctions were adopted against a number of co-owners, owners and top managers in the fuel and energy sector. In March 2022, Washington prohibited the import of Russian energy resources to the United States. Canada acted likewise. The EU started with banning Russian coal imports and later spread the ban, with a few exceptions, to oil and oil products. The bans are to come into force on December 5, 2022, and February 5, 2023, respectively. The UK plans to stop the import of Russian oil this year. Overall, Western countries are working to gradually banish Russian oil and oil products from their markets.

However, Moscow has quickly redirected its deliveries to Asian markets, where Western countries cannot easily impose similar restrictions, especially since Russian companies are selling their products with large discounts. The idea of a price cap has been proposed to be able to influence Russian oil prices outside Western countries.

The essence of the proposed mechanism is very simple. The United States, G7 and any other countries that join the coalition will legally prohibit the provision of services which enable maritime transportation of Russian-origin crude oil and petroleum products that are purchased above the price cap. The US Treasury has issued a Preliminary Guidance to explain the essence of the forthcoming bans, to be formalised in a determination pursuant to Executive Order 14071 of April 6, 2022. Section 1 (ii) of the executive order empowers the US Treasury and the Department of State to prohibit the export or re-export of “any category of services” to Russia. The upcoming Determination will explain the ban for American parties to provide services which enable the transportation of Russian-origin crude oil and petroleum products above the price cap. The US administration plans to enforce the ban on oil on December 5, 2022, and the ban on oil products on February 5, 2023, simultaneously with the EU bans on Russian oil imports.

But what is the exact meaning of the phrase “services which enable maritime transportation”? The US will most likely offer an extended interpretation. In other words, such services will include transportation, related financial transactions, insurance, bunkering, port maintenance and the like. This would allow Washington to influence a broad range of service providers outside the United States. For example, the US administration might consider dollar-denominated transactions on oil transportation to fall under US jurisdiction, so that very many players outside the US will face fines or prosecution. Punishment for avoiding the price cap, as well as for using deceptive shipping practices, have been set out in the new Guidance.

It is another matter how strictly the other coalition countries will implement this guidance and how large this coalition can be. The level of coordination within the initiator countries will likely remain very high, which means that the allied countries will do this in accordance with their national legislations. The coalition will include the countries that have already adopted sanctions against Russia.

The biggest question is whether the countries that have not adopted such sanctions, including Russia-friendly countries, can be convinced to join the coalition. The answer is most probably negative, but this will not settle the problem. Despite the official position of the friendly countries, their businesses could surrender to the US demand to avoid the risk of persecution.

The G7 statement and the new Guidance of the US Treasury imply that the sanctions are being imposed out of concern for the international community rather than solely for the purpose of punishing Russia. They say that the price cap is designed to stop the growth of oil prices that have been artificially inflated by the conflict in Ukraine. However, this “concern” can lead to unpredictable consequences.

To begin with, the latest attempt at the political mandating of prices will increase uncertainty, which will further drive the prices up. Prices can grow on expectations of problems with signing deals on the delivery of Russian oil and oil products over excessive compliance, which will lead to temporary shortages. Another problem is that the other oil producers will have to lower prices as well. They will not like this.

In fact, the sellers’ market is being changed into the buyers’ market by artificial political methods rather than for economic reasons.

And lastly, Russia is being forced to become the leader of dumping. Demand for its oil could be higher than for the products of other suppliers, and Moscow can make up for its profit shortfall by increasing deliveries. If the Western countries that prohibit the import of Russian oil and oil products buy other suppliers’ oil at higher prices while Asian countries continue to buy Russian products, this will artificially increase the competitiveness of Asian economies.

It is time for Russia to start thinking about adjusting to the Western restrictions, including by developing its own tanker fleet and abandoning the US dollar in oil deals. The latter is the prevalent task of Russia’s foreign trade in the new political conditions.

From our partner RIAC

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Absolute Proof that EU Leaders Are Responsible for Europe’s Soaring Fuel-Prices

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A BusinissInsider news-report on the morning of September 7th headlined “Putin says Russia will restart Nord Stream 1 gas flows ‘tomorrow’ if it gets turbines, and blames sanctions for the shutdown” and opened with:

Russian President Vladimir Putin said Wednesday that Gazprom could restart gas flows to Europe via the key Nord Stream 1 pipeline tomorrow, if it gets the turbines needed. He blamed Germany and Western sanctions for the indefinite halt in operations for the pipeline, according to media reports from his speech at the Eastern Economic Forum. At the same time, he said pressure from the US was behind the holdup in launching another pipeline, Nord Stream 2.

Putin was telling the EU’s leaders that what has been forcing gas-prices in Europe up 300% since Russia’s February 24th invasion of Ukraine isn’t Russia’s invasion of Ukraine (such as they allege) but instead the U.S.-EU-UK economic sanctions against Russia which have caused all U.S.-and-allied — including all EU — nations to terminate imports of fuels from Russia. He was saying that Russia will turn on the pipelines into the EU as soon as EU leaders turn off their sanctions that prohibit their businesses and consumers from buying it.

The ball is now in their court. Let’s see what they do with it. Have they been lying to allege that Russia’s invasion of Ukraine caused this 300% gas-price rise? If so, then Putin has said that the moment they stop lying and start to allow the gas to flow again from Russia, that gas will flow again from Russia and those prices will consequently plunge back down again.

If, however, they have been telling the truth (though it’s hard to see how Russia’s invasion of Ukraine on February 24th could even possibly have forced up the prices in the EU of all fuels from Russia), then the ball will immediately be in Putin’s court, for him promptly to get the flows of Russian fuels into Europe restored to what they had been prior to the EU’s sanctions that were imposed in the wake of that invasion.

Because it’s hard to see how Russia’s invasion of Ukraine on February 24th could even possibly have forced up the prices in the EU of all fuels from Russia, the headline here is based upon the very reasonable expectation: that the result of Putin’s September 7th challenge to the EU’s leaders will be that they are proven to have been lying when they have blamed these price-rises on him, instead of on themselves.

In other words: On September 7th, Putin laid down the gauntlet to EU leaders, regarding whom is to blame for Europe’s now-soaring energy-prices, and for the consequences thereof. That challenge to them tests whom has been telling the truth about this matter, and whom has been lying about it. It is that test, regardless of whether news-reports about his statement (other than this one), report it as testing whom the liars, and whom the truth-tellers, about this matter, have been. This is a big tree that is falling in the news-forest, and that tree is falling, regardless of whether or not (or the extent to which) it is being reported to the public. The test is a fact — an important fact — even if it won’t be reported (other than here). However, something else will be even more important: what the result of this test will turn out to be. And then the test for the news-media will be: will they report that result? Will they report the finding? Because there certainly will be a finding, from this test. And it certainly will be an important one.

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Coal Diplomacy: Could We Be Free from the Climate Crisis?

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One of the things that is perplexing at the moment is that there is no clarity about how life will be lived in the coming year from an economic standpoint. In 2023, both the Indonesian finance minister and the Indonesian president said that “the world is dark.” Uncertainty regarding many topics, particularly economic concerns, is referred to be “dark.” Recession that affected several of the world’s major economies. The biggest issues now are energy shortage and food ingredient scarcity. Politics is no longer focused on how to achieve power, as well as the world’s attention and authority, but on how to sustain tomorrow’s life and escape the perils of hunger and cold.

Since the implementation of Western sanctions on Russia, not only has the political game grown more attractive in terms of military and economics, but it has also had an influence on the economy. Because of Russia’s high price for oil and gas, as well as the growing issue of energy shortages, various European nations have taken the initiative to generate electricity by burning coal. This has recently received a lot of attention in the media. The transfer of energy sources is plainly the polar opposite of the world’s current commitment to reduce emissions and environmental impacts. In the face of global uncertainty, the availability of coal as an energy source will assist emerging nations with coal reserves, such as Indonesia. However, when the time period and amount of coal burned are considered, this definitely accelerates the environmental impact. According to the BP Statistical Review of World Energy 2021 report, worldwide coal consumption in 2020 was 151.42 exajoules. This figure fell by 4.2% from the previous year, when it stood at 157.64 exajoules. China is the largest consumer, accounting for 54.3% of total worldwide spending, followed by the United States, India, and Japan.

How Coal affects the environment

According to the Encyclopedia Britannica (2015), coal is derived from animal and plant fossils that perished and were buried millions of years ago; coal is currently the world’s greatest fossil fuel when compared to oil. necessitates a number of operations and a rather wide space It generates a lot of pollution and environmental harm from coal mining to processing to consumption to the ultimate cycle of use. The following is an example of a coal processing line:

First, when coal is discovered, people and certain groups will plan to mine it. The plan is then carried out by constructing a mine. At this early stage Coal mines will have a negative influence on the ecosystem, beginning with changes in the terrain, which will reduce soil fertility. Biodiversity is under peril.

Second, a variety of chemical reactions occur in nature during coal processing procedures. When fossil fuels are burned to generate energy, the carbon in the fuel interacts with oxygen to make CO2 gas, the majority of which is emitted into the atmosphere. Not only does coal combustion emit CO2, but it also emits methane into the atmosphere. As a greenhouse gas, methane is twenty times more powerful than carbon dioxide. Not only does coal combustion emit CO2 and methane, but it also emits sulfur in the form of sulfur dioxide (SO2) gas.  If these three chemical compounds are released into nature, they have a severe influence on the environment and humans, producing soil degradation, air pollution, and the sulfur content released is also particularly toxic for water. Although there is a new phrase and breakthrough “Clean coal,” according to Michael Economides, professor of chemical engineering at the University of Houston, Texas), it is highly improbable that clean coal can be created by “Carbon Capture and Storage (CCS).”

Third, following a series of procedures, the mining and burning of coal will also leave visible traces. Past mining locations’ created craters and changing landscapes, of course, damage the ecology, and former excavations frequently cost life.

 Indonesia and coal

Indonesia is one of the countries that has profited from the present global energy constraint. The Center for Mineral, Coal, and Geothermal Resources reported that Indonesia’s coal reserves were at 31.7 billion tons as of January 19, 2022. Indonesia not only utilizes coal for internal purposes, but also exports it to other nations in order to gain foreign currency. When coal prices rise, it contributes to state income, but these gains are only transitory since the government gives additional relief to coal service employees through power subsidies and compensation.

According to investor.id data source Carbon Brief, the Indonesian government offers power subsidies and compensation with a budget of Rp. 127.9 trillion. This sum is higher than the previous year’s total of Rp. 74.4 trillion. The government provides subsidies and incentives so that PLN may continue to acquire coal from the firm while keeping power prices stable.  Owners of coal mining enterprises will gain the most during this period of energy shortage. In January-March 2022, one of the coal mines had a 457.6% rise in net profit. Until June 2022, Indonesia’s coal output has achieved 283.57 million tons, or around 42.77% of the target for 2022, which was 633 million tons. Meanwhile, national coal sales through June 2022, which included both exports and domestic sales, were 175.15 million tons.

Climate Commitment Challenge

It is quite difficult to retain environmental commitment in these times. On the one hand, humans are attempting and committed to keeping the environment stable by reducing the greenhouse effect, which can harm the ozone layer, but the current situation has not provided an opportunity to obtain energy that is cleaner and environmentally friendly, and can be produced in large quantities quickly, other than rocks and coals.  Coal processing and utilization as an energy source has been known for over a century, and its influence has been felt in recent decades. However, the usage of coal cannot be minimized or eliminated at this time. Europe’s Germany, Poland, and even India in Asia ordered coal from Indonesia to meet their national energy demands. This has occurred since Russia’s sanctions were implemented.

This circumstance demonstrates how the political system affects the food chain. With the increased usage of coal in many regions of the world, it is possible that the Paris Agreement and the G20 statement, as well as other environmental and climate-related pledges, will be revisited. However, increased worldwide coal usage will hasten the depletion of global coal stockpiles. Keep in mind that nature takes thousands of years to generate coal, but human progress in this century is so rapid.

Conclusion

The human task of sustaining the appropriateness of a place to live in the face of global instability will never diminish. These obstacles might arise from the environment in which humans live or from outside sources such as governmental policy, commerce, and conflict.  The recent increase in the use of coal is a short-term effort for humans to survive and carry out their activities, but in the long run, human dependence on coal must be considered, given that humans’ ability to grow and reproduce faster than nature’s ability to produce coal for humans, and even if coal is still relied on, it will accelerate environmental pollution, which then affects weather and climate. It is vital to review how the commitment to environmental protection has been pursued in both local and international obligations.

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