# TARIFF OF ELECTRICITY & PRINCIPLE OF ITS CALCULATION Mr. Prititosh Ray Empanelled National Level Monitor Ministry of New and Renewable Energy Government.

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TARIFF OF ELECTRICITY & PRINCIPLE OF ITS CALCULATION Mr. Prititosh Ray Empanelled National Level Monitor Ministry of New and Renewable Energy Government of India 1

3 Electrical energy is most useful form of energy because it can be most conveniently transformed into other forms of energy like heat light, mechanical energy that we require in our day to day life. But electricity is not readily available and is required to be produced (generated) in a factory called power station. Like any other manufacturing process, the production (generation) of electricity also need some cost to be incurred - Plants and Equipment, Inputs (water, fuel etc.), Ash smoke disposal systems, Personnel Cost of Transmission and Distribution to the large number of consumers of various categories (viz. domestic, commercial, industrial, agricultural etc.) All these costs when added together constitutes the total cost of electricity which in the consumers have to share according to the quantum of electricity consumed taking into account the nature and time of use of electricity by each category of consumers. INTRODUCTION

The question is how this cost of electricity is to determined in a transparent manner. Some standard principles have been evolved through ages of un & sell of electricity become more and more complicated. Methods of calculation of cost of generation of electricity in a Thermal Power station in terms of these basic principles. Cost of Electricity has two components – Fixed Cost and Variable Cost The basic difference between power and energy – Power – It is the capacity to Generate or consume electricity. The term Power specifies the capacity of generation or consumption in terms of Kilowatt (KW) or Megawatt (MW). One Megawatt as we know in one thousand Kilowatt. Energy – It is the Power Generated or Consumed by utilizing the capacity for a duration of time. It one kilowatt Power has been generated or distributed continuously for one hour, it is said that an energy of One Kilowatt hour has been generated or used. Similarly if Five kilowatt of Power is generated or consumed for Two hours, an energy of 10 ( = 5 X 2) kilowatt hour has been generated or consumed and so on. 4 INTRODUCTION ……(contd.)

Fixed Cost Cost of setting up a Power Plant, Inverter, Plant & Equipment, Personnel Employed, Raw Material Inventory Costs that are fixed As per recent norms fixed cost cannot be recovered fully from the consumers if the capacity is not available for generation above a certain percentage of declared capacity. Variable cost Cost of generating the quantum of electrical energy and covers the fuel costs for generating this quantum of electricity. The Fuel in a coal fired Thermal Power Station is coal (Primary fuel) and Oil (Secondary fuel). 5 COMPONENTS OF COST – Fixed and Variable Cost

Return on equity capital Taxes and Duties Depreciation Interest on loan component of capital Interest on working Capital Operation & maintenance expenses Employment Cost Insurance Premium Payable Costs arising out of Foreign Exchange Rate Variation (FERV) Bad Debts 6 COMPONENTS Of FIXED COST

1.Return on Equity: Debt-Equity ratio in electricity generation is 70:30. Equity employed in more than 30% the amount of liquidity shall be limited to 30% and balance amount treated as loan. If however the equity employed is less than 30%, the actual equity and loan shall be considered for determination of return on equity. Equity Capital shall be the sum total of paid up equity capital, preference share capital, fully convertible debentures, foreign currency convertible bonds and share premium amount. Generally Return on equity @14% is decided to be recovered from the consumers in electricity sector. 2.Tax and Duties:- Tax on income stream of the company, Banking cash transaction charge, any other direct tax and Fringe benefit tax shall be computed as expenses Shall be recovered as pass through from consumers and beneficiaries Govt. duties shall be recovered at specified rate from the consumers but shall be processed on to the Govt. 7 COMPONENTS Of FIXED COST …..(contd.)

3.Depreciation: The depreciation of various assets shall be calculated in terms of useful life period of each equipment as specified The residual value of assets shall be considered as 10% and depreciation shall be allow up to a maximum of 90% of the original cost of the asset. Depreciation shall be chargeable from the first year of operation of the asset. In case of operation of the asset from the middle of the year depreciation shall be changed on pro-rate basic. Free hold land is not depreciable and its cost shall not include while calculating the depreciation cost. 4.Interest on Loan: The generating company shall be allowed to recover the interest expenses on all borrowings towards capital works as per terms of such borrowings including the repayment schedule Interest on normative loan shall be allowed at weighted average rate of interest on above actual borrowings 8 COMPONENTS Of FIXED COST …..(contd.)

5.Interest on Working Capital: Working Capital primarily for purchase of fuel has to be maintained at all times so that the generation does not suffer due to shortage of working capital. On a normative basis working capital requirement is assessed at the rate of 18% of estimated amount of sales revenue reduced by the amount of Depreciation. Sometimes It is about fuel cost on 3 months of average generation. 6.Operation & Maintenance Expenses: O & M expenses include Repair and Maintenance expenses as also the Administrative and general expenses The Administrative & General Expenses includes the following items: Rents, rates & taxes (other than taxes & relating to income, profits & dividend taxes) Legal charges and statutory fees (but excluding any penalty to be paid under the law) Auditors expenses Consultancy charges for work which can not be done in house or is uneconomical to do so. 9 COMPONENTS Of FIXED COST …..(contd.)

7.Employees cost: Employee cost shall include the expenses on account of salaries & wages, staff welfare expenses, travelling expenses, Bonus etc including Directors remuneration, fees expenses and other facilities and salaries and wages of Corporate office/ Registered office and shall be shown separately. The cost of maintaining terminal benefit fund shall be included in employees cost. However, recently a new guideline has been introduced for reasonable MAN: MW ratio. 8.Insurance Premium Payable: All insurance payments reasonably paid to cover transportation risks, erection risks, Fire risks etc and any such risk shall be recovered from the consumers. 10 COMPONENTS Of FIXED COST …..(contd.)

9. Foreign Exchange Rate Variation: In case of Foreign exchange rate variation (FERV) the resultant payment due to FERV arising on account of interest payment and payment of loan shall be passed through to the consumers. 10. Bad Debt: Bad debts as actually had been written off in the latest available audited accounts of the generating companies subject to a ceiling of 5% of the Annual Gross sales value of energy at the end of the year can be included as a pass through item. 11 COMPONENTS Of FIXED COST …..(contd.)

Cost supplied to the Power stations are graded as grade A, B, C, D, E, F and G according to the heat value of the particular quality of the coal. Heat values are expressed in terms of kilo calories/kg meaning thereby that one kg of coal of certain grade where fully burnt will give rise to a certain amount of heat measured in kilo calories. These heat values an expressed in Useful Heat Value (UHV). GCV of particular grade of coal is higher than its useful heat value or UHV. GCV & UHV of various grade of coal are listed below: Grade UHV GCV(in kilo calories/kg) AMore than 6200 6454 BBetween 5600 – 6200Between 6049 – 6454 CBetween 4940 – 5600Between 5597 – 6049 DBetween 4200 – 4940Between 5089 – 5597 EBetween 3360 – 4200Between 4324 – 5089 FBetween 2400 – 3600Between 3865 – 4324 GBetween 1300 – 2400Between 3113 – 3865 12 VARIABLE COST OR FULL COST

Station Heat Rate Different Power station depending on design efficiency require different amount of heat to produce one Kwh of electrical energy. This is known as Station Heat Rate and is expressed in terms of kilo calories/kwh. For example station Heat Rate (SHR) of Budge Budge Power Station of CESC is about 2500 k.cal/kwh where as far New Cossipore Generating Station SHR is of the order of 6000 k.cal/kwh. This is because New Cossipore is an old Power Station and less efficient by design and operation. Similarly for Barkrashwar Thermal Power Station of WBPCDCL the SHR is 2500 k. cal/kwh and for Bandel Power Station of WBPCDCL the SHR is of the order of 3000 k.cal kwh for older units. 13 VARIABLE COST OR FULL COST …….(contd.)

Specific Oil Consumption Although coal is the primary fuel for generation of energy in a Thermal Power Plant, certain amount of oil is also required to be burnt for starting the process of Boiler firing, initial low level of generation etc. Each unit or plant has different amount of oil requirement for generating each kwh of electrical energy. This is called Specific Oil Consumption of the Unit or Plant and is expressed in mililitres per kwh or ml/kwh The Specific Oil consumption in the Plant may vary from 1 ml/kwh to 4 ml/kwh When a unit is first synchronized after erection and commissioning the oil consumption may reach higher values during the stabilization period This oil has its own Heat Value Called G.C.V of oil or Gross calorific value of oil and is expressed in kilo calories/litre. This value is generally of the order of 9500 to 9600 kilo calores per litre. Average price of oil being 40000 Rs./KL to 50000 Rs/KL limit may change according to international market rate 14 VARIABLE COST OR FULL COST …….(contd.)

15 Typical Specific Oil Consumption Levels in some Thermal Power Stations Sl No.Power Stations Specific oil consumption in milliliter/KWh (ml/kwh) 1Budge Budge (CESC)1.5 2Bandel T.P.S.3.5 (for old units) 3Kolaghat T.P.S.2.05 4Bokreswar T.P.S.1.3 VARIABLE COST OR FULL COST …….(contd.)

Auxiliary Consumption Auxiliary consumption varies between 8.5% to 10.5% of gross energy generated in the power station of different vintage, efficiency & technology used. All though quantum of Auxiliary Consumption is required to the generated of burning fuel in the Power Station, the amount of energy spent as auxiliary consumption can not be actually delivered to the Purchaser. However cost of generating the auxiliary consumption is also to be recovered from the purchaser in addition to the cost of energy delivered to him. N.B. It is to be remembered that cost of coal is to be considered as per latest notification of Coal India. Cost of Oil has to be considered as per international market rate. 16 VARIABLE COST OR FULL COST …….(contd.)

FUEL COST 1.Electricity proposed to the generated in the power station during the year in Million Units (MV) 2.Auxiliary Consumption (say 10% of proposed Energy generation in MU 3.Ex-Bus Generation to the delivered =(1-2)MU 4.Station Heat Rate of Power Station in Kilo calories/ KWh 5.Total Heat Required for generation = 1 X 4 in Million Kilo Calories. 6.G.C.V of Oil in Kilo Calories/Liter 7.Specific oil consumption in ml/KWh 8.Total Oil Consumed = 1 X 7 in KL (Kilo liters) 9.Average Price of oil in Rs/KL 10.Cost of Oil =8 X 9 in Rs. 11.Heat generation from oil = 6 X 8 ÷ 1000 in million kilo calories. 12.Heat generation from coal = 5 -11 in million kilo calories. 13.Heat value of coal in Kilo Calories / Kg 14.Coal required =12 X 1000 ÷ 13 in M.Tonnes. 15.Weighted average price of coal in Rs / MT. 16.Cost of Coal = 14 X 15 in Rs. 17.Total Cost of Fuel = 10 + 16 in Rs. 17 Sample Calculation Chart for Determining Sample Calculation Chart for determining: NET ARR & AVARAGE COST OF GENERATION 1. Fuel Cost. 2. Coal & Ash Handling charges. 3. Employees Cost including Cost of contracted manpower. 4. Administrative & General Expenses. 5. Rents, Lean Rentals etc. 6. Legal and professional Charges. 7. Audit Fees. 8. Repair Maintenance including consumables. 9. Insurances. 10. Depreciation. 11. Interest on loan capital. 12. Interest on working Capital. 13. F.E.R.V 14. Bad Debt. 15. Water charges. 16. Return on Equity. 17. Gross Aggregate Revenue Requirement = Sum(1 to 16) Less: i) Miscellaneous Income from other sources. ii) Other deduction. 19. Net ARR to be recovered through tariff = 17 – 18 in Rs. 20. Average Tariff for Purchase = 19 ÷ Ex-Bus Energy sal in Rs./Kwh

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