Generation Tariff Revision Proposal (2013-2016) As per the Tariff - PowerPoint PPT Presentation

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

Outline  Principles of TDR  Domestic Generation Tariff Trends (1986-2013)  Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal  Clarifications  Changes Proposed in 2013-16 Generation Tariff Revision Proposal  Cost of Supply Methodology  Proposed Generation Tariff for 2013-16

Principles of Tariff Determination Regulation (in accordance with Section 14.1 of the Electricity Act 2001) Fairness to both service customers and service providers No unjust Transparency in discrimination the determination against service and presentation providers or users of tariffs. TDR Enhance efficient Reflect the actual and adequate cost of efficient supply to satisfy business the domestic operation demand Conducive to efficiency improvement in business operation

Domestic Generation Tariff Trends (1986-2013) • CHPC Tariff Nu. 0.10/kWh 1986- 1994 • CHPC Tariff Nu. 0.30/kWh 1994- 2001 • CHPC Tariff Nu. 0.30/kWh • KHPC Tariff Nu. 0.30/kWh 2001- • BHPC Tariff Nu. 0.50/kWh 2005 • CHPC Tariff Nu. 0.30/kWh, BHPC Energy Sold to CHPC • KHPC Tariff Nu. 0.30/kWh 2005- • THPA Energy Tariff 0.30/kWh 2007 • Royalty Energy Tariff Nu. 0.30/kWh 2007- • Non-royalty or Additional Energy Tariff Nu. 1.20/kWh 2010 • Royalty Energy Tariff Nu. 0.13/kWh. From 2011, Royalty Energy Revenue did not accrue to Druk Green 2010- • Non-royalty or Additional Energy Tariff Nu. 1.20/kWh 2013

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal Druk Green 2010 2010 Tariff Review Particulars As per Druk Green 2013 Proposal Outcome. TDR/Tariff Proposal Model Effectively 6% , i.e. 12% 1. Cost of  15.5% 12% 15% on 50% of equity only Equity citing the 60% grant  At par with norms and reasonable return in India from export  TDR Section 1.8 & Schedule C allows revision  No Production cost of provision 2. Royalty No  Total Energy net of royalty energy allowed for Energy provision the royalty used for excluding returns recovery of Production tariff need to be production cost Cost recovered  Similar to norms in  Royalty energy tariff India reduced from Nu. 0.30 per kWh to Nu. 0.13 per kWh and no royalty revenue accrual to Druk Green

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal Druk Green 2010 2010 Tariff Decision Particulars As per Druk Green 2013 Proposal Outcome. TDR/Tariff Proposal Model Included in Import to be billed 3. Energy No  Recovery of actual O&M costs separately with yearly Import provision cost for full import ceiling of 49.5 GWh or Cost Nu. 92.07 million  Wheeling charge also to be recovered  Allocated CO  Only one-third CO cost 4. Other Cost of  Full Corporate Office costs to plants allowed, citing that Costs Supply cost less cost CO costs relate to segregated for new projects & does specific new projects not belong to any plant  Net assets as  For assets  Nu. 1.236 billion worth per book of transferred to Govt. accounts asset handed to other agencies, liabilities agencies disallowed remain with Druk Green

Feedbacks on 2010 Tariff Reviewand 2013-16 Generation Tariff Revision Proposal Druk Green 2010 2010 Tariff Decision Particulars As per Druk Green 2013 Proposal Outcome. TDR/Tarif Proposal f Model  Most 5. Investment Scrutiny by Nu. 4.999 billion investments Nu. 3.742 billion Plans the BEA disallowed rd  Only 1/3 CO investment allowed citing that it is not related to plants. Thereafter, only 85% working out to Nu. 2.462 billion allowed 6. Donation & _ Actual under Removed and not Actual under O&M Community O&M expenses allowed to recover expenses Welfare Expenses

Feedbacks on 2010 Tariff Review and 2013-16 Generation Tariff Revision Proposal Druk Green 2010 2010 Tariff Decision Particulars As per Druk Green 2013 Proposal Outcome. TDR/Tarif Proposal f Model 7. O&M BEA to 0% 2% 0% efficiency determine gains 8. Generation _ Nu. 1.99 per kWh Nu. 1.20 per kWh for Nu. 1.99 per kWh Tariff for Additional Additional Energy Energy  Nu. 0.13 Nu. 0.84 per kWh per kWh for for Royalty Royalty Energy Energy  Royalty revenues does not accrue to Druk Green since 2011

Clarifications Treatment of Equity as Grant Completed projects handed over to Druk Green Grant given by Govts. of Grant received by RGoB along with corresponding India and Austria and invested in the project equity and debt but no grants  Druk Green owned by DHI, the commercial arm of the government & expected to operate commercially and provide returns to the RGoB in the form of dividends  The Auditors certified treatment of grants received by RGoB as equity  RGOB as the ultimate shareholder has not given any indication to treat the equity as grant Therefore, the grants received for the projects by RGoB be treated as equity.

Clarifications Treatment of Royalty  TDR 2007 (Updated in 2010) Section 7.3 requires the royalty energy to be sold by Generation Licensees at Royalty Price to implement transfer of subsidy from Generation Licensee to customers  However, in line with EDP 2010 and BSHDP 2008 and based on comments of BCCI, the proceeds from the royalty sales accrues to RGOB since January 2011. Therefore, Since royalty energy proceeds accrues to RGoB and not Druk Green anymore, the transfer of subsidy from Generation Licensee to customers does not arise

Changes Proposed in 2013-16 Generation Tariff Revision Proposal – 1. Higher Allowance of Cost of Equity 1. Higher Allowance of Cost of Equity Allowance of higher CoE in keeping with TDR and also for following reasons; 1.1. No Grants Received by Druk Green  Druk Green did not receive any grant  Equity injection from MoF through DHI  Druk Green operates like any Corporate Entity answerable to shareholders  Only RE Assets received in form of grant cannot earn Return on Assets (TDR 6.6.2) 1.2. Export Revenues Subsidizing Domestic Tariffs  Beyond the scope of Act and TDR (EA 14.1.iv & TDR 1.5)  Linking returns from export to CoE for domestic tariff is an indirect subsidy  Subsidy through Royalty pricing or through other mechanism under the purview of Govt.  Curtailing CoE for domestic tariff does not allow Druk Green recover cost of supply

Changes Proposed in 2013-16 Generation Tariff Revision Proposal – 1. Higher Allowance of Cost of Equity 1.3. Druk Green’s Declining Returns (Inclusive of Export) Increase due to Export Tariff of KHP & THP  Fall in profit despite Druk Green’s consistently better operational performance  Hydropower Benchmarking Study by PA Consultants, Norway;  Druk Green’s total cost per WMO is the least among other hydropower plants in Asia and South America.  Average production is highest at 6.4 GWh compared to the group average of 3 GWh per WMO  Operational KPIs of Druk Green KPIs Druk Green Average Remarks Power Plant Availability 97.66% BC Hydro, Canada 96% and (PPA) NHPC, India 91% Water Utilization Factor 99.96%

Changes Proposed in 2013-16 Generation Tariff Revision Proposal – 1. Higher Allowance of Cost of Equity Trends in Demand, Supply and Export  Druk Green’s revenue suffers due to twin effects of decreasing export and low domestic tariff 8,000 Generation 7,000 6,000 Export Eneegy (GWh) 5,000 4,000 3,000 Domestic Demand 2,000 1,000 0 2010 2011 2012 2013 2014 2015 2016

Changes Proposed in 2013-16 Generation Tariff Revision Proposal – 1. Higher Allowance of Cost of Equity 1.4. Challenges in Financing Opportunities for Hydropower Development  At existing tariff levels - uphill task to sustain the dividend expectation  At Druk Green’s current returns of 10-11%, it is unlikely to get investors/financiers support for new projects and would not facilitate plough back of profit for investment in new hydropower projects. The current returns will not enable Bhutan to achieve the objective of economic self reliance through development of a financially viable and reliable electricity industry (EA 3.1.iv). 1.5. Returns Based on Capital Asset Pricing Model (CAPM)  Expected return on equity = risk free rate + Beta (market return – risk free rate)  As reference case; NHPC’s Expected returns as per model – 16%  Beta 0.91  Interest rate of 10 years Indian Govt. bond 8% &  Average Indian market return since 1991 of 17%  Returns for the power sector in Bhutan should be comparable

Changes Proposed in 2013-16 Generation Tariff Revision Proposal – 1. Higher Allowance of Cost of Equity 1.6. High Inflation Rates  Average inflation is 9%. At 12% CoE, real return is only 3% - not commensurate with risks  TDR permitted CoE may be appropriate for very low inflation mature economies 1.7. CoE as per Indian Electricity Regulatory Commission (CERC) Norms  15.5% post-tax  Comparison with India relevant because of integrated energy market and export tariff based on CERC norms 1.8. Higher Average Returns for Listed Companies in Bhutan  Most listed companies have returns higher than 15% 1.9 . Indicative Generation Tariff of Upcoming Hydropower Projects (Using Tariff Model)