Download CERC Tariff Policy

Discussion Paper on Terms and
Conditions of Tariff
November 12, 2003
GMR Group
Objective of Tariff Norms
• Provide incentive for investors for realizing the
“power for all” target
– Tariff norms that reflect opportunity cost for a
given business risk
• To reduce cost of generation in addition to reducing
fixed cost
– Reduce taxes
– Reduce fuel cost
GMR Group
Fixed Cost Recovery
• Fixed cost recovery should be different for coal and
gas plants
– Coal plants at [70% ] availability
– Gas and liquid plants at [75%] availability
GMR Group
Return on Equity
• The current guideline on Return on Equity of 16% may be
continued
– The ROE method has been in practice and well
understood while ROCE method is complicated to
implement
– The ROE is linked to risk of business and not interest on
debt
– There is no return during construction (for 3-5 years)
– Project finance debt interest rate is about 11% based on
the type of project and risks etc.
– Normative Debt: Equity at 70:30 may be continued
– FE adjustment for both debt and equity
– Interest as a “pass through” may be continued
GMR Group
Interest on Working Capital
• Existing norms may be continued
• The Coal companies are demanding I (one) month
L/C and I (one) month cash advance (equivalent to
supply of coal) and the cost of L/C and cash
advance should be included for the working capital
norm
GMR Group
Depreciation
• The existing norm of depreciation may be continued
– Allows repayment of loans, tenors are usually for
10-12 years for power projects
– Provides cash for additional capacity
– Advance against depreciation etc. would lead to
micro-management by and burden on the
Regulatory Commissions
GMR Group
Operation and Maintenance (O&M)
• The current O&M norm of 2.5% of capital cost is low
• O&M norm should be different for coal (lignite) and gas
(liquid) fuel plants
• O&M should escalate on the basis of WPI
• O&M should vary with age
• The suggested base O&M norm as % of capital cost as of
COD:
Type
0-5 of COD
> 5 of COD
Coal (Lignite)
2.5%
3%
Gas (Liquid Fuels)
5%
5.5%
GMR Group
Other Operating Parameters
• Heat Rate
– Heat Rate for coal Plants of 2500 Kcal/ kWh to be
continued
– Heat Rate for gas/ liquid fuel plants 2000 Kcal/ kWh
(Combined Cycle) and 2900 kcal/ kWh (Open) Cycle may
be continued
• Justified based on existing data
• Also need to account for load fluctuations, degradation (esp.
in case of gas based plants), etc.
– The condition “whichever is less” may be removed to
incentivise operations to be efficient
GMR Group
Other Operating Parameters
• Specific Fuel Oil Consumption and Auxiliary Energy
Consumption
– The existing norms may be continued
– The condition “whichever is less” may be
removed to incentivise operations to be efficient
• Incentive for higher availability
– The existing norm may be continued
GMR Group
Additional Points for Reducing Cost of
Generation
• Reduction in taxes
– Customs duty on capital goods import: 21.8%
– Customs duty on spares: 50.8
– Sales taxes 12-16%
– Taxes on fuel
– Impact of taxes on capital cost (Base Cost : 100)
Imported
Content (60)
Customs Duty
= 60x22%= 13.2
Local Content
(40)
Sales tax
=40X16%=6.4
Total increase in cost 20%
GMR Group
Additional Points for Reducing Cost of
Generation
• Reduction fuel cost
– Fuel cost forms 40-50% of total cost
– Fuel taxes
• Suggestions
– Export parity pricing for liquid fuels
– Cost of coal to be in line with international prices
GMR Group