Network charging mechanisms are required for efficient recovery of the system capital and operational cost. Network pricing is a complex subject, for a varied and huge Indian power system network, it is essential that pricing structure should evolve over a period of time. The power industries throughout the world are undergoing significant structural changes, with an aim to offer economic and efficient solutions to provide electricity. New regulatory mechanisms encourage efficiency improvement in power distribution, in order to provide better services to end-consumers. For running an efficient power distribution business, utilities are required to collect user charges from the network users.
A methodology for setting network charges needs to serve two purposes:
- To recover the costs of capital, operation, and maintenance of a transmission or a distribution network, allowing the network companies to earn a reasonable rate of return on the capital invested.
- To provide Opportunities for an efficient use of existing network and cost-effective development of future network.
The distribution sector in India has been plagued by high distribution losses (30% overall) coupled with theft of electricity, low metering level and poor financial health of utility with low cost recovery. Due to the above factors, the distribution companies have not been able to undertake the corresponding investment infrastructure augmentation. The electricity acts and policies provide for a new regulatory and market design leading to changes in the power industry. Independent regulation of electricity tariff has been adopted as a step towards reforming the sector ridden by technical and commercial inefficiencies.
As per Electricity act 2003, appropriate regulatory commissions shall determine the principles and methodologies for tariff for generation, transmission, wheeling and retail sale of electricity, and would be guided by the National Electricity Policy 2005 and Tariff Policy 2006. The electricity act empowers the commissions to determine the tariffs for wheeling and retail sale of electricity. Further, it insists for cost-of-supply reflection on tariff and minimisation of cross subsidy in a particulartime frame. The act promotes license-free generation along with license-free distribution in rural areas, trading and open-access. The Tariff Policy 2006, seeks the optimal development of networks to promote efficient utilisation of assets and attract the required investment while providing adequate returns. The network system users are expected to share the total network cost in accordance with their respective utilisation of the system. This article summarises the present distribution network pricing methodology in India and issues related to the pricing model.
Cost of supply model
For success of power sector reforms and provision of services of specified standards to consumers, it is necessary that distribution segment should be technically and commercially efficient. Therefore, the Regulatory Commissions need to strike the right balance between the requirements of the commercial viability of distribution licensees and consumer interests. Loss making utilities need to be transformed into profitable ventures which can raise necessary resources from the capital markets to provide services of international standards to enable India to achieve its full growth potential.
With the fundamental concept based on rate-of-return methodology, the regulations require that the charges to be collected from retail and open access customers be determined on the basis of Cost-of-Supply (CoS) for each category of customers. Based on the principle of cost causation, the CoS model allocates the incurred costs by the utility to the various categories of consumers – assuming that different categories of consumers like domestic, commercial and industrial contribute differently to the individual costs.
With this emphasis, both from the regulatory tariff setting and utility’s comptetive strategy aspect – it has become necessary to compute the cost of supply for individual customer category. As cost to supply model involves the classification of cost according to elements that cause them to vary, there the cost allocated to consumer class according to the way the services to each consumer class cause the elements to cost to be incurred. The model has two step approach based on cost classification and cost allocation.
- Cost classification: The first approach is classification of cost, with an aim to introduce open access facility to consumers and generators efforts were being made to segregate the cost of supply in a number of functional cost elements of generation fixed charge, fuel charge, transmission charge, distribution and consumer charge – so that the cost causation only is charged from the consumer who utilises the portion of the facility and service. Cross subsidy for each category of consumer in a transparent manner is decided by regulatory commission. This process will help in analysis of cost driver and rational allocation of cost for various categories. For different categories of demand cost driver will be different.
- Cost allocation: After cost classification allocation of cost is done. Cost allocation to the category heads is done to reflect the category’s responsibility in cost causation. Even within the same consumer category, segregation is done based on voltage. Voltage profile of all consumers will be deciding the cost of supply. This category-wise cost of supply model involves a better and more equitable manner of allocating costs than the calculation of costs on an average basis.
The demand costs are divided across the different categories in proportion to their contribution to the system load. This cost will be dependent on the contracted demand by consumers. If the system is overloaded then the equipment’s life is reduced. So charges should be such that if the actual demand exceeds the contracted demand, then the penalty should be recovered from the consumer. As the connected load determines the design of the network and the quantum of contracted power, the demand costs are allocated with consideration to the load management and load profiling for different categories.
After the allocation of total costs to each category, the category-wise cost of supply is derived. Taking into account the total units sold to each category, per unit category-wise cost of supply is determined. Thus, the revenue per unit for each category is calculated, and the difference between the revenue per unit and the cost of supply per unit for each of the categories provides the subsidy/cross-subsidy applicable per unit.
Issues with cost of supply model
- Open Access (OA): This would help redistribution of surplus power across the system, and provide consumer’s choice. OA will promote competition and lead to availability of cheap and reliable best quality power. But power players are competely based on margin rather than better and innovative product.
- Power trading and power exchange: Several power exchanges with day-ahead trading have come up in the market, though presently dealing in small quantities only. But in short-term market, participants are prone to risk volumetric and price. A seller may not be able to offload all/any of its supply due to low price in market due to sudden load crass. A buyer may not be willing to procure due to sudden increment in price due to fuel shortage.
- Aggregate technical and commercial losses: As the T&D loss was not able to capture all the losses in the net work, concept of Aggregate Technical and Commercial (AT&C) loss was introduced. Commercial losses reflect the utility’s inefficiency to recover revenue; hence, it is imperative that they be penalised for it. Cost of technical losses up to a certain extent can be tolerated in tariff – as they are inherent in power systems, but excessive losses should be utility’s responsibility. Category-wise cost allocation is necessary to incentivise the users for loss minimisation on a perpetual basis.
- Unbundling of tariff: The tariff offered to the end-consumer presently reflects the combined cost for the different functional components. The system of unbundled tariff is required, which will reflect all the service cost separately.
Four level of operation based on bus voltage profile model
In this model shortcomings of the present cost of supply models are addressed. Here, pricing is done as per the online monitoring of the system. The level of operation can be realised by the online bus voltage and power factor of the system – based on which consumer will be charged. There are various levels of voltage that are predefined – and as voltage level changes charges also change. Because of this model, the consumers are penalised, if they are disturbing the voltage profile. And based on this model, consumers are given the discount if they are keeping the voltage and power factor profile within the said limits.
This model encourages consumers to keep the voltage profile and power factor within the limits. In this model, Long-Run Incremental Cost (LRIC) method also considers for both used and unusedcapacities of various network elements for pricing. It may be negative, indicating that the transaction has resulted in the deferral of distribution network reinforcement before its planned lifetime.
Where
- O: Optimum voltage level to be maintained throughout the system
- A: Minimum lower limit of voltage [MLL]
- B: Lower limit of voltage [LL]
- C: Upper limit of voltage [UL]
- D: Maximum upper limit of voltage [MUL]
- α: First level control angles [degrees]
- β: Second level control angle [degrees]
- γ: Third level control angle [degrees]
- θ: Fourth level control angle [degrees]
- a, b, c, and d: Cost Image Factor [CIF]
Fig. 1: Four Level Operation Based on the Bus Voltage Profile…
Flow chart for the four level dynamic model
For this online data is collected from the system after regular interval then the data is analysed with the help of load flow analysis. With analysis, we can find out various parameters like bus voltage, power factor and total active and reactive power based on that system will check all the parameters, limits and then will find out the level of operation for the recorded voltage and power factor quantities the dynamic pricing factor will be calculated. If the system is over loaded then the equipment life will be reduce so based on used and unused capacity the LRIC charges are calculated. Addition of both LRIC and dynamic pricing factor will give the final pricing for the consumer.
Models comparison
- In cost of supply model, total costs are primarily driven by fixed and variable costs and charges to cover incremental cost alone, which will be adequate for recovery insufficiency. The dynamic model considers the capital invested in network assets and the operational charges separately and it takes into account long-run incremental cost.
- Active participation by consumers in demand response, accommodating all generation and storage options, providing enhanced power quality, enabling new products, services and markets which is not there in cost of supply. But as in dynamic model, consumers are charged for voltage profile deterioration also so active participation of consumer will be there.
- In Cost of Supply model, charges do not vary as per the Network Utilisation, but in dynamic model because of LRIC factor – charges will vary with the network utilisation.
- LRIC pricing is more economically efficient, since it reflects the cost of future network reinforcement as a result of nodal demand/generation increment.
Conclusion
This article summarises the present distribution network pricing methodology in India and issues related to the pricing models. In the present pricing model which is being followed, revenue recovery is not completely aligned with the intrinsic nature of underlying cost, and the economics involved in the model is not consistent with the consumer’s impact on network cost. Four level dynamic model method of network pricing is accurate for setting up tariff, and efficient in recovering the actual network cost, signaling the network user to change their utilisation patterns to smoothen the load profile and release congestion. So, the combination of LRIC, dynamic cost and power factor orientation cost would achieve accurate pricing and reasonable recovery incorporating both long and short term goals.
