Some issues in pricing bulk electricity

Abstract

Power supply sector in India has been undergoing significant change during the last several years. The monopoly of the vertically integrated State Electricity Boards (SEBs) is yielding place to large scale electricity generation in the Central sector and to the concept of national grid. In the new structure of the power supply sector, explicit prices at which power would be sold at the interfaces have to be mentioned. A study of the relationship between NTPC and the SEBs is useful in highlighting the issues involved at the interfaces. In the present scenario, NTPC charges different prices for power supplied from its different plants. NTPC is an integrated power system and, therefore, multiple prices based on plant cost structures are not feasible. NTPC has to devise ways and means of specifying one price for all SEBs. At present NTPC enters into agreement with SEBs for sale of electricity through the Bulk Power Sales Agreement. This model (BPSA) is a simple accounting model. While NTPC and SEBs agree on the structure of BPSA, there has arisen serious dispute regarding the normative values of the technical and financial parameters that should be used in BPSA calculations. SEBs has taken the view that liberal and easy norms have been assigned to NTPC which results in steep prices. NTPC claims that its norms are far more stringent than the national averages and therefore, there is no reason to make them more stringent. This impasse has resulted in huge arrears (Rs. 2494 crore as at 31st March, 1993) from SEBs to NTPC. This has imposed serious cash problems upon NTPC and has led to curtailment of its expansion plans. This underscores the urgency of examining the tariff issue in detail. The first issue for research is determination of suitable norms for electricity supplied by NTPC to SEBs. This work examines the prevailing national and international practices for determining the norms for NTPC. It is seen that norms are not stringent enough. In economic computations spread over several time periods, inter-temporal equivalence is enabled by suitably discounting the flows that occur at different points in time. It is, therefore, important to examine the practical aspects of computation of financial discount rate. This thesis tries to determine the existing ideas in corporate finance. Three private sector firms, which are similarly placed vis-a-vis NTPC, are chosen and their costs of equity are ascertained through various procedures. These results are extended to NTPC after adjustment for various effects. In literature, there is considerable discussion regarding the merits and demerits of using marginal cost vis-a-vis average cost for pricing. It, therefore, is a matter of practical interest to examine the cost function for NTPC system from a financial perspective and see where marginal costs lie in relation to average costs.it is seen that marginal and average costs from financial approach lie close to one another. The scope of costs differs depending upon the context. The context varies depending upon the purpose and unit of analysis. This work examines where the accounting, financial, and social costs lie in relation to one another.

The important findings are 1. Under the BPSA framework, the existing prices are higher. 2. Under a financial framework, the average and marginal costs are close to one another. 3. Transmission capacity is significantly less costlier than generation capacity. Therefore, beyond a point, significant returns to investment would be through investment in transmission facility.

Some important limitations of this study are: The investment plan proposed by NTPC is taken as optimal; Studies on electricity economics require estimation of economic parameters several years in advance, thus making the estimated values less reliable; In the benefit-cost approach only the most direct impacts have been included. The above results have to be seen in the context of these limitations.