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Questions and Answers
What policy was notified by the Central Government in compliance with section 3 of the Electricity Act 2003?
What policy was notified by the Central Government in compliance with section 3 of the Electricity Act 2003?
Tariff policy
What is the goal set by the National Electricity Policy regarding new generation capacity?
What is the goal set by the National Electricity Policy regarding new generation capacity?
Adding new generation capacity of more than one lakh MW
What is one of the objectives of the tariff policy?
What is one of the objectives of the tariff policy?
The Tariff Policy aims to decrease the competitiveness of the electricity industry.
The Tariff Policy aims to decrease the competitiveness of the electricity industry.
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What must the Central Electricity Regulatory Commission and State Electricity Regulatory Commissions be guided by?
What must the Central Electricity Regulatory Commission and State Electricity Regulatory Commissions be guided by?
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The Debt: Equity ratio for financing future capital costs of projects should be _____.
The Debt: Equity ratio for financing future capital costs of projects should be _____.
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What type of costs should not be a pass-through for foreign exchange variation risk?
What type of costs should not be a pass-through for foreign exchange variation risk?
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What approach should the Appropriate Commission use for determining the revenue requirement?
What approach should the Appropriate Commission use for determining the revenue requirement?
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The tariff fixation for projects with lower Green House Gas emissions does not consider benefits from the Clean Development Mechanism.
The tariff fixation for projects with lower Green House Gas emissions does not consider benefits from the Clean Development Mechanism.
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Match the following elements:
Match the following elements:
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What is the outer limit to introduce open access in distribution according to the Act?
What is the outer limit to introduce open access in distribution according to the Act?
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When should the Availability Based Tariff (ABT) be introduced at the State level?
When should the Availability Based Tariff (ABT) be introduced at the State level?
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What mechanisms are suggested for power procurement for future requirements?
What mechanisms are suggested for power procurement for future requirements?
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New capacity additions should deliver electricity at the lowest possible rates.
New capacity additions should deliver electricity at the lowest possible rates.
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What is necessary for the Appropriate Commission in creating an enabling environment for captive generation?
What is necessary for the Appropriate Commission in creating an enabling environment for captive generation?
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What are the objectives of the tariff policy concerning transmission?
What are the objectives of the tariff policy concerning transmission?
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What should transactions be charged based on in terms of transmission loss allocation?
What should transactions be charged based on in terms of transmission loss allocation?
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The national transmission network in India is fully developed.
The national transmission network in India is fully developed.
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What should happen if the licensee fails to initiate filings in time?
What should happen if the licensee fails to initiate filings in time?
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What is the goal of making the distribution segment of the industry efficient?
What is the goal of making the distribution segment of the industry efficient?
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What is one recommended method for procurement of non-conventional sources of energy?
What is one recommended method for procurement of non-conventional sources of energy?
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What is the purpose of third party verification of energy audit results?
What is the purpose of third party verification of energy audit results?
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By when should the SERC complete the independent assessment of baseline data for various parameters?
By when should the SERC complete the independent assessment of baseline data for various parameters?
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The SERC can institute a system of independent scrutiny of financial data submitted by the licensees.
The SERC can institute a system of independent scrutiny of financial data submitted by the licensees.
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Which factors should be considered when determining the extent of subsidy for different consumer categories?
Which factors should be considered when determining the extent of subsidy for different consumer categories?
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What is the proposed timeline for tariffs to be within ± 20% of the average cost of supply?
What is the proposed timeline for tariffs to be within ± 20% of the average cost of supply?
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The formula for computing cross-subsidy surcharge is S = T - [ C (1 + L / 100) + D ], where S is the ______.
The formula for computing cross-subsidy surcharge is S = T - [ C (1 + L / 100) + D ], where S is the ______.
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What should the carrying cost of the regulatory asset be allowed for?
What should the carrying cost of the regulatory asset be allowed for?
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What is a better way to support poorer categories of consumers according to Section 65 of the Act?
What is a better way to support poorer categories of consumers according to Section 65 of the Act?
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Provision of free electricity is encouraged as it prevents wasteful consumption.
Provision of free electricity is encouraged as it prevents wasteful consumption.
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Study Notes
Tariff Policy Overview
- The Tariff Policy is a notification by the Central Government as per the Electricity Act, 2003, following the National Electricity Policy introduced in February 2005.
- Goals include adding over 1,00,000 MW of generation capacity during the 10th and 11th plan periods and ensuring per capita electricity availability exceeds 1000 units annually.
- Aims to eliminate energy shortages and provide access to electricity for all households within five years.
Key Objectives of the Tariff Policy
- To provide consumers with electricity at reasonable and competitive rates.
- To ensure the financial viability of the power sector, thereby attracting necessary investments.
- To promote transparency, predictability, and consistency in regulatory approaches across different jurisdictions, reducing regulatory risks.
- To enhance competition and operational efficiency, improving electricity supply quality.
Legal Framework
- Section 3 of the Electricity Act, 2003 empowers the Central Government to formulate and revise the Tariff Policy.
- Regulatory bodies like the Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commissions (SERCs) must adhere to this policy in their operations.
General Approach to Tariffs
- Introduction of competition is essential to reduce capital costs and improve operational efficiencies.
- Future power procurement should be primarily competitive, with exceptions for existing projects or state-owned developers.
- New generation projects should undergo competitive bidding after five years.
Financial Structures
- The policy sets a Debt: Equity ratio of 70:30 for project financing, allowing higher equity if promoters choose.
- Depreciation rates for generation and transmission assets will be notified and applicable for tariffs.
- Tariff structures must encourage efficient debt structuring to lower consumer costs.
Performance-Based Regulation
- The policy emphasizes a performance-based cost of service regulation, focusing on targeted outcomes rather than input costs.
- Multi-Year Tariff (MYT) frameworks are to be adopted to set tariffs for a five-year control period, ensuring regulatory consistency and predictability.
Environmental Considerations
- Projects resulting in lower greenhouse gas emissions can factor in Clean Development Mechanism (CDM) benefits for tariff considerations.
Challenges and Recommendations
- Distinction in duties and taxes on electricity consumption could distort competition; a uniform approach is encouraged.
- Open access in distribution is to be implemented before the outer limit of January 27, 2009, if circumstances allow.
Generation Sector Focus
- The policy calls for accelerated growth in the generation capacity to meet growing demand efficiently.
- A transparent competitive bidding process for power procurement is mandated to secure both base load and peak load capacities.
- It proposes a two-part tariff structure for long-term contracts to facilitate merit order dispatch, to be introduced at the state level by April 2006.### Framework for Generation and Power Purchase
- Extension of regulations to include generating stations and captive plants as specified by SERC capacities.
- The Appropriate Commission can implement differential rates for peak and off-peak hours to enhance load management.
- Power Purchase Agreements must have secure payment arrangements; persistent defaults may allow generating companies to seek other buyers.
Captive Generation
- Captive generation is vital for competitive power availability.
- An enabling environment for captive power plants connection to the grid should be created to allow surplus power injection.
- Distribution licensees may buy firm supplies from captive plants based on Central Government guidelines.
- Tariffs for captive generation should reflect variable generation costs and include capacity charges.
Non-Conventional Energy Sources
- A minimum percentage for energy purchase from non-conventional sources must be established by the Appropriate Commission.
- Preferential tariffs will support procurement from non-conventional sources until they become cost-competitive.
- Distribution licensees’ procurement needs to occur through competitive bidding for future energy requirements.
Transmission System Overview
- National transmission network is under development with regional and state networks needing uniform capacity enhancement.
- Goals for the transmission tariff policy include optimal development, efficient utilization of assets, and encouraging necessary investments.
Transmission Pricing Policy
- A suitable tariff framework for inter-State transmission must be implemented, sensitive to distance and direction of power flow.
- The CERC will set a mechanism for determining transmission charges based on user utilization.
- Network expansion does not require prior agreements with beneficiaries; expansion is based on regulatory approvals.
Transmission Loss Allocation
- Transactions on transmission charges should be based on average losses, considering distance and sensitivity at relevant voltage levels.
- A system of loss compensation will be implemented based on incremental losses as the transmission network expands.
Distribution Objectives
- Reliable and quality power supply at reasonable rates is a primary aim of the National Electricity Policy.
- State Commissions should set performance standards for licensees to ensure service continuity and quality.
- A balance between commercial viability of distribution companies and consumer interests is crucial.
Multi-Year Tariff (MYT) Framework
- The MYT framework minimizes risks, promotes efficiency, and provides predictability to consumer tariffs.
- Mechanisms for sharing excess profits with consumers should be established within the MYT framework.
- Licensees may charge lower tariffs competitively without claims on additional revenue.
Framework for Revenue Requirements and Costs
- Legitimate power purchase costs must be recognized, balancing it with efforts to reduce Aggregate Technical & Commercial (ATC) losses.
- Independent assessments of baseline data are necessary for effective management of energy supply and loss reduction.
- Regulatory assets should be used sparingly, only in specific natural or force majeure circumstances, to mitigate tariff impacts.### Regulatory Framework and Tariff Design
- Regulatory asset proposals must ensure a reasonable return on equity to support the borrowing capacity of licensees.
- Optimal pricing of electricity promotes energy conservation and sustainable use of groundwater.
- Tariffs should reflect efficient supply costs; subsidies can be provided by state governments under Section 65 of the Act.
Subsidy Mechanisms and Targeting
- Direct subsidies are more effective for poorer consumers than cross-subsidization.
- Special support may be granted for consumers below poverty line consuming up to 30 units/month, maintaining tariffs at 50% of average supply costs.
- A roadmap must be established to align tariffs with supply costs by 2010-2011, aiming for tariffs within ± 20% of average costs.
Agricultural Tariffs and Groundwater Management
- Agricultural tariffs should account for sustainable groundwater use, varying by locality based on groundwater conditions.
- Higher subsidies may be permitted for impoverished farmers in areas facing adverse groundwater conditions, with restrictions to ensure sustainability.
- Free electricity provision is discouraged as it promotes wasteful consumption and may lead to lower water tables.
Metering and Charging Practices
- Two-part tariffs (fixed and variable) and time-differentiated tariffs will be prioritized for large consumers to enhance energy conservation.
- State governments must assign existing Power Purchase Agreements (PPAs) to successor distribution companies, ensuring uniform retail tariffs across different consumer categories.
- Incentives for metering and billing based on actual usage will be promoted, especially for previously unmetered consumers.
Open Access and Cross-Subsidy Surcharge
- Cross-subsidy surcharges for open access consumers should be fair and not hinder market competition.
- Surcharge calculations will consider the differential between applicable tariffs and the cost to the distribution licensee, factoring in delivery and losses.
- Cross-subsidy surcharges should progressively decrease to a maximum of 20% of the initial level by 2010-2011.
Trading Regulations
- The Appropriate Commission has the authority to set trading margins to promote competition and prevent profiteering during power shortages.
- Continuous monitoring of trading activities is essential to maintain competitive electricity markets.
General Guidelines and User Charges
- Reasonable user charges should be levied to discourage excessive consumption and protect network quality.
- Pre-paid meters can facilitate targeted subsidy transfers to needy consumers, improving transparency and efficiency.
Connection and Wheeling Charges
- Connection charges imposed by new distribution licensees must be reasonable to prevent exploitation and ensure fair competition.
- Wheeling charges should consider average loss compensation and be derived from principles governing intra-state transmission charges.
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