Domestic power tariff revision proposed
May 30 | Kuensel
By Tshering Dorji
With the three-year tariff cycle ending next month, the Druk Green Power Corporation (DGPC) and Bhutan Power Corporation (BPC) have proposed domestic electricity tariff revision for the next three years.
The Bhutan Electricity Authority (BEA) has conducted its public hearing and is in the process of reviewing the proposals from the two companies.
The proposed tariff
DGPC has proposed for a generation cost of Nu 1.70 per unit (KWh) of electricity. This means that the BPC would buy power from DGPC at this rate, should the proposal gets BEA’s approval.
The rate is determined based on the total cost of the existing hydropower plants of Basochhu, Kurichhu, Chukha and Tala and the average annual generation. This cost also takes into account the cost of debt DGPC bears, its cost of equity and returns. “The proposal for upward revision is based on the recovery of the cost of generation reflecting the cost of efficient business operation,” DGPC’s proposal states. “The increase in tariff will enable DGPC to earn returns as permissible within the tariff policy and regulatory framework, and to maintain satisfactory level of profitability.”
However, the BPC’s proposal was drafted in consideration to the existing DGPC’s generating cost, Nu 1.59 a unit.
An official from the BPC said that the proposal from both the DGPC and BPC were submitted on the same date and that the BPC, unaware of DGPC’s proposal took into account the existing tariff. “If the DGPC’s proposal gets approved, BPC’s tariff will automatically increase. This is the usual practice since DGPC’s proposal is also subject to BEA’s review,” she said.
The BPC, however, categorises its consumers based on electricity consumption such as the light voltage (LV), medium voltage (MV) and high voltage (HV). Within the LV, there are three blocks. Block I, if the consumption is between 0 and 100 units, block II for consumption between 100 and 300 units and block III for consumption of more than 300 units. However, institutions such as schools and hotels are categorised as LV bulk consumers.
The current tariff for LV block I is Nu 1.28, Nu 2.68 for block II and Nu 3.53 for block III. The actual cost of supply to the LV consumers is Nu 5.81 per unit of electricity, which is the unsubsidised cost. Since the government gets royalty energy of 15 percent from whatever the hydropower plants generate, the government uses this amount to subsidise the cost.
For instance, the BPC actually charges LV consumers Nu 5.81 per unit of electricity but because of the subsidy, the consumers are charged less. Even the free 100 units of electricity for the rural consumers, the chief executive officer of BPC, Sonam Tobgay said, the company bears no cost. “BPC charges the government actual cost of supply,” he said.
In the earlier cycle, government has used Nu 1.7B annually to subsidise the tariff. The tariff determination rules mandate the company to segregate the BPC’s cost based on consumers because most of the rural electrification loans are concessional and the cost of financing is much less. This benefit, according to a BPC official is passed only to the LV consumers.
However, in their new proposal, the cost of supply or the unsubsidised tariff is proposed at Nu 5.89 for LV consumers, an increase of about 1 percent. But the actual cost the consumer would bear is dependent on the government subsidy. “It is upto the ministry of economic affairs as to how they would like to use the royalty energy to subsidise the consumers or even to continue with the 100 units free electricity for that matter,” he said.
According to the proposal, status quo is maintained on the cost of supply for LV consumers for the next three years.
As for MV consumers, the energy charge has been proposed at Nu 2.48 a unit in the first year.
The HV consumers, who are not allotted subsidy, would also have to pay an energy charge of Nu 1.59 a unit for the next three years.
However, the MV and HV consumers have to pay the demand charge, the cost, which industries have to bear for booking power in advance.
This cost is also derived from the cost of BPC’s transmission to the industrial estates in the final year of the cycle.
A BPC official said that demand charge is usually levied on advance booking on power and charges are meant to discourage hoarding, which happened in the past. Even then, she said that average tariff, including the demand charge levied on the HV industries comes to about Nu 2.24 a unit, which is the lowest in the region.
The BPC CEO said that demand charge is basically the recovery of BPC’s investment in transmission and operations dedicated to the HV industries.
“People want reliable services and to do so we have to keep pace with the technology and invest in it,” said Sonam Tobgay hinting that cost is bound to increase if services are to be improved. “But we have been very transparent and rationale in terms of revealing our cost, financing and future investment.”
How is tariff determined?
The tariff is determined using the cost plus model, a cost-based pricing strategy for selling products. In cost plus model, all costs related to materials, labour and overhead are added on top of a markup percentage or profit to determine the selling price.
However, in terms of electricity pricing in the country, the domestic power tariff policy and tariff determination rules and regulation was put in place to ensure fairness and transparency. This ensures that unnecessary and unreasonable costs incurred by the power utility companies are not passed down to the consumers.
Since DGPC is taking care of the operational hydropower plants, it bears the cost of generating electricity. It sells electricity to Bhutan Power Corporation.
DGPC after accounting all its financing cost, returns on equity and operational cost would determine the generation cost. The final tariff consumers pay to the BPC is inclusive of generation cost, BPC’s operational cost, investment, financing cost and return on equity.
The tariff determination rules specify what costs and how much percentage of it should be used to determine tariff. The BEA would review the proposals and add the subsidy component in consultation with the government.
The three-year cycle period begins from July 1, this year.