TARIFF OF HYDROELECTRIC

SCHEMES AND A CASE STUDY

BY

Anil Kumar

1
 PRICING OF HYDROELECTRIC PROJECTS

Pricing of hydro projects can be calculated in

the following forms:

Cost of generation (Rs/Kwh)

Sale rate of generation (Rs/Kwh)

Lavellized tariff of generation

2
 Pricing of hydroelectric generation
can be done:

On Present Day Cost

(cost at a given price level) or

Completed cost
(cost of project on its completion)

3
 SOME IMPRTANT DEFINITIONS
‘Design Energy’

 It means quantum of energy, which would be

generated in a 90% dependable year with 95%
installed capacity of the generating station.

 If the total energy generation in the years for which

hydrological data is available (say N years) is
arranged in descending year order, the [(N+1)*0.9]th
year would represent the 90% dependable year. The
90% dependable year is a year in which the annual
energy generation has the probability of being equal
to or in excess of 90% of the expected period of
operation of the scheme. 4
 Primary Energy
& Saleable Primary Energy
Primary Energy

 It means the quantum of energy generated up to

the design energy on per year basis at the
generating station.

 It means the quantum of primary energy available

for sale (ex-bus) after allowing for 12% free
energy to the home state.

5
 Secondary Energy & Saleable
Secondary Energy

Secondary Energy: It means the quantum of

energy generated in excess of the design
energy on per year basis at the generating
station.

Saleable Secondary Energy: It means the

quantum of secondary energy available for sale
(ex-bus) after allowing for 12% free energy to
the home state. 6
 Run –of –River and Storage Type
power station
 Run –of –River power station
It means hydro electric power generating station
which has no upstream pondage.
 Run –of –River power station with pondage: It
means a hydro electric power generating station
with sufficient pondage for meeting diurnal
variation of power demand.
 Storage Type power station
It means a hydro electric power generating station
associated with large storage capacity to enable
variation in generation of power according to
demand. 7
Infirm Power
It means electricity generated prior to
commercial operation of a unit of a generating
station.

Operation and Maintenance Expenses or

O & M Expenses
It means the expenditure incurred in operation
and maintenance of the generating station,
including part thereof, including the expenditure
on man power, repairs, spares, consumables,
8
insurance and overheads.
 NORMS FOR OPERATION HYDRO
STATIONS
Auxiliary Consumption for:

Surface PH Underground PH

Shaft mounted Exciter 0.2 0.4

Static Exciter 0.5 0.7

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 NORMS FOR OPERATION HYDRO STATIONS
Contd..
Transformation Losses

0.5 % of the energy generated

Date of Commercial Operation

Not exceeding 15 days from the date of

synchronization
10
Normative Capacity Index for recovery of
full capacity charges
i) During first year of commercial operation of the
generating station
 Purely run-of-river (ROR) power stations : 85 %
 Storage type and ROR power stations with pondage : 80%
ii) After first year of commercial operation of power
station
 Purely run-of-river (ROR) power stations : 90 %
 Storage type and ROR power stations with pondage : 85%

Note: There shall be pro rata recovery of capacity

charges in case of the generating station achieves the
capacity index below the prescribed normative levels.
At zero capacity index, no capacity charges shall be
11
payable to the generating station.
 STEPS INVOLVED IN TARIFF
COMPUTATION

Estimation of total cost of the project

Computation of Annual Design Energy
Computation of saleable energy generation
Computation of cost of generation
Computation of sale rate of generation
Computation of levellized tariff

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 ESTIMATION OF TOTAL COST
Hard Cost
i) Cost of Civil Works
ii) Cost of E&M Works
iii) Sub – Total (Hard Cost)
Soft Cost
i) IDC
ii) Financing Charges
Total

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COMPONENT OF TOTAL COST

i) Equity (30%)

ii) Loan (70%)

Total

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 COMPUTATION OF SALEABLE GENERATION

i) Gross generation at the bus bar of the power station

ii) Generation after auxiliary consumption
[(i) – Auxiliary consumption]
iii) Generation after transformation losses
[(ii) – transformation losses (0.5 % 0f (ii)]
iv) Generation after allowing free power to Home State
if any, That is,
Saleable generation = Generation after free energy
to home State
= [(iii) – free energy to home State (say @ 12 %)]
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 COMPUTATION OF FIXED AND
RUNNING CHARGES
Fixed costs (or fixed charges) are those costs
which tend to be unaffected by changes in the
number of units produced.
Variable costs (or running charges) are those
costs, which fluctuate according to changes in
number of units produced.
In case of a hydroelectric project, annual fixed
and running charges are computed in terms of
annual capacity charges, annual energy
charges and interest on working capital as
16
follows:
Two part tariff for Hydroelectric Projects
Computation of Annual charges

The two-part tariff for sale of electricity from a

hydro power generating station comprises of:

Recovery of annual capacity charge and

Primary energy charges.

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 (a) Computation of Annual
Capacity Charges
Capacity charges are computed by using the
following formula:

Annual Capacity Charges

= (Annual fixed Charge – Primary Energy
Charges)

However, the recovery through Primary energy charge

can not be more than Annual fixed charge. 18
 (b) Annual Fixed Charges

Annual fixed charges consist of:

i. Interest on loan capital

ii. Depreciation, including Advance against
Depreciation
iii. Return on equity
iv. Operation and maintenance expenses and
v. Interest on working capital.
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 Computation of Annual Fixed
Charges
Annual fixed charges are computed on the
following basis:

i. Interest on loan capital

Interest on loan capital is computed loan-wise

on the loans.

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 ii. Depreciation including Advance
against Depreciation
Depreciation is computed in the following manner:
i) Value base for purpose of depreciation is historical
cost of the asset.
ii) Depreciation is calculated annually based on straight
line method over useful life of asset and at rates
prescribed in CERC Regulations, 29th March, 2004.
 Residual life of the asset shall be considered as
10% and depreciation is allowed up to maximum
of 90% of the historical capital cost of the asset.
 Land is not a depreciable asset and its cost is
excluded from the capital cost while computing
90% of the historical cost of the asset.
 Historical capital cost of asset shall include
additional capitalization on account of Foreign
Exchange Rate Variation up to the start of the
year already allowed by the Central Government/ 21
Commission.
iii) On repayment of entire loan, the remaining
depreciable value is spread over the balance
useful life of the asset.
iv)Depreciation is chargeable from first year of
operation. In case of operation of the asset for
part of the year, depreciation is charged on pro
rata basis.

Advance Against Depreciation

Advance Against Depreciation (AAD) = Loan
repayment amount subject to a ceiling of 1/nth of
loan amount, where n is the repayment period.
• ADD is permitted only if the cumulative repayment
up to a particular year exceeds the cumulative
depreciation up to that year;
• ADD is restricted to the extent of difference
between cumulative repayment & cumulative 22
depreciation up to that year.
 iii. Return on Equity

Return on equity is computed on the equity @

14% per annum.

Provided that equity invested in any foreign

currency is allowed a return up to the
prescribed limit in the same currency and the
payment on this account is made in Indian
Rupees based on the exchange rate prevailing
on the due date of billing.
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iv. Operation and Maintenance
Expenses

The base operation and maintenance

expenses are fixed at 1.5% of the actual
capital cost in the year of commissioning and
is subject to an annual escalation of 4% per
annum for the subsequent years.

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 V. Interest on Working Capital
Working Capital covers:
 Operation and Maintenance expenses for one
month
 Maintenance spares @ 1 of the historical cost
escalated @ 6% per annum from the date of
commercial operation and
 Receivables equivalent to two months of fixed
charges for sale of electricity, calculated on
normative capacity index.

Rate of interest on working capital is the short-term

Prime Lending Rate of SBI as on start of the year in
which the generating unit/station is declared under
commercial operation. Interest on working capital is
payable on normative basis notwithstanding that the
generating company has not taken working capital 25
 (c) Primary and Secondary Energy
Charges
i) Primary energy charge
 Primary energy charge are worked out on the basis of
paise per kWh rate on ex-bus energy scheduled to be
sent out from hydro electric power generating station
after adjusting for free power delivered to home State.

 Rate of primary energy for all hydro electric power

generating stations, except for pumped storage
generating stations is equal to the lowest variable
charges of the central sector thermal power
generating station of the concerned region. The
primary energy charge is computed based on the
primary energy rate and saleable energy of the
26
station.
 Provided that in case the primary energy charge
recoverable by applying the above primary energy
rate exceeds the Annual Fixed Charge of a generating
station, the primary energy rate for such generating
station is calculated by the following formula:
 Primary energy rate = Annual Fixed Charge
Saleable Primary Energy
 Primary Energy Charge = Saleable Primary Energy x
Primary Energy Rate
Secondary Energy Charge
 Secondary Energy Rate are equal to Primary
Energy Rate
 Secondary Energy Charge = Saleable Secondary
Energy x Secondary Energy Rate. 27
 Cost of Generation
Cost of generation is calculates as follows:

i) Total charges without return on equity =

(a) + (b) + (c) – b(iii)

ii) Cost of energy generation (Rs/ Kwh) =

8.1(i)/Energy after transformation losses

28
 Sale Rate of Generation/ First Year
Tariff
Sale rate of generation is calculates as follows:

i) Total charges with return on equity =

(a) + (b) + (c)

ii) Sale Rate of energy generation (Rs/ Kwh)

= 8.2(i) /Saleable energy

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 LEVELLIZED TARIFF
As per Government of India’s Notification dated
30th March, 1992 (As amended from time to
time), the two part tariff for sale of electricity
from hydroelectric project shall comprise
recovery of annual capacity charge and energy
charges.

Total tariff is calculated per KWh for each year

upto the life of the plant (35 years) and
levellised tariff is calculated by applying 12%
discount factor.
30
 Steps for Computation of Levellized tariff
i) Sale rate of energy (Rs/Kwh) for the first year is
computed as mentioned above.
ii) For remaining years of repayment period of loan {(n-1)
yrs, if the repayment period is 15 years)}, annual
depreciation (or 1/nth of total loan as depreciation, if
repayment period is n years) is deducted from each of
previous years balance loan amount and sale rate
(Rs/Kwh) for each year is computed.
iii) For the remaining years, sale rate of generation is
computed as per actual calculations of depreciation.
iv) Computation of discounting factors for all 35 years
(life of a hydroelectric station)
v) Discounting the annual charges with the
corresponding annual discounting factors
vi)Lavellized tariff is computed by dividing the sum of
annual charges of energy for all 35 years bye sum of
the discounted factors of all the 35 years. 31
 INCENTIVES
Incentive are payable in the first year of operation, when
the capacity index (C1) exceeds 90% for purely run-of-
river power generating stations and 85% for run-of
river power station with pondage or storage type
power generating stations and inventive shall accrue
up to a maximum capacity index of 100%.

Incentive payable to generating company

= 0.65 x Annual Fixed Charge x (C1A– C1N)/100
(If incentive is negative, it is set to zero.)
Where, C1A is the Capacity index achieved and C1N
is the normative capacity index whose values are 90%
for purely run of the river hydro stations and 85% for
pondage/ storage type hydro generating. 32
 INCENTIVES Contd………
The incentives on account of capacity index
and payment for secondary energy is payable
on monthly basis, subject to cumulative
adjustment in each month of the financial year,
separately in respect of each item, and final
adjustment is made at the end of the financial
year.

The total incentive payment calculated on

annual basis is shared by the beneficiaries
based on the allocated saleable capacity.
33
Incentive for completion of hydro electric power
generating stations ahead of schedule
In case of commissioning of a hydro electric
power generating station or part thereof ahead
of schedule, as set out in the first approval of
the Central Government or the techno-
economic clearance of the Authority, as
applicable, the generating station becomes
eligible for incentive for an amount equal to pro
rata reduction in interest during construction,
achieved on commissioning ahead of the
schedule.
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 Incentives Contd…….
The incentive is recovered through tariff in twelve
equal monthly installments during the first year
of operation of the generating station.
In case of delay in commissioning as set out in
the first approval of the Central Government or
the techno-economic clearance of the Authority,
as applicable, interest during construction for
the period of delay is not allowed to be
capitalized for determination of tariff, unless the
delay is on account of natural calamities or
geological surprises.
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 Computation of Unit Cost/ Sale Rate of
Generation at Bus Bar - A Case Study
Illustrated Example for Calculation of
 Cost of Generation (Rs/Kwh)
 Sale Rate/ First Year Tariff
 Levellized Tariff
Assumptions
a) Interest Rate for debt : 8%
b) Interest on working Capital : 10.25%
c) Repayment : 15 years
d) Life of Hydroelectric project : 35 years
e) Return on Energy : 14% 36
Computation of Unit Cost/ Sale Rate of Generation at
Bus Bar – A case Study Contd…

1. Installed Capacity : 1000 MW

2. Cost Estimates:
a) Hard Cost : Rs. 4992.24 Crs
b) IDC & F. Charges : Rs 584.85 Crs
c) Total : Rs 5577.09 Crs
3. Debt : Equity : 70:30
a) Equity : Rs 1673.13 Crs
b) Debt : Rs 3903.96 Crs
37
 Computation of Unit Cost/ Sale Rate of
Generation at Bus Bar Contd…

4.Design Energy : 3387.47 Gwh

5.Auxiliary consumption @ 0.7%: 23.71 Gwh
6.Energy after Aux. consumption: 3363.76 Gwh
7.Transformation losses @ 0.5%: 16.82 Gwh
8.Energy after Transformer losses: 3346.94 Gwh
9 Free Power to home State @ 12%: 401.63 Gwh
10. Saleable Energy : 2945.31 Gwh
38
 Computation of Unit Cost/Sale Rate of
Generation at Bus Bar– A case Study Contd…
11. Annual Fixed Charges
a) Interest on loan {8% on 3(b)}: Rs 301.91 crs
b) Depreciation {Limited to 1/15th of loan: Rs 260.26 crs
c) O & M charges{1.5% on 2(c)} : Rs 83.66 crs
d) Return on Equity{14% on 3(a)} : Rs 234.24 crs
e) Interest on working Capital{10.25% on 3(b)
: Rs 21.84 crs
i. O & M charges for 1 month: Rs 6.97 crs
ii. Maintenance Spares {1% of 2©}:Rs 55.77 crs
iii. 2 months average billing Rs 150.32 crs
iv. Rs 213.06 crs
f) Total Annual Charges: Rs 901.90 Crs 39
Computation of Unit Cost/Sale Rate of Generation
at Bus Bar– A case Study Contd…

12. Cost of Generation = Rs 1.99/ Kwh

{11(f)-11(d)}/ 8)
{Annual charges without return on equity)}/Energy after
Transformation)

13. Sale Rate of Generation = Rs 3.06/ Kwh

{11(f)/10)
{Annual charges with return on equity)}/ saleable energy)

Note: This unit rate is excluding water cess, income tax

incentives, penalties tc 40