ELECTRICITY PRICING IN TANZANIA - ESI Africa · 2019-09-02 · ELECTRICITY PRICING IN TANZANIA • BACKGROUND • TARIFF APPLICATION GUIDELINES 2009 ... – Only Usedand Useful assets

Felix NgamlagosiDirector of Regulatory

Economics EWURA

10 – 13 SEPT. 2012

ELECTRICITY PRICING IN TANZANIA

ELECTRICITY PRICING IN TANZANIA

• BACKGROUND• TARIFF APPLICATION GUIDELINES 2009

• CURRENT TARIFF SETTING APPROACHES– SPP TARIFF SETTING – IPP TARIFF SETTING

• NEW TARIFF SETTING APPROACHES– GENERATION PRICING– TRANSMISSION PRICING– DISTRIBUTION AND SUPPLY PRICING

• CONCLUSION

BACKGROUND

Regulated Sector Sector Legislation

Electricity Electricity Act, 2008

Petroleum Petroleum Act, 2008

Water and Sewerage

Water Supply and Sanitation Act, 2009

Natural Gas Draft Gas Bill, 2012

EWURA Established under Section 4 of Chapter 414 of the Laws of Tanzania

BACKGROUND – Duties of EWURA

To promote effective competition and economic efficiency at all levels of regulated activities;

To protect the interest of the customers;

To protect financial viability of efficient suppliers;

To promote the availability of regulated services to all (existing and potential) customers;

To enhance public knowledge and awareness;

Take into account the need to protect and preserve the environment.

BACKGROUND - Functions

1) Subject to sector legislation:-

Issue, renew and cancel licences;

Establish standards, terms and conditions;

Regulate tariff rates and charges; and

Make rules to enable discharge of its duties

2) Monitor the performance of regulated sectors:-

Levels of investment;

Security of Supply (quality and quantity);

Cost of Services; and

Efficiency of Supply Chain.

BACKGROUND - LEGAL MANDATE

EWURA draws its mandate to review tariff from the Electricity Act (“Cap.131”) and the EWURA Act (“Cap.414”)•Section 24(1) and (2) of Cap.131 requires licensees to submit tariff proposals to the Authority for a review and approval at least once in every three years•Section 17 of Cap.414 require EWURA to regularly review rates and charges

TARIFF APPLICATION GUIDELINES 2009: PRINCIPLES

Tariff Application Guidelines (TAG): Sect. 23(2) of Cap. 131 and Sect 17(2) Cap. 414.

a)Reflect the cost of efficient business operation;

b)Recover a fair return on approved investments;

c)Ensure price stability

d)Access charges based upon comparable charges for comparable use;

e)Pay in accordance with the costs imposed,

f) Enhance efficiency in consumption and supply,

g)Promote competition and attract investment.

TARIFF GUIDELINES… Procedure

.Application

Assessment

Public Inquiry

Evaluation

Decision

Gazette

Task

s

Time (days)

30 45 90 120 180

TARIFF GUIDELINES ……Approach

• The Revenue Requirement Formula

RR= O&M + D+ T + (WACC*RAB)

Where:

RR = Revenue Requirement

O&M = Operation and Maintenance

D = Depreciation Expenses

T = Taxes

WACC = Weighted Average Cost of Capital

RAB = Regulatory Asset Base

TARIFF GUIDELINES ……Approach

• Guiding Criteria:

– Prudently Incurred Costs – Burden of Proof rests with the Applicant

– Only Used and Useful assets are considered

– Benchmarking of Tariff, Profit and Costs against other service providers similar to the applicant

– Balancing of Stakeholders’ Interests

• Does not distinguish the segments in the electricity sub-sector.

SPP TARIFF SETTING – Framework

• The Government/EWURA developed a Standardized Power Producers (SPP) Framework: (Renewable, 100kW-10MW).

• The objective is to support development of renewable energy sources through “Light-Handed Regulation ” - HOW?1. Minimizing amount of information required

2. Minimizing the number of separate regulatory requirements and decisions

3. “Standardized documents” reduce negotiation time and resources.

SPP TARIFF SETTING – Framework

• Standardized Power Purchase Agreement�Grid and Off-grid Connections

• Standardized Tariff Methodologies�Grid and Off-grid Connections

• Rules and Guidelines• Standard Forms

• Limitation of current SPP Framework include:– payment structure not reflecting timing of SPP

costs; and

– technology neutral: not attractive to some tech.

SPP Tariff Setting

• Tariff Categories

– Calculated separately for Main Grids and for Mini-Grids

– Based on TANESCO’s avoided costs of generation, differing based on location/grid and season.

• Specifies “Floor Price” and “Price Cap” for each SPP

– Floor Price: 100% of the tariff when SPPA was signed;– Cap Price: 150% of the tariff when SPPA is signed (TZ

CPI-adjusted) .

SPP Tariff Setting

• SPP tariffs are based on the principle of Avoided Cost.

• SPP tariff in main grid is obtained by averaging LRMC and Forecast grid thermal generation cost of TANESCO – adjusted seasonally (Wet Season V/S Dry Season).

• SPP tariff in Mini Grid is an average of Incremental Capacity and Variable Cost of Mini Grids (1MW Diesel Generator) and LRMC.

When the Main Grid reaches an Isolated Grid, Main Grid Tariff will apply under a New SPPA

PPA – Existing Pricing

• EWURA approves PPAs in accordance with Section 25 of Electricity Act.

• Parties negotiate on electricity prices which are approved by EWURA.

• PPAs under review - Aggreko, Symbion, Kilwa Energy.

• Old PPAs include Songas and IPTL - not reviewed by EWURA (except when due for amendment ).

Capacity Charge:

• Return on Equity to shareholders

• Debt repayment, Interest payment,

• O&M and rehabilitation costs over period of PPA

• Other fixed costs (land rental, staffing costs...)

• Indexed to inflation and exchange rates

• Allows recovery of pre – Financial Closure costs

Energy Charge:

• Fuel cost (may be a pass through)

• Variable O&M (e.g. Lubricants in diesel plant)

PPA – Major Elements in Pricing

Electricity Tariffs: New Approach

• EWURA engaged a consultant, AF-MERCADOS to:

– Develop Tariff-Setting Methodologies for Generation, Transmission, Distribution/Retail segments of the Electricity Industry. They shall apply to utilities that generate and sell electricity either in bulk to TANESCO or sell at retail to individual customers.

– Undertake a Cost of Service Study for TANESCO based on the established Rate Setting Methodology.

Electricity Tariffs: New Approach

• The new approach advocates Cost-reflective tariff that involves the following:– Determination of tariff by segment: generation

tariff; transmission tariff; distribution and supply tariff .

– Forward looking consideration of relevant costs by segment

– Estimation of costs without any cross-subsidies built in.

New Approach - Generation Pricing

– Based on the Weighted Average Cost of Generation (WACG);

– Includes benchmark variable costs and capacity charges.

– Considers the current state of the Tanzania wholesale market where there is no “competition in the market”.

– Ensures relatively low wholesale prices, being passed through to consumers.

New Approach - Transmission Pricing

• The Transmission Tariff is based on the use of Postage Stamp (PS) methodology (Transmission Costs divided by total units) – ignores the effect of distance.

• Pricing considers capital expenditures, operating expenditures, depreciation, return on investment (RAB & WACC), and losses.

• The advantage of PS: simplicity and predictability in determination of transmission tariff.

New Approach - Distribution and Supply

• Distribution and Supply pricing considers efficient capital expenditures, efficient operating expenditures, depreciation, return on investment (RAB & WACC), and losses.

• Includes Fixed User Service Charge which cover cost of the commercial cycle (billing, processing, collection, etc.) and direct services to customers (call centre etc).

New Approach – Other Considerations

• Automatic Adjustment of Tariff: Quarterly for:

– Fuel quantum and prices fluctuations; – Foreign exchange fluctuations; and

– Inflation.• Tariff Design/Cost allocation

– to reflect the burden each customer is imposing on the distribution system

CONCLUSION

• Tanzania has a transparent and friendly Policy, Legal and Regulatory framework for investment in the energy sector.

• The law encourages “cost reflective tariffs”. The Tariff Application Guidelines, SPP Framework with clear Rules, Guidelines, and Standardized Tariff Methodologies are evidence of a committed “Regulatory Regime” that protects the interests of all stakeholders.

CONCLUSION

• The study of developing Tariff Setting Methodology and Cost of Service Study is another evidence of commitment by EWURA and the GOVERNMENT in implementing the as pronounced in the various legal instrument.

• The new approach will provide a reference point for all stakeholders when dealing with matters related to rate setting methodology.

• These instrument will also guide prospective investors to assess and ascertain sustainability of their investment in Tanzania.

For More Information Visit:

ww.ewura.go.tz