Consultation Paper on Tariff Structure DISCLAIMER

Transcription

1 Consultation Paper on Tariff Structure DISCLAIMER This document has been prepared by ERO for consultation purposes. It does not present a decision issued by ERO.

2 CONTENT Overview Tariff Structure and Existing Tariffs Seasonal Consumption Daily Consumption Share of Categories in Total Consumption Losses in Electric Power System Electricity Import and Export Tariff Structure Changing Options Seasonal tariff Daily tariff: High tariff (HT) and Low tariff (LT) Block Tariff Summary of Tariff Structure Analysis Seasonal tariff (high and low season) Daily tariff (high and low) Block Tarrifs Impacts of Simplifying Tariff Structure ANNEX 1: Existing Regulated Customers Retail Tariffs

3 OVERVIEW Pursuant to Article 41 of the Law on Energy Regulator and bylaws (Pricing Rules), the Energy Regulatory Office (ERO) is responsible for determining the allowed revenues for licensees and setting tariffs for regulated activities in the energy sector within the Republic of Kosovo. The current tariff structure has been approved by the Board of ERO during tariff review in March This tariff structure is subject to assessment by the ERO since September During this period, ERO has carefully assessed the existing tariff structure including its possible modifications reflecting the needs of customers, energy enterprises and Kosovo s power system. In this process, ERO was supported by consultants from Advanced Engineering Associates International Inc. (AEAI), a project funded by USAID. In setting tariffs, ERO follows the principles of regulation, which besides economic regulation, focuses on prices, quality of service, security of supply and investments. It also takes into account the social aspect, environment, health, and affordability of prices by customers. After careful analysis made to the tariff structure, the ERO Board concluded that the opening of a public consultation which could result in changes to the tariff structure is useful for household customers and system in general. The current tariff structure is generally regarded as complicated and difficult to be understood by customers. The purpose of the current tariff structure is to present load profile for customers, reflect the service cost, and that prices are affordable to customers. It should be emphasized that the tariff structure does not have an impact on the licensed companies, because, despite the tariff structure, the total allowed revenues for supplying regulated customers are determined based on the real costs of these enterprises. Change in tariff structure has significant impact on changing customer regulated tariffs, which apply to all household customers within the Republic of Kosovo. A change in the current tariff structure for household customers may have negative consequences in level of affordability for electricity price based on the consumption category and level of electricity use. The current tariff structure due to the limitations of our power system favours household customers who consume less electricity, which includes a large percentage of customers in Kosovo. ERO agrees that tariffs should be simple and understandable for customers, but should not harm the customers for the sake of simplicity. Taking these elements into account, and for stakeholders information purposes, ERO in this document assessed the elements that directly have an impact on tariff structure, such as: the level of development in Kosovo Energy sector, the principles of tariff structure, load format, system losses, electricity imports and exports and the level of existing tariffs. In order to facilitate as open consultations as possible, ERO drafted this document presenting the advantages and disadvantages of several options in tariff structure. Potential impacts of the tariff structure in the system and the regulated tariffs for customers are presented as well. When drafting possible options in this document, ERO considered stakeholder s comments addressed to ERO through official requests, and it paid special attention to the recommendation given by the Assembly of the Republic of Kosovo. 2

4 1. TARIFF STRUCTURE AND EXISTING TARIFFS The main principles when it comes to design of retail tariff structure in the energy sector relate to the fact that tariffs shall be reasonable, transparent, understandable, and cost reflective as well as shall urge efficient consumption. When designing household customers tariff structure, a balance between simplicity, complexity and justice is encouraged. It is a universal right for customers to be supplied with electricity. To secure such energy, activities of production, transmission, distribution, etc., have to be carried out. In absence of production capacities in Kosovo, marginal supply costs are significantly higher at the time of maximal load peak, which is burdened further with very high import prices. ERO, when developing current tariff structure, took into account the poverty level and the standard of living in Kosovo and also paid special attention to the protection of vulnerable customers. A typical example which shows a share of electricity costs as per licensees for end customers is presented in the figure below. Share of costs as per licensees Supplier 24% Distribution 10% Generation 60% Transmission 6% Fig. 1 Share of costs as per licensees in 2012 In line with the relevant rules and methodologies approved by the ERO, electricity tariffs are based on the real service cost principle for each customer group at different voltage levels. Costs involved in regulated tariffs should be divided between customer categories, within each group of customers, whilst basic charges for costs should be determined. The main tariff components and charges applicable in Kosovo are the following: Charge for electricity (active and reactive) which applies to energy consumed (measured) for each customer group. Charge for engaged power applied to the maximum demand measured (kw) for each customer at any time of load. Charge for capacities which apply to capacity connected and contracted (in kw or kva) for the group of customers to whom capacity applies for. Charge of customer (also known as fixed charge) applies with a fixed rate for any customer at any time of load. 3

5 In the current tariff structure, first block of electricity consumption has a lower price than the average price of electricity, allowing all household customers to afford essential customer needs. Consumption in the second block is close to the service cost, whilst consumption in the third block (over 600 kwh) has the highest price, in order to subsidise other blocks. The existing tariff structure with blocks intends to charge household customers with lower prices for lower consumption of electricity and it charges higher prices to households with higher consumption. In this way, customers having low incomes benefit from cheaper prices for electricity consumption. This is based on the generally accepted premise that customers who have lower incomes consume less electricity, whereas those having better financial conditions consume more. According to data for 2013, 75 % of the total number of customers consumes less than 600 kwh. Tariffs divided into blocks are defined in the form: level from 0 to 200 kwh, which applies to all customers, level from 200 kwh to 600 kwh, and level over 600 kwh Number of customers as per consumption <200 kwh kwh >600 kwh Fig. 2. Number of customers as per electricity consumption The existing tariff structure for household customers in Kosovo is such that except being designed in three blocks, it also has different prices for winter and summer season, including consumption during the day and night, in order to reflect different electricity costs at different times. Tariffs during the day night (high and low tariffs) and seasonal tariffs (high and low season) are used to urge lower electricity consumption, especially in times of peak. Daily and seasonal tariffs are also allowed under Article 42, paragraph 3.11 of the Law on Energy Regulator, which stipulates that seasonal and time of use tariffs are permitted. Tariff/ Season Winter Summer High 07:00 22:00 08:00 23:00 Low 22:00 07:00 23:00 08:00 Table 1 Tariff periods for electricity All regulated customers retail tariffs are presented in Annex SEASONAL CONSUMPTION 4

6 Load in Kosovo s power system varies during the year, whereas in the high season is much higher than in low season. Table no.2 shows forms of loads for winter and summer days in These cover the following days: Peak during weekdays in winter 31 January 2012 Peak during the weekends in winter 15 January 2012 Peak during weekdays in summer 15 April 2012 Peak during weekends in summer 10 April 2012 These data are based on production by production units in Kosovo including imports. There were no adjustments made for load not supplied. Time WINTER Day of the week during the winter Weekend during the winter SUMMER Day of the week during summer Weekend during the summer WINTER Day of the week during the winter Weekend during the winter SUMMER Day of the week during the summer Weekend during the summer Time WINTER total Day of the week during the winter Weekend during the winter SUMMER Day of the week during the summer Weekend during the summer WINTER Avve. Day of the week during the winter Weekend during the winter SUMMER Day of the week during the summer Weekend during the summer Table 2 Peak per hour and season The highest consumption so far in the Kosovo s power system, 1165 MWh/h, was recorded on 31 st of December

7 1400 MWh Load in winter MW orë Day of the week in summer Weekend during the summer Fig. 3. Load during the winter season The chart for the winter season (fig.3) shows that there are three quite distinct periods during the day. These periods cover hours from 0:00h to 07:00h, 07:00h to 17:00h and 17:00h to 24:00h. The graph shows that there are options for levelling the curve by shifting the burden from the third period into the first or second period. MWh/h Load Winter Weekend Working days Fig. 4. Average load per hour during the high season Figure no. 4 shows the average hourly load during high season unlike figure no. 3 which presents the load for a certain day (weekdays peak in winter 31 st of January 2012 and weekends peak in winter 15 th of January 2012). 6

8 1000 MWh Load in Summer MW hours Day of the week in summer Weekend during the summer Fig. 5. Load during the summer season Figure for low season (fig. 5) has similar shape with high season graph for weekend during the summer, although in a lower level, wherein peak reaches around 900 MW in summer and 1,100 MW in winter. The figure for low season shows that once more there are three quite distinct consumption periods during the day. These cover hours from 00:00h to 08:00h, 08:00h to 17:00h and from 17:00h to 24:00h. These periods shift due to longer hours of daylight and reduced load for heating. MWh/h Load Summer Weekend Working days Fig. 6. Average load per hour during the low season Figure no. 6 shows the average hourly load during low season unlike figure no. 5 which presents the load for a given day (weekdays peak in summer 15 th of April, 2012 and peak summer weekends 10 th of April 2012). Load diagrams can be used to determine the percentage of electricity consumed during peak and off peak. By combining load diagrams of five weekdays and two weekend days, we might get a better assessment of how peak and off peak electricity is divided by calculating highest loads for peak hours. Based on the above forms of load and using these data to present typical weeks, the percentage of consumption during peak and off peak is divided as follows. Winter: Peak 71.7% Off peak 28.3% Summer: Peak 71.5% Off peak 28.5% 7

9 3. DAILY CONSUMPTION Tariff Structure Besides changes in seasonal consumption in electro power system, changes occur even during the day (24 hours). Diagram analysis of daily consumption is also important, and it is presented by breaking down hours during the day. In order to draw up a clear picture of the differences for daily consumption throughout the year, in the figure below (figure 7) an annual hourly cumulative diagram is shown. Besides consumption, the diagram shows the hourly production, exchange per hour and cuts (reductions) per hours. Diagram of daily consumption within Kosovo in the figure below (Fig. 5) presents an average hourly consumption for the entire year. The diagram clearly shows that the main difference is between the hours of day and night, which often exceeds the ratio of 1:2. Even the annual average of the maximum hourly consumption presents a major difference: the minimum average (hour per hour) is 432 MW at 05:00h and the average maximum (hour per hour) is 780 MW at 21:00h. Fig. 7. Daily Diagram (average of hours) 2012 Changes in consumption level during daylight and night hours poses a difficult challenge for licensed enterprises in the energy sector, given that electricity production is mainly based on lignite operating generators and that these generators are old and non flexible. The diagram (figure 7) shows that from 08:00h to 23:00h, on average there was a lack of electricity from domestic production while this is completed with imports or reduced consumption, whilst from 00:00h to 07:00h there was a surplus whereby electricity is exported. 8

10 MW Daily Diagram (hours average) Winter Summer Fig. 8. Daily Diagram (hours average) for 2012 The diagram above (Figure 8) shows the change in the curve for high and low season. In the diagram we see that the curves have approximately the same shape, but with slight differences in the winter where the highest peak is from 17:00 h to 23:00h, whilst in the summer from 20:00h to 23:00h. It is particularly important to emphasise that the values of consumption for the period from 10:00h to 23:00h, especially during the low season vary a little. The change in daily maximum against minimum during the night is 269 MW, representing a maximum output level of the greater unit in the country. Maximum at 10:00h and daily total maximum at 21:00h differs only with 31 MW. On this basis, we may consider that all this period is quite similar, with high consumption and practically belonging to the high tariff. Based on customer demand for electricity in a considerable part of the year, significant shortages of electricity appear in the same day, which have to be covered with imports (higher prices), whilst surplus to be exported appears overnight (with low prices). Of course, we have higher consumption in evening hours but the main effect that has an impact on cost (problem: absence surplus) is the difference of day and night period, as existing tariffs were set. Fig. 9 Monthly average of daily maximums and minimums for

11 The difference between the maximum and minimum average daily consumption during 2012 is provided in figure no.9, which clearly shows that there is a big difference between minimum and maximum consumption. Such differences pose a serious obstacle for following customer diagram, and to maintain deviations in the system within allowed limits, especially when considering the inflexibility of lignite generation units. 4. SHARE OF CATEGORIES IN TOTAL CONSUMPTION The share of household consumption is still dominant against total consumption invoiced and it comprised 59.5% in 2013, while it was 57.74% in Figure no.10 presents categories in percentage of consumption in relation to consumption invoiced. Konsumi ne perqindje i ndarë sipas kategorive te konsumit ne raport me energjine e faturuar, 2013 Konsumatorët industrial 20.3% Konsumatorët ne amviseri 59.5% Konsumatorët Komercial 19.6% Ndriqimi 0.5% Fig. 10 Share of customer categories for 2013 Konsumi sipas kategorive krahasuar me bruto konsumin Konsumi sipas kategorive krahasuar me neto konsumin Ndriqimi publik 0.3% Konsumi i brendshë m i KEK ut 2% Industrial 13.1% Humbjet totale 34.0% Komercial 12.4% Amëvisëri 38.1% Ndriqimi publik 0,47 Konsumi i brendshë m i KEK ut 3,26 Industrial 19,78 Amvisëria 57,74 Komercial 18,75 Fig. 11 Share of categories in gross and net consumption for 2012 Energy sector development is a base for overall economic development. There is a need for restructuring and investment both in electricity production as well as transmission and distribution. Consumption of electricity in distribution level during 2013 was GWh, whilst it was 4,768 GWh during 2012, an increase of 0.4%. 10

12 5. LOSSES IN ELECTRIC POWER SYSTEM Losses in electric power system consist of losses in transmission and distribution, divided into technical and commercial losses. Losses have a special significance and ERO pays special attention to them. The high level of losses, especially in high season creates major difficulties in supplying customers in times of peak. Years Total Consumption Losses in Transmission MWh MWh % ,943, , ,275, , ,505, , ,584, , ,467, , ,520, , Tab. 3: Consumption and transmission losses from In recent years, due to investments made in the transmission network, there has been significant reduction of losses. This reduction almost reached an acceptable level and is at level close to the regional countries. As shown in tab. 3, the trend of electricity losses in transmission continued to remain almost the same in 2013 compared with 2012, when losses were 110 GWh, or 2.00% in percentage against total consumption, whilst in 2012 these losses were 109 GWh or 1.99%. 60% Humbjet në Rrjetin e Shpërndarjes % 40% 48.4% 48.1% 42.8% 42.8% 41.2% 38.1% 36.7% 35.5% 30% 20% 30.2% 30.7% 25.8% 24.8% 24.0% 21.37% 20.4% 19.5% 10% 18.2% 17.4% 17.1% 18.1% 17.2% 16.8% 16.3% 16.1% 0% Fig. 12 Losses in distribution level for Despite continuous reduction of losses in distribution system, total losses of electricity in terms of distribution remains very high. Total distribution losses in 2013 were 1,701 GWh or 35.52% against electricity supply in distribution, whilst losses in 2012 were 1,750 GWh or 36.69%. Total losses in distribution consist of technical losses, which are high due to outdated network and lack of investments, and commercial losses which relate to network losses caused by illegal actions in the distribution system (theft and meter tampering). Figure no. 12 shows data on the level of general distribution losses for past eight years. Referring to the data in figure no. 10 it can be noticed that since 2006 until today, there is a positive trend of continuous decline, but with low value of minimising losses in the distribution system. Curve related to commercial loss reduction is more evident but not sufficiently, whereas for 11

13 technical losses, decline is in a lower level due to outdated distribution system and lack of investment for improving the distribution network. The quantity of commercial losses is around 972,769 MWh for 2013, which is too high for a distribution system with total energy demand of 4.7 TWh per year. Reducing commercial losses will not only positively impact the electricity tariffs, but would also increase efficiency in use of electricity by customers, which increases the security of supply. The high level of losses in the distribution continues to burden energy system, while its reduction does not require investment as in case of technical losses. With higher awareness of citizens and a greater commitment by licensed enterprises maximally relying on state bodies (in particular the judiciary and police), the results for reduction of commercial losses would be higher. 6. ELECTRICITY IMPORT AND EXPORT Unlike previous years, Kosovo was a net exporter of electricity in However, imports dominated the peak time. Public Provider (PP) imported through commercial contracts entered into with Electricity Importers and exchanged electricity with systems from regional countries, enabling coverage of customer needs. MWh 140,000 Importi me kontrata dhe si shkëmbim 2013 /MWh , ,000 80,000 60, , , Import Shkembim Çmimi ( /MWh) Fig. 13 Import of electricity and price in 2013 Although it turns out that Kosovo was a net exporter of electricity in 2013, based on the quantity of electricity (kwh), it should be emphasized that due to the high import during peak, the total import in monetary value has been higher than the total of exports in monetary value (export = million and import= million). Imported electricity through commercial importing contracts (tenders) during 2013 was 457,815 MWh amounted at 28,447,948 with an average price of 62.14/MWh, whilst electricity imported in 2012 was 571,897 MWh, with an average price of 79.46/MWh. The amount of imported electricity is 20 % lower than last year, whilst the average price is around 22 % lower compared with

14 MWh 180,000 Eksportime kontrata dhe si shkëmbim 2013 /MWh , , , ,000 80,000 60,000 40, , Eksport Shkembim Çmimi ( /MWh) Fig. 14 Export with contracts and exchange for 2013 During 2013, export was very high compared to previous years, implying that there was electricity surplus. These surpluses were recorded mainly at night (low tariff), when in regional systems, offer for electricity during the nights increases in large quantities and this affected export prices to be significantly lower than import prices. Electricity exported with commercial contracts during 2013 was 755,504 MWh amounted to 21,341,724 with an average price of 28.2/MWh, whilst electricity exported in 2012 was 371,316 MWh, with average price of 31.16/MWh. The quantity of electricity exported is 103% higher than earlier year, whilst the average price is around 9% lower compared with Unlike import, export in 2013 was made in every month of the year except January. This occurred due to the fact that capital overhauls planned for 2013 for generating units were not executed. 13

15 7. TARIFF STRUCTURE CHANGING OPTIONS ERO, in line with Article 26 of the Law on Energy Regulator carries out consultations on tariff related matters. Regarding the current tariff structure in Kosovo, the Board of ERO received numerous comments and feedback from third parties, and according to the comments, the tariff structure is generally regarded as complicated and difficult to be understood by customers. The purpose of the current tariff structure is to present load profile for customers, to reflect the service cost, and make prices affordable to customers. ERO deems as reasonable third parties comments to simplify the tariff structure, however, attention should be paid that its simplification does not harm customers. In order to inform the public and stakeholders, several possible options for tariff structure were provided below. Tariffs should provide appropriate signals in terms of customer behaviour, such as savings and peak displacement. Tariff structure changing options including the reasoning are presented in three main pillars: seasonal tariffs (high and low season tariffs); daily tariffs ( high and low tariffs), and tariffs in blocks. 7.1 Seasonal tariff Seasonal tariffs are divided into two seasons (known as winter summer season): high season (winter season) starts from the period: 1st of October 31st of March; and low season (summer season) starts from the period: 1st of April 1 30th of September. Naming winter summer seasons was made for easier distinction between high and low season of electricity consumption and does not relate to the start or end of the season. With the start of the high season, consumption starts to increase and at the same time prices are higher (as high season tariffs are higher than low season tariffs), which represents an additional cost to family budget of household customer and their capability to pay the electricity. Customers in low season pay under average cost, whilst the opposite occurs in high season. Seasonal tariff is determined to urge electricity savings during the months when load increases, given that when load increases, options to supply all customers are reduced. 14

16 1. Below are presented some advantages and disadvantages of keeping seasonal tariff: Tariff Structure Advantages of keeping seasonal tariffs 1 Encourages customers to save electricity at the time of maximum loads during high season Disadvantages of keeping seasonal tariffs High difference between the high and low season price with 38%, causes high value invoicing for household customers in high season (winter), it also results in customers paying under the real cost for summer season. 2 Seasonal tariffs may have an impact on reduction of import at the time of high season 3 Costs are adequately reflected due to insufficient production and eventual imports during the high season 2. Below are presented some advantages and disadvantages of eliminating seasonal tariffs: Advantages of eliminating seasonal tariffs 1 Tariff structure is simplified and more easily understood by customers Disadvantages of eliminating seasonal tariffs There is a possibility of impact on consumption increase during the high season and with import increase, prices are higher, mainly during times of peak, which directly affects the overall electricity price increase 2 It assists in levelling the value of monthly invoices throughout the year, given that customers have approximately the same level of monthly income during the year Same price in both seasons (high and low) during the winter after eliminating seasonal tariff could be attractive for using the electricity for heating, which has an impact on load increase. 3 Tariffs are easier to administrate given that high invoice value related problems would be removed when the season is changed 4 Due to limited options for heating residential spaces, some customers use electricity for heating purposes regardless of the high price at the time of high season 15

17 7.2 Daily tariff: High tariff (HT) and Low tariff (LT) The existing daily tariff structure consists of high tariffs (HT) and low tariffs (LT). Time of using high tariff within high season is from 07:00h to 22:00h, whilst for low season it counts from 08:00h to 23:00h. If these daily tariffs are dimensioned in better way (night and day), it can positively influence in driving customers to more efficient use of electricity at the peak time, especially in the winter. Being unable to meet the growing demand for electricity from domestic production, electricity needs to be imported, at the same time greater transmission and distribution capacities should be put in place. This would affect the growth of electricity per unit price. The greatest impact on increasing demand comes from customers who have higher expenditures, thus affecting the growth of the average electricity price per kilowatt hour (kwh). Below we listed three possible options for a daily tariff: 1. Existing daily tariffs; 2. Modification of daily tariff (High Tariff to be from 17:00h to 23:00h and 18:00h during the summer and 24:00h in winter); 3. Eliminating daily tariff and replacing it with an average tariff 1. Daily existing tariff Advantages of daily existing tariff 1 High consumption tariff matches the high cost of electricity. In the high tariff period, electricity consumption is higher than the average annual output per hour, which imposes import of electricity. 2 Given non flexibility of generators, there is electricity surplus from 00:00h to 08:00h, whilst the export price is very low Disadvantages in daily existing tariff Inaccurate tuning of tariff changers within electric meters results in failure to reflect actual consumption according to tariffs in time of use. Current situation in terms of options for using electricity in low tariff is small at a part of the customers due to lack (reductions) of water 3 Enables efficient use of electricity by customers during low tariff benefiting from lower prices, and protects these customers. 4 Peak prices are higher and off peak prices are lower than the average tariff, paying costs incurred in real time 16

18 2. Modification of daily tariff (High Tariff to be set from 17:00h to 23:00h and 18:00h during the summer and 18:00 to 24:00h during the winter) Advantages of modifying daily tariff 1 Setting HT (from 17:00h 23:00h and 18:00h 24:00h) can affect the ironing the load during the day (customers may consume electricity at LT from 24:00h to 17:00h) 2 Allows more efficient use of electricity by customers compared with the first option and allows shifting of consumption in low tariff for customers who have water restrictions Disadvantages of modifying daily tariff Changing tariff time in existing meters (approximately 400,000 meters) and changing in CCP invoicing software ( Customer Care Package ) takes time and causes additional costs. With the change of time in daily tariffs may result electricity price fluctuations depending on the new structure determined where and increase may occur both in high tariffs or low tariffs 3 Peak prices are higher and off peak prices are lower than average tariffs, paying costs incurred in real time 3. Eliminating daily tariff and substituting it with an average tariff Advantages of eliminating daily tariff 1 An average daily tariff is easier to be understood by customers Disadvantages in eliminating daily tariff Elimination of daily tariffs will lead to increase of electricity imports, as customers have no incentive to decrease consumption at peak time, which consequently may have an impact on the price increase 2 Easily administered by licensed companies 17

19 7.3 Block Tariff Average electricity consumption in households is around 450 kwh, thus, taking into account GDP growth over the years and given that consumption is in relation to GDP, it may be concluded that the average consumption may increase up to 500 kwh in coming years. ERO follows socio economic policies in the energy sector by applying three block tariff structure for household customers. Tariffs divided into blocks are defined in the following form: level from 0 to 200 kwh which applies to all customers, level from 200 kwh to 600 kwh, and level over 600 kwh. This division was made in order for the electricity payment to be affordable to households with low incomes, which currently benefit from the block tariff with electricity consumption below 200kWh/month, and who do not use electricity for heating. These household customers are charged with lower price than the average electricity price. Considering the recommendations of the Parliamentary Committee, public opinion, media and customers, three possible options are presented below for simplifying the tariff structure for electricity, including tariff blocks: 1. Existing Block Tariff (with three blocks) The current tariff structure with three blocks has been proven as effective both when it comes to protection of customers and reflecting the cost. Block tariffs favour customers who consume less electricity, including those in need, and reduce the burden of subsidy from the Government to customers part of social scheme. Advantages of existing block tariff 1 Prices are more affordable for lower consumption, which usually includes customers with lower incomes 2 Urges rational (lower) electricity consumption for all customers due to domestic electricity production constraints 3 It has an impact on decrease in electricity imports and thus decrease in the average price that customers will pay 4 Enhances the security of supply with electricity Disadvantages of existing block tariff Existing tariff blocks are considered as complicated to be understood by customers High electricity tariffs for higher consumption than 600 kwh, especially during high seasonal tariff There is possibility of error in the meter reading which may have an impact on electricity invoices 18

20 2. Two blocks tariff (I st block from kwh and II nd block over 450 kwh); Tariff Structure The analysis conducted show that average electricity consumption for a household in 2013 was approximately 450 kwh per month, therefore the second option of division into two blocks is presented taking into account the average (I st block from kwh and II nd block over 450 kwh). Advantages of two blocks tariff 1 Presents simplification of the current block tariff structure 2 Urges rational (lower) electricity consumption for all customers due to the limitations of domestic electricity production 3 It has an impact on decreasing electricity imports and thus a decrease in average price that customers will pay up to 450 kwh Disadvantages of two blocks tariff It is more complicated to understand than the average tariff (no blocks), but more simple compared with three blocks It results in increase of invoice price for customers of block from 0 to 200 kwh There is a possibility of error in meter reading, which may have an impact on electricity invoices 4 It may have an impact on the security of supply with electricity 3. Eliminating blocks and the use of an average tariff If block tariff is completely removed, this would be the simplest option, however, it provides no incentive to reduce overall consumption. Advantages of Average tariff (no blocks) 1. The tariff structure will be easier to understand than two options above 2. Presents the average tariff cost regardless of the level of consumption 3. Reduces the possibility of error in meter reading, which may have an impact on electricity invoice, resulting in customer complaints. Disadvantages of average tariff (no blocks) It may result in increased electricity consumption and this may have an impact on electricity import It will result in increase of invoice price for customers with consumption up to 600 kwh It favours customers with higher consumption, which has an impact on increase of electricity import resulting also in increase of average electricity price 4. More easily administered by licensed companies 19

21 8. SUMMARY OF TARIFF STRUCTURE ANALYSIS Same as analysis, a summary of possible options is divided into three parts, seasonal tariffs (high and low season tariffs), daily tariff (higher and lower tariffs) and tariffs in blocks Seasonal tariff (high and low season) First Option: Keeping existing seasonal tariffs The purpose of setting seasonal tariff is to reduce consumption during the high season, when there are serious electricity shortages from domestic production to cover regular supply. Seasonal tariffs also encourage customers not to use electricity for heating, due to the technical system conditions (outdated system). Although seasonal tariff is being applied for a long time now, however, according to data from recent years, application of these tariffs did not produce a positive effect in reducing consumption. Second Option: Elimination of seasonal tariffs Seasonal tariff elimination is considered as more practical and convenient for customers, including energy companies. This option simplifies the existing tariff structure, reduces the differences in invoices during the high and low season, avoids the eventual impact on the amount of payments in case of errors in reading, at the time seasons change, enterprises will have linear collection over a year, and it is more easily administered. 20

22 8.2. Daily tariff (high and low) First Option: Existing Daily Tariff The existing daily tariff consists of high tariffs (HT) and low tariffs (LT). Time of use for high tariff in high season is from 07:00h to 22:00h, whilst in low season from 08:00h to 23:00h (peak load). According to figure 7, annual hourly chart shows that consumption is the highest from 08:00h to 24:00h and during this period we have lack of electricity which is covered through imports, and therefore electricity costs should be reflected in high and low tariff. This provides a good signal for customers to shift energy consumption from high into low tariff, when Kosovo has electricity surplus at night and the price of electricity is low. Accurate implementation of the high and low daily tariff remains a challenge due to failure to tune tariff changers within electric meters, which results in unrealistic reflection of consumption. Second Option: Modifying daily tariff (high tariffs to start from 17:00h to 23:00h during the high season and 18:00h to 24:00h during low season) As a second option, it is assessed that the timing for high tariff is shifted, starting from 17:00h to 23:00h during the high season, and the timing of high tariff from 18:00h to 24:00h during the low season. The highest peak (third period 17:00h 23:00h) appears during this period which reflects higher import prices, compared with the rest of the peak. This would provide a modest signal to customers to shift the peak from highest consumption in the second period (07:00h 17:00h). This shift in electricity consumption will help because in the second peak period, the quantity of import is lower. Implementing the change in tariff time within existing meters and invoicing program poses great difficulties and such changes take time and cause additional costs. Third Option: Elimination of daily tariff and substituting it with an average tariff The third option is assessed to be the elimination of daily tariff (higher and lower tariffs) and setting a single daily tariff (single value tariff) which presents an average tariff between high and low tariff. This method is very simple to understand by customers, but does not urge saving electricity at peak time. With this average daily tariff, customers are not encouraged to use electricity based on real system costs and may cause a higher cost during peak times. Application of this option may have an impact on import increase, rising consumption which can cause an increase in the average price of electricity, as well as burdens the system, which may lead to irregular supply to customers. This option simplifies the existing tariff structure, and avoids possible impact on the amount of payments due to incorrect tuning of tariff changers within electric meters and it is more easily administered. 21

23 8.3. Block Tariffs Block tariffs are used for urging efficient electricity consumption. At the same time, these tariffs secure that interests between customers and energy enterprises are adequately balanced and also favour customers who consume less electricity, including those in need according to the applicable legislation. First Option: The existing structure with three blocks The first option presents the existing tariff structure with three blocks for household customers. The existing structure is applied so that payment for electricity could be more affordable for customers who consume less electricity usually families with lower incomes. Currently, all customers benefit from lower electricity consumption prices up to 200kWh/month. These are subsidised from category of consumption over 600kWh/month, which are charged with higher prices than the average price. Second Option: Tariff with two blocks: I st Block from 0 to 450 kwh and II nd Block over 450 kwh The option with two block tariffs presents a block tariff restructuring, simplifies existing tariff structure when compared with the first option. This option has little impact on the increase of average price for most customers when compared with elimination of block tariff (third option). This option urges more efficient use of electricity compared with the third option, having an impact on the reduction of consumption for household customers. Since the average customer consumption in households is up to 450kWh, then this option may be more reasonable to implement compared with the first option. Third Option: Elimination of blocks and using an average tariff If block tariff is completely removed, it would be the simplest option; however, it provides no signal for reducing electricity consumption and for more efficient use of it. This option imposes higher prices to customers with lower consumption, compared with block option, whilst it favours customers with higher consumption, which contributes to increase of electricity imports, and thus raising the average electricity price. It should be emphasized that the biggest complaints of customers as presented in the winter months (2012 and 2013) come from the higher price tariff with consumption over 600kWh/month. Applying this option will result in lower invoice values for higher consumption (all customers who consume over 600kWh/month) and in higher invoice values for lower consumption (all customers who consume less than 600kWh/month). This option significantly simplifies the existing tariff structure and avoids negative impacts in terms of incorrect tuning electric meters and it is more easily administered. 22

24 9. IMPACTS OF SIMPLIFYING TARIFF STRUCTURE The current tariff structure was designed in order to maintain household customer prices in lower level possible in order to be affordable for these customers. This is achieved by setting prices below service cost for households with low consumption and by subsidising these prices, higher prices for higher consumption. The current tariff structure is set to follow the load on the system, which means that it charges customers with higher prices when the power system has high load, while lower prices when energy system has low load. Given the limited production of electricity in Kosovo, electricity cost increases significantly at the time of maximum load and the time when we have to import electricity due to high consumption. By changing the tariff structure, in most cases at household customers who consume less than 600kWh, the average invoice values will be higher. In absence of sufficient electricity production, the need arises for all customers to cover higher import prices to ensure safe supply for household customers. In the following we presented some preliminary information on the costs of the power system which can be used to achieve an average tariff for household customers. Change in tariff system will lead to a change in method of calculating tariff for household customers. So far, due to the existing tariff system, with all its components, the average price for one kwh was variable depending on the consumption time and the quantity of consumption. Simply, the price for one kwh for household customers so far has been different because it is calculated by taking into account the season, time of the day and the quantity of consumption in kwh. It should be emphasized that change of tariff structure (from existing tariff into simpler one) requires obtaining average price for one kwh regardless of time (seasonal and daily tariff) or quantity (block tariff) of household customer consumption. ERO during the seven tariff review (2013) set the Maximum Allowed Revenues of licensed companies for a 5 years period. Allowed Revenues for licensed companies are set to cover the costs of electricity generation, transmission, distribution and supply to final household customer. These costs are adjusted annually, but still present a preliminary assumption of costs for the system covering Based on information and assumptions made by ERO, this part of the document presents the costs of the energy system in general, and it is divided by licensed companies as shown in Table 5. Based on these costs, the average value for the regulated tariff for household customers is estimated. Final decisions on these costs will be taken at the end of the regulatory period; in this case up to 1st of April 2014, therefore these are only preliminary estimates that ERO made to present the possible impacts from changing tariff structure. Regardless of the tariff structure, electricity customers are invoiced in a manner which secures that all Allowed Revenues for licensees are collected, meaning that regardless of the tariff structure, all energy system costs should be covered. The decision to simplify tariff structure forces ERO to change the form of calculating these tariffs and the easier tariff structure is, the average electricity price per kilowatt will increase more for categories consuming up to 600kWh/month. Costs foreseen for electricity production are presented in the table below. 23

25 Electricity Production Cost ( /MWh) TPP Kosova A 35.7 TPP Kosova B 22.6 HP Ujmani 27.5 Generation connected at Distribution Level 43.8 Imports 70.0 Tab. 5: Electricity Generation Cost Tariff Structure The data in the table above show that the cheapest option for electricity generation is generation from TPP Kosova B, whilst the most expensive option is electricity import. In addition to production costs, energy system has costs for transmission, distribution, and supply to the final customer These costs are added to production costs to determine the tariff for regulated customers, and due to different production prices, the average tariff system differs from the lower limit, which is the production cost of TPP Kosova B to the upper limit which is the cost of electricity imports. Values in euro presented in table no. 6 serve as an illustration of the costs for the entire power system. It should be emphasized that these values are only estimations and may vary, but they present preliminary indications for costs which constitute the overall cost of supplying household regulated in level 0.4 kv for Estimated costs of power system for 2014 /million Domestic Production Imports 41.9 KOSTT (Transmission) 14.4 DSO (Distribution) 31.2 Supply (EPS) 26.1 Exports (13.7) TOTAL Tab. 6: Estimated costs of power system Costs of production, imports and transmission constitute 77.8% of all costs of the energy system, whilst distribution and supply costs make up to 22.2%. Based on these data and overall costs, minimum and maximum costs for one kwh may be calculated covering households that are connected to 0.4 kv voltage level. As an illustration on how to determine the average tariff for household customers, calculations were made for possible values of the average tariff if we remove the differences of tariff value according to consumption or time of use. In order to calculate the average tariff of household customers through the above costs and other data, the lowest tariff possible for production comes 24

26 from TPP Kosova B which is 2.26 c/kwh, and the highest from import 7.0c/kWh. Given the costs of production, to supply customers, on basis of invoicing determinants of different customer groups, distribution and supply costs should be allocated to these costs, which may amount to 1.35c/kWh. If these estimated costs are taken into account for distribution and supply of electricity with 1.35c/kWh, the total cost to end household customers is from 3.61c/kWh to 8.35c/kWh. It should be emphasized that these costs are only an illustration of the estimated costs of the system to explain the possible effects if tariff structure is changed. Based on data calculated in this document, other system data, invoicing determinants of different customer groups, the quantity of electricity consumption from households, and other assumptions, as an illustration of the average tariff for household customers that may be imposed without any restriction as a result of changes in the tariff structure may be around 6.08c/kWh. Keeping some elements of the current tariff structure would allow having a change in average tariff. Depending on the final decision on the tariff structure, tariffs for regulated customers for specific consumption in specific time may be from 3.61c/kWh to 8.35c/kWh. The current tariff structure, which allows some tariffs to have values close to the lower limit of 3.61 c/kwh (i.e. customers who consume during the summer and during the night), and some other tariffs that are higher than 8.35 c/kwh (i.e. customers consuming during the winter and day). Table 7 presents the invoice values of the electricity in ratio 70% to 30% (HT with LT) not including VAT. Value of electricity invoice (without VAT) Ratio HT=70% (high tariff) and LT=30% (low tariff) With blocks Consumption Average tariff Winter season Summer season Tariff value (6.08 c/kwh) 200 kwh kwh kwh kwh kwh kwh kwh Tab. 7: The value of the electricity invoice without VAT for different consumptions at the ratio: HT= 70% and LT= 30% 25