ELECTRICITY PRICING IN TANZANIA Felix Ngamlagosi Director of Regulatory Economics EWURA 10 13 SEPT. 2012
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 EWURA Established under Section 4 of Chapter 414 of the Laws of Tanzania 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
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 Task s Assessment Public Inquiry Evaluation Decision 30 45 90 120 Gazette180 Time (days)
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.
Tariff Categories SPP Tariff Setting 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).
PPA Major Elements in Pricing 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)
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 Costreflective 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 crosssubsidies 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