CALCULATION OF POWER PLANT TARIFF

MUHAMMAD FARHAN & MUHAMMAD REHAN
(feedback@pgeconomist.com)

Aug 6 - 12, 20
12

Now days, with increasing load shedding, power crises and circular debt, people are interested to get the actual power production cost. We have heard many rumors that China is willing to supply electricity at 300 rupees per house, Iran wants to give electricity at 3 rupee per unit and many more like this. Here we will discuss how the power plant tariff actually calculated and what factors are involved in calculating the tariff.

The power plant tariff is based on two parts i.e.

* Variable Cost / Energy Cost / Fuel Cost

* Fixed Charges / Capacity Charges

First we will discuss the variable cost that is mainly cost of fuel and variable components. This cost is mainly based on efficiency of the plant. Different types of plants have different efficiencies based on different type of fuel. Some of these are following:

* Combined Cycle Gas Turbine Power Plants: 48~51 % (based on weather condition and fuel type)
* Diesel Engines with steam turbine: 45~48 %
* Conventional Thermal Power Plants (Steam Turbine): 36~38 % (HFO) and 32~35 % (Coal)
* Small Power Plants (Biomass based): 20~22 %

Heat Rate of the plant can be calculated by the efficiency. As one kWh is equal to 3,412.5 Btu, if divide the standard by efficiency, the result will be the heat rate. For example the heat rate of 50% efficient plant would be 6,825 Btu per kWh. The prices of different fuels are following:

* Gas: Rs. 460 per mmBtu (Million Btu)
* HFO: Rs. 2,025 per mmBtu
* Diesel: Rs. 2,900 per mmBtu
* Coal: Rs. 600 per mmBtu
* Imported LNG: Rs. 1,700 per mmBtu

By using these values, fuel cost to produce electricity can be calculated easily. The other variable factor is the variable operation and maintenance costs (O&M) that include the cost of different lube oils and other chemicals.

Now move to the other part of the tariff that is fixed or capacity charges. Its calculation is slightly lengthy as it includes different factors that are following:

* Fixed Operations & Maintenance Cost (Fixed O&M)
* ROE (Return on equity)
* ROEDC (Return on Equity during Construction)
* Insurance
* Cost of working Capital
* WH Tax (With Holding Tax)
* Debt Repayment (Principle & Interest Payment)

Following are the some important definitions that need to be known before calculating the capacity charges:

* Installed Capacity: The power that the plant can generate
* Auxiliary Load: Power used by plant to run its own auxiliaries (It is usually 6~10 of installed capacity)
* Net Capacity: Installed Capacity - Auxiliary Load
* Unit Exported in year: The units a plant can export to the WAPDA in a full year
* Capacity Factor: Units Exported in a year / (Net Capacity X 8760 hrs)

> Capacity factors of different types of plants:

* Thermal: 60-70 %
* Hydel: 40-45 %
* Wind: 28-33 %
* Solar: 16-20 %
* Agreement Year: This is total time of the agreement between the IPP and the WAPDA usually 25~30 years
* Loan Re-Payment Schedule: It depends upon the banks and normally 10-15 years of time is available to re-pay the loan

Now move to the calculation for the different factors of Capacity cost. Power Plants are usually constructed at 20:80, equity to debt ratio.

Fixed Operations and maintenance includes the cost of maintenance, different tools, financial cost, salaries, rents and cost of other utilities.

Return on Equity: It is calculated by using formula in Excel as - PMT (Rate of return, number of years, equity, false). By using the formula, the amount payable in one year is being calculated. Then divide this value to the units exported in a year to get the cost per kWh (unit).

Return on Equity during Construction: It is the amount incurred during construction and testing time. The amount would be finalized after the commissioning of the plant but estimation is used to calculate the tariff with certain variables.

Insurance: It is like other industries that the insurance would be 1.20~1.50 % of the total project cost that includes both equity and debt. Similarly the insurance for the whole year is being converted to per kWh by dividing it to units exported in year.

Cost of working Capital: The power plant generally needs to hold the fuel stock for the 30 days. To purchase and maintain this stock, money is being landed by the banks. The interest cost of this amount is the base of this factor. With Holding Tax: The withholding tax is 7.5 % of the Return on equity and Return on Equity during construction.

Debt Payment: The Power plants usually have the debt of 80 % of total project cost. The debt re-payment is calculated similar to the ROE. The Excel formula is being used to calculate the loan re-payment - PMT (Interest Rate, number of payments, loan amount, false). The loan re-payment is based on the re-payment schedule of banks that can be 2 to 4 installments a year. The total loan re-payment (principle amount) and interest charges are being divided by units exported in a year to get cost per kWh.

By adding all these factors, Capacity cost to produce a unit of electricity can be calculated.

Indexation Factors: Some indexation factors are used to nullify the effect of inflation and exchange rate fluctuations. These are normally the following: * Exchange Rate (US$ / Euro / JP Yen

* US CPI
* Pakistan Inflation

By applying all the indexation factors, electricity cost is being calculated. The variable cost of the hydel and wind plants is lower but their capacity cost is more because of low capacity factor (less production in a year). The most cheaper and environmental friendly production is from gas but gas is not available in country and imported gas is more costly than coal. So it's the best solution to produce the power from imported coal by installing new efficient plants and converting existing plants to coal. The following is the sample of a power plant Tariff Table that shows the payment schedule for whole project life.

PROPOSED TARIFF TABLE FOR 220 MW HFO FIRED POWER PLANT (IPP)

CAPACITY 220 MW INTEREST RATE 16% % HFO PRICE 70,000 RS/TON
Aux Load 6% % ROE 18% % HFO CV 38,200 Btu/Kg
Net Capacity 206.8 MW Insurance 1.35% % of Capital FCC 13.9 Rs/kWh
Capital Cost 330 Million US$ Fixed O&M 0.400 Rs/kWh Capacity Factor 60% %
Debt 80% % Efficiency 45% % Units produced in year 1,086,940,800 kWh
1USD 90 Rs Heat Rate 7583.33 Btu/kWh Working Capital Requirement 2,069 Million Rs for30 days
Agreement Period 25 Year VOM 0.25 Rs/kWh Cost of WC 310.36 Million Rs
Loan Payment Period 10 Year Interest Rate for WC 15% % Withholding Tax 7.50% % of ROE & ROEDC


New Agree-ment Year Energy Charges (Rs/kWh) Capacity Charges (Rs/kWh) Total Tariff (Rs/kWh)
Fuel VOM Total Fixed O&M Insur-ance Cost of Working Capital ROE ROEDC WH Tax Loan Payment Interest Charges Total
1 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 0.99 3.46 6.67 20.82
2 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 1.16 3.29 6.67 20.82
3 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 1.35 3.10 6.67 20.82
4 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 1.58 2.88 6.67 20.82
5 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 1.84 2.61 6.67 20.82
6 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 2.15 2.31 6.67 20.82
7 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 2.50 1.95 6.67 20.82
8 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 2.92 1.53 6.67 20.82
9 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 3.40 1.05 6.67 20.82
10 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 3.97 0.48 6.67 20.82
11 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
12 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
13 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
14 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
15 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
16 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
17 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
18 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
19 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
20 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
21 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
22 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
23 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
24 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36
25 13.9 0.25 14.15 0.40 0.37 0.29 1.00 0.08 0.081 - - 2.22 16.36