TARIFF OF ELECTRICITY &

PRINCIPLE OF ITS
CALCULATION

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 INTRODUCTION
• Electrical energy is most useful form of energy because it can be most
conveniently transformed into other forms of energy like heat light, mechanical
energy that we require in our day to day life.

• But electricity is not readily available and is required to be produced

(generated) in a factory called power station.

• Like any other manufacturing process, the production (generation) of

electricity also need some cost to be incurred - Plants and Equipment, Inputs
(water, fuel etc.), Ash smoke disposal systems, Personnel

• Cost of Transmission and Distribution to the large number of consumers of

various categories (viz. domestic, commercial, industrial, agricultural etc.)

• All these costs when added together constitutes the total cost of electricity
which in the consumers have to share according to the quantum of electricity
consumed taking into account the nature and time of use of electricity by each
category of consumers.
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 INTRODUCTION ……(contd.)
• The question is how this cost of electricity is to determined in a transparent manner.

• Some standard principles have been evolved through ages of un & sell of electricity
become more and more complicated.

• Methods of calculation of cost of generation of electricity in a Thermal Power station in

terms of these basic principles.

• Cost of Electricity has two components – Fixed Cost and Variable Cost

The basic difference between power and energy –

Power –
It is the capacity to Generate or consume electricity. The term “Power” specifies the capacity
of generation or consumption in terms of Kilowatt (KW) or Megawatt (MW). One Megawatt
as we know in one thousand Kilowatt.

Energy –
It is the Power Generated or Consumed by utilizing the capacity for a duration of time. It one
kilowatt Power has been generated or distributed continuously for one hour, it is said that
an energy of One Kilowatt hour has been generated or used. Similarly if Five kilowatt of
Power is generated or consumed for Two hours, an energy of 10 ( = 5 X 2) kilowatt hour
has been generated or consumed and so on. 4
 COMPONENTS OF COST – Fixed and Variable Cost

Fixed Cost

•Cost of setting up a Power Plant, Inverter, Plant & Equipment, Personnel

Employed, Raw Material Inventory

•Costs that are fixed

•As per recent norms fixed cost cannot be recovered fully from the consumers
if the capacity is not available for generation above a certain percentage of
declared capacity.

Variable cost

•Cost of generating the quantum of electrical energy and covers the fuel costs
for generating this quantum of electricity.

•The Fuel in a coal fired Thermal Power Station is coal (Primary fuel) and Oil
(Secondary fuel).
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 COMPONENTS Of FIXED COST
• Return on equity capital

• Taxes and Duties

• Depreciation

• Interest on loan component of capital

• Interest on working Capital

• Operation & maintenance expenses

• Employment Cost

• Insurance Premium Payable

• Costs arising out of Foreign Exchange Rate Variation (FERV)

• Bad Debts 6
 COMPONENTS Of FIXED COST …..(contd.)

1. Return on Equity:

1. Debt-Equity ratio in electricity generation is 70:30.

2. Equity employed in more than 30% the amount of liquidity shall be limited to 30%
and balance amount treated as loan.
3. If however the equity employed is less than 30%, the actual equity and loan shall
be considered for determination of return on equity.
4. Equity Capital shall be the sum total of paid up equity capital, preference share
capital, fully convertible debentures, foreign currency convertible bonds and share
premium amount.
5. Generally Return on equity @14% is decided to be recovered from the consumers
in electricity sector.

• Tax and Duties:-

1. Tax on income stream of the company, Banking cash transaction charge, any
other direct tax and Fringe benefit tax shall be computed as expenses
2. Shall be recovered as pass through from consumers and beneficiaries
3. Govt. duties shall be recovered at specified rate from the consumers but shall be
processed on to the Govt.

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 COMPONENTS Of FIXED COST …..(contd.)

3. Depreciation:

 The depreciation of various assets shall be calculated in terms of useful life

period of each equipment as specified
 The residual value of assets shall be considered as 10% and depreciation shall
be allow up to a maximum of 90% of the original cost of the asset.
 Depreciation shall be chargeable from the first year of operation of the asset.
 In case of operation of the asset from the middle of the year depreciation shall be
changed on pro-rate basic. Free hold land is not depreciable and its cost shall not
include while calculating the depreciation cost.

3. Interest on Loan:

 The generating company shall be allowed to recover the interest expenses on all
borrowings towards capital works as per terms of such borrowings including the
repayment schedule
 Interest on normative loan shall be allowed at weighted average rate of interest
on above actual borrowings

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 COMPONENTS Of FIXED COST …..(contd.)
5. Interest on Working Capital:

 Working Capital primarily for purchase of fuel has to be maintained at all times so
that the generation does not suffer due to shortage of working capital.

 On a normative basis working capital requirement is assessed at the rate of 18% of

estimated amount of sales revenue reduced by the amount of Depreciation.
Sometimes It is about fuel cost on 3 month’s of average generation.

6. Operation & Maintenance Expenses:

 O & M expenses include Repair and Maintenance expenses as also the

Administrative and general expenses

 The Administrative & General Expenses includes the following items:

⁻ Rents, rates & taxes (other than taxes & relating to income, profits & dividend
taxes)
⁻ Legal charges and statutory fees (but excluding any penalty to be paid under
the law)
⁻ Auditor’s expenses
⁻ Consultancy charges for work which can not be done in house or is
uneconomical to do so.
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 COMPONENTS Of FIXED COST …..(contd.)

7. Employees cost:

 Employee cost shall include the expenses on account of salaries & wages, staff
welfare expenses, travelling expenses, Bonus etc including Directors
remuneration, fees expenses and other facilities and salaries and wages of
Corporate office/ Registered office and shall be shown separately.

 The cost of maintaining terminal benefit fund shall be included in employees

cost. However, recently a new guideline has been introduced for reasonable
MAN: MW ratio.

8. Insurance Premium Payable:

 All insurance payments reasonably paid to cover

⁻ transportation risks,
⁻ erection risks,
⁻ Fire risks etc
⁻ and any such risk shall be recovered from the consumers.

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 COMPONENTS Of FIXED COST …..(contd.)

9. Foreign Exchange Rate Variation:

 In case of Foreign exchange rate variation (FERV) the resultant payment

due to FERV arising on account of interest payment and payment of loan
shall be passed through to the consumers.

10. Bad Debt:

 Bad debts as actually had been written off in the latest available audited
accounts of the generating companies subject to a ceiling of 5% of the
Annual Gross sales value of energy at the end of the year can be
included as a pass through item.

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 VARIABLE COST OR FULL COST

• Cost supplied to the Power stations are graded as grade A, B, C, D, E, F and G

according to the heat value of the particular quality of the coal.

• Heat values are expressed in terms of kilo calories/kg meaning thereby that one
kg of coal of certain grade where fully burnt will give rise to a certain amount of
heat measured in kilo calories. These heat values an expressed in Useful Heat
Value (UHV). GCV of particular grade of coal is higher than its useful heat value
or UHV.
GCV & UHV of various grade of coal are listed below:

Grade UHV GCV

(in kilo calories/kg) (in kilo calories/kg)

A More than 6200 6454

B Between 5600 – 6200 Between 6049 – 6454
C Between 4940 – 5600 Between 5597 – 6049
D Between 4200 – 4940 Between 5089 – 5597
E Between 3360 – 4200 Between 4324 – 5089
F Between 2400 – 3600 Between 3865 – 4324
G Between 1300 – 2400 Between 3113 – 3865
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 VARIABLE COST OR FULL COST …….(contd.)

Station Heat Rate

•Different Power station depending on design efficiency require different amount of

heat to produce one Kwh of electrical energy.

•This is known as Station Heat Rate and is expressed in terms of kilo calories/kwh.

•For example station Heat Rate (SHR) of Budge Budge Power Station of CESC is
about 2500 k.cal/kwh where as far New Cossipore Generating Station SHR is of
the order of 6000 k.cal/kwh.

•This is because New Cossipore is an old Power Station and less efficient by
design and operation.

•Similarly for Barkrashwar Thermal Power Station of WBPCDCL the SHR is 2500 k.
cal/kwh and for Bandel Power Station of WBPCDCL the SHR is of the order of
3000 k.cal kwh for older units.

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 VARIABLE COST OR FULL COST …….(contd.)

Specific Oil Consumption

• Although coal is the primary fuel for generation of energy in a Thermal Power
Plant, certain amount of oil is also required to be burnt for starting the process
of Boiler firing, initial low level of generation etc.

• Each unit or plant has different amount of oil requirement for generating each
kwh of electrical energy. This is called Specific Oil Consumption of the Unit or
Plant and is expressed in mililitres per kwh or ml/kwh

• The Specific Oil consumption in the Plant may vary from 1 ml/kwh to 4 ml/kwh

• When a unit is first synchronized after erection and commissioning the oil
consumption may reach higher values during the stabilization period

• This oil has its own Heat Value Called G.C.V of oil or Gross calorific value of oil
and is expressed in kilo calories/litre. This value is generally of the order of
9500 to 9600 kilo calores per litre. Average price of oil being 40000 Rs./KL to
50000 Rs/KL limit may change according to international market rate
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 VARIABLE COST OR FULL COST …….(contd.)

Typical Specific Oil Consumption Levels in some Thermal Power Stations

Specific oil consumption

Sl No. Power Stations
in milliliter/KWh (ml/kwh)
1 Budge Budge (CESC) 1.5
2 Bandel T.P.S. 3.5 (for old units)

3 Kolaghat T.P.S. 2.05

4 Bokreswar T.P.S. 1.3

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 VARIABLE COST OR FULL COST …….(contd.)

Auxiliary Consumption

Auxiliary consumption varies between 8.5% to 10.5% of gross energy generated in

the power station of different vintage, efficiency & technology used.

All though quantum of Auxiliary Consumption is required to the generated of burning

fuel in the Power Station, the amount of energy spent as auxiliary consumption can not
be actually delivered to the Purchaser.

However cost of generating the auxiliary consumption is also to be recovered from

the purchaser in addition to the cost of energy delivered to him.

N.B. It is to be remembered that cost of coal is to be considered as per

latest notification of Coal India. Cost of Oil has to be considered as per
international market rate.

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 Sample Calculation Chart for Determining

FUEL COST Sample Calculation Chart for determining: NET ARR &
AVARAGE COST OF GENERATION
1. Electricity proposed to the generated in the
power station during the year in Million Units 1. Fuel Cost.
(MV) 2. Coal & Ash Handling charges.
2. Auxiliary Consumption (say 10% of proposed 3. Employees’ Cost including Cost of contracted manpower.
Energy generation in MU 4. Administrative & General Expenses.
3. Ex-Bus Generation to the delivered =(1-2)MU 5. Rents, Lean Rentals etc.
4. Station Heat Rate of Power Station in Kilo 6. Legal and professional Charges.
calories/ KWh 7. Audit Fees.
5. Total Heat Required for generation = 1 X 4 in 8. Repair Maintenance including consumables.
Million Kilo Calories. 9. Insurances.
6. G.C.V of Oil in Kilo Calories/Liter 10. Depreciation.
7. Specific oil consumption in ml/KWh 11. Interest on loan capital.
8. Total Oil Consumed = 1 X 7 in KL (Kilo liters) 12. Interest on working Capital.
9. Average Price of oil in Rs/KL 13. F.E.R.V
10. Cost of Oil =8 X 9 in Rs. 14. Bad Debt.
11. Heat generation from oil = 6 X 8 ÷ 1000 in million 15. Water charges.
kilo calories. 16. Return on Equity.
12. Heat generation from coal = 5 -11 in million kilo 17. Gross Aggregate Revenue Requirement = Sum(1 to 16)
calories. Less: i) Miscellaneous Income from other sources.
13. Heat value of coal in Kilo Calories / Kg ii) Other deduction.
14. Coal required =12 X 1000 ÷ 13 in M.Tonnes. 19. Net ARR to be recovered through tariff = 17 – 18 in Rs.
15. Weighted average price of coal in Rs / MT.
16. Cost of Coal = 14 X 15 in Rs. 20. Average Tariff for Purchase = 19 ÷ Ex-Bus Energy sal in
17. Total Cost of Fuel = 10 + 16 in Rs. Rs./Kwh

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Thank You

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