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Wheels set in motion for power price hike

DGPC has submitted a revised tariff proposal to BEA for review

The Druk Green Power corporation (DGPC) has proposed revising generation tariff for additional energy it sells to the Bhutan Power corporation (BPC) for domestic supply to Nu 1.99 kWh from the present Nu 1.20 a unit (kWh) for the next three-year cycle starting July.

Additional energy refers to sales beyond royalty energy, 15 percent of total generation, to BPC.  The royalty energy is supplied to BPC at a special rate to subsidise domestic supply.

The revised tariff proposal, which has been submitted to the Bhutan Electricity Authority (BEA) for review, was arrived at to allow for higher cost of equity, recovery of the cost of production of royalty energy and power import, and full recovery of other costs.

These changes are proposed to reflect the actual cost of power generation, in keeping with the tariff determination regulations (TDR), as well as norms applicable to other utilities in the region.

The proposal states the prevailing tariff for additional energy of Nu 1.20 a kWh has not changed since September 2007.  In the last revision cycle in 2010, the tariff for royalty energy was reduced to Nu 0.13 a unit from Nu 0.30 a unit.

Over the past three years, there has been a huge opportunity loss, exceeding Nu. 1.3 billion, to DGPC due to domestic demand exceeding royalty energy component and the prevailing low generation tariffs. The additional energy demand ranging from 545.50 GWh in 2010 to 818.59 GWh in 2012 could otherwise have been exported to India thus earning much higher returns.

During the tariff review in 2010, DGPC was allowed a six percent cost of equity (CoE), on the grounds that hydropower projects were constructed with grants.  By considering GoI grant financing in the 2010 tariff determination, resulted in lower generation tariffs.

DGPC managing director Dasho Chhewang Rinzin said a higher CoE would not only be in keeping with the updated TDR, but also appropriate, because DGPC does not receive grants directly.  Indian utilities are allowed a CoE of 15.5 percent to ensure recovery of cost of supply.

The increase in tariff will allow DGPC to earn returns as permissible within the regulatory framework, maintain satisfactory levels of profitability, and safeguard revenues from export from being eroded by domestic sales.

The proposal also says Druk Green’s returns have been steadily declining in recent years.  Profit after tax in 2011 reduced by more than Nu 500M.  The higher profitability in 2012 was primarily due to the increase in export tariff for the Kurichu and Tala Hydropower Plants from Nu 1.80 per kWh to Nu 1.98 per kWh, effective from December 2011.  The decline in returns is primarily attributed to the current domestic tariff levels.

The proposal also points out that any impact on Druk Green’s profitability will adversely affect revenue flows to the government.  Druk Green contributes about 26 percent of the government’s total revenues in taxes and dividends (National Revenue Report 2011-12).

The proposal also states that, if present generation tariffs are increased to a certain extent, and that too only reflecting the true cost of supply, it could lead to drastic tariff increases in the future, once the new hydropower projects are commissioned, which could cause a huge shock to the domestic electricity market.

Much higher tariffs are anticipated for the new projects, based on much higher capital costs of construction (see Table 1).  The tariffs for these projects could be much higher once the projects are commissioned and the actual costs to completion are computed.

“If the proposal doesn’t come through, it wouldn’t have significant impact on DGPC’s sustainability, as all loan obligations are met, but increase in tariff would allow us in pumping back money for proper maintenance and as a huge corporation generate more revenue that is directly returned to the government for development activities,” Dasho Chhewang Rinzin said.

By Passang Norbu

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