CERC DISCUSSION PAPER ON TERMS AND

CONDITIONS FOR TARIFF FROM 01.04.2004

WARM WELCOME TO THE

PRESENTATION BY

NEYVELI LIGNITE CORPORATION LTD.,

NEYVELI

DATE:10.11.2003 PLACE: NEW

DELHI
CAPACITY ON HAND & PRESENT STATUS

TPS I : 6 X 50 MW + 3 X 100 MW
AFTER LEP, MORE THAN 50% OF
EXTENDED LIFE UTILISED.
 TPS II : 3 x 210 MW + 4 x 210 MW
 STAGE I – ALL UNITS CROSSED 1,00,000 HOURS
OF OPERATION.
LEP TO BE TAKEN IN THE NEXT FEW
YEARS.
 STAGE II – IN SERVICE FOR MORE THAN 10
YEARS
 TPS I Expn. : 2 x 210 MW
NEWLY COMMISSIONED STATION
 THERMAL CAPACITY ADDITION PROGRAMME
OF NLC

S.NO. DETAIL ESTIMATED COST

IN Rs.CRORES
1. TPS II EXPANSION 2 2080
X 250 MW
2. RAJASTHAN 2 1113
X 125 MW
3. JOINT VENTURE WITH 4000
TNEB COAL BASED
1000 MW at Tuticorin
4. ORISSA 2000 MW 8000
 THERMAL PROJECTS UNDER FORMULATION

S.NO. DETAIL ESTIMATED COST

IN Rs.CRORES
1. TPS I EXPANSION 455
PHASE II 1 X 125 MW
2. THERMAL POWER 3969
STATION III – 2 X 500
MW
3. JOINT VENTURE WITH 2837
CPCL – REFINERY
RESIDUE BASED – IN
CHENNAI 492 MW
TARIFF SETTING PRIOR TO ERC ACT 1998
 SINGLE PART TARIFF SYSTEM

 GOI NOTIFICATIONS TAKEN AS GUIDE LINE.

 SEBs ARE COGNIZANT OF THE TECHNICAL

CONSTRAINTS AND LIMITATIONS OF
LIGNITE FIRED STATIONS OF NLC.

 FINAL AGREEMENTS THROUGH EXTENSIVE

DISCUSSIONS AND MUTUAL ACCEPTANCE
OF NORMS AND PARAMETERS.
 TECHNICAL CONSTRAINTS FACED IN
OPERATION OF NLC POWER STATIONS
 LIGNITE SOURCE FROM ONE TO ONE LINKED MINES -
HENCE, PERFORMANCE OF POWER PLANTS DEPENDS
ON PERFORMANCE OF MINES.

 WIDE VARIATION IN LIGNITE QUALITY AFFECTS

PERFORMANCE OF THERMAL UNITS.

 CONTAMINANTS IN LIGNITE RESULT IN INCREASED

FORCED OUTAGES AND LOW LOAD OPERATION OF
THERMAL UNITS.

 SLAGGING PROBLEMS ARE PRONOUNCED - AFFECT

FULL LOAD OPERATION - LEAD TO OUTAGES.

 BEING A LOW CALORIFIC VALUE FUEL, QUANTUM

HANDLED PER DAY IS VERY HUGE.
 TECHNICAL CONSTRAINTS FACED IN
OPERATION OF NLC POWER STATIONS
 LIGNITE IS ALREADY A HIGH MOISTURE FUEL; DURING RAINY
SEASONS, LIGNITE BECOMES SLUSHY AND TRANSPORTATION
POSES LOT OF PROBLEMS.

 SLUSHY LIGNITE AFFECTS THE FURNACE STABILITY,

WARRANTING USE OF FUEL OIL AND PART LOAD OPERATION.

 FREQUENT LIGNITE MILL CHANGE OVER NECESSARY BECAUSE

OF WEAR TO MILL PARTS DUE TO CONTAMINANTS IN LIGNITE.

 SOME OF THE MEASURES TO OVERCOME THE FUEL RELATED

PROBLEMS RESULT IN LOSS OF EFFICIENCY.
 PERFORMANCE LEVELS OF NLC
LIGNITE BASED UNITS
 MAXIMUM POSSIBLE PLF LEVEL IS AROUND 80%
ONLY.

 THE ABOVE WAS ALSO POSSIBLE ONLY IN THE

LAST TWO YEARS.

 EVEN IN CASE OF SMALLER SIZED UNITS, THE PLF

ACHIEVED COULD NOT BE MORE THAN 80%.

 HIGHER FORCED OUTAGES AND LOWER DAILY

OPERATING LOAD FACTOR (MAINLY BECAUSE OF
FUEL) ARE THE PRIME REASONS.
 PRINCIPLES FOR TARIFF SETTING
 COST PLUS APPROACH, AS INDICATED IN THE
DISCUSSION PAPER, IS TO BE CONTINUED .

 NORMATIVE VALUES SHOULD BE FIXED IN A SUCH A WAY

THAT THEY INCENTIVISE THE GENERATOR AND ALSO
PROVIDE A LEVEL PLAYING FIELD.

 NORMATIVE VALUES FOR TARIFF SHOULD NOT BE

BENCHMARKED BASED ON BEST PERFORMANCE LEVELS
AND THAT TOO COMPARED WITH OTHER FUELS.

 THE EFFORTS TAKEN TO IMPROVE EFFICIENCY IS TO BE

REWARDED; IMPROVEMENT OVER NORMS BY THE
GENERATOR SHOULD NOT BE MADE AN IMPEDIMENT.
 PRINCIPLES FOR TARIFF SETTING
 RATE OF INCENTIVE AND RANGE OF PERFORMANCE
FOR INCENTIVE SHOULD BE BASED ON TYPE OF FUEL /
STATION SPECIFIC ISSUES.

 NORMATIVE VALUES SHOULD BE SUCH THAT THE SAME

ENABLE INVESTMENT FOR THE DEVELOPMENT OF THE
POWER SECTOR.

 IN CASE OF NLC, THE UNREQUISITIONING BY THE EBs, IF

NOT LIMITED ON AN ANNUAL BASIS, MAY AFFECT THE
FINANCIAL VIABILITY OF NLC.

 THE NEW CHALLENGES POSED BY THE

IMPLEMENTATION OF ABT AND THE ELECTRICITY ACT
2003 SHOULD ALSO BE TAKEN INTO CONSIDERATION
WHILE FIXING THE TARIFF OF THE GENERATOR.
 RATE OF RETURN
 NLC RECOMMEND FOR CONSIDERATION COST OF EQUITY
APPROACH.

 AS PER EXISTING PRACTICE, INCOME TAX, FERV, ROYALTY

ETC., TO BE REIMBURSED IN FULL.

 DEBT-EQUITY RATIO AS APPROVED AT THE TIME OF GOI

SANCTION FOR OLD PROJECTS AND 70:30 FOR NEW
PROJECTS.

 ROE TO BE RETAINED AT 16% POST TAX.

 PLR PLUS SPREAD AS ALLOWED BY SBI TO BE ALLOWED

FOR DEBT PORTION.
 JUSTIFICATION FOR NLC PROPOSAL
 PROJECTS ALREADY SANCTIONED SHOULD NOT
SUFFER BECAUSE OF POLICY CHANGES.

 WITH THE LESSER REMAINING LIFE OF OLD

PROJECTS , THE 16% RETURN MAY NOT BE MUCH
IN ABSOLUTE TERMS; THIS ALSO JUSTIFIES POST
TAX RETURN.

 ROE IS PREFERRED SINCE IN ROCE MODEL,

RESTRICTIONS ON RETURN AS A FIXED %AGE ARE
IMPOSED, DEVIATING FROM THE COST PLUS
APPROACH.
 RATE BASE
 WHILE ARRIVING AT THE RATE BASE, NEW ADDITIONS
/ REPLACEMENTS SHALL ALSO BE ALLOWED IN FULL.

 CEILING FOR INITIAL SPARES TO BE 5% OF CAPITAL

COST. THE PRESENT PROVISION IS FOUND
INADEQUATE TO ACQUIRE SPARES FOR TURBINE AND
GENERATOR ROTORS.

 FOR ADDITIONAL CAPITAL EXPENDITURE, THE

CEILING OF 20% TO BE DISPENSED WITH SINCE MANY
OF THE SYSTEMS / SERVICES ARE NORMALLY
COMPLETED AFTER COD ONLY AND LAST 10%
PAYMENTS RELEASED ONLY AFTER COMMISSIONING.
 RATE BASE
 ALL EXPENDITURE INCURRED DURING PROJECT
EXECUTION LIKE WORKS OVER AND ABOVE SCOPE,
DEFERRED EXPENDITURE IN ORIGINAL SCOPE ETC.,
ARE TO BE ALLOWED.

 REIMBURSEMENT OF FERV IS TO BE AT ACTUAL.

 LIABILITY SIDE APPROACH MAY BE CONSIDERED

FOR ARRIVING AT THE RATE BASE TO ENSURE
ADEQUATE AVAILABILITY OF RESOURCES,
ESPECIALLY UNDER THE FAST CHANGING POWER
SECTOR SCENARIO.
 INTEREST ON WORKING CAPITAL
 MARGIN MONEY TO BE PERMITTED AS PER THE
REQUIREMENTS OF BANKING REGULATIONS.

 O&M EXPENSES TO BE RETAINED IN THE WORKING

CAPITAL AS BEFORE. THIS IS JUSTIFIED IN VIEW
OF THE REBATE AVAILABLE FOR PROMPT
PAYMENTS IN THE BPSA AND ALSO ADDITIONAL
REBATES & INCENTIVES PROVIDED FOR IN THE
SECURITISATION SCHEME.

 INCLUSION OF INTEREST ON WORKING CAPITAL

AS A %AGE PROVIDED FOR PASS THROUGH ITEMS
NOT TO BE CONSIDERED; THIS SEEMS TO BE
AGAINST THE COST PLUS APPROACH.
 O&M EXPENSES
 FOR OLD PLANTS, THE AVG.VAULE IS TO BE
ESCALLATED BY 2.5 TIMES TO ARRIVE AT BASE
YEAR O&M AS AGAINST 2 TIMES AS PER EARLIER
CERC ORDER.

 THE ESCALATION TO BE @10% INSTEAD OF 6%.

 THIS IS NEEDED IN VIEW OF THE EVER ESCALATING

COSTS OF MAINTENANCE.

 THE AGEING OF THE UNITS AND THE INCREASED

MAINTENANCE REQUIREMENTS ARE ALSO TO BE
TAKEN INTO CONSIDERATION.

 IN CASE OF NEW PLANTS, 3.5% OF CAPITAL COST

IN VIEW OF FALLING COST OF POWER PLANTS
 O&M EXPENSES
BENCH MARKING OF O&M EXPENSES MAY BE
DIFFICULT
(a) DUE TO DIFFERENT TECHNOLOGIES

(b) DIFFERENT FUEL USAGE, SIZE OF THE UNIT

(c) AGEING

(d) EXTENT OF AUTOMATION

(e) MAN POWER AND OTHER FACTORS

IT IS RECOMMENDED THAT THE O&M COST FOR

THE NEW POWER STATIONS SHALL CONTINUE TO
BE NORMATIVE PERCENTAGE OF CAPITAL COST.
 DEPRECIATION
 DEPRECIATION RATE TO BE MAINTAINED AT
7.84%.

 THIS IS NECESSARY TO ENSURE ADEQUATE

FUNDS FOR PROMPT DEBT SERVICING AND
ADDITIONS / REPLACEMENTS.

 RELATING DEPRECIATION TO THE ECONOMIC

VALUE OF THE ASSET IS CONSIDERED NOT
NECESSARY.
 HEAT RATE
 MUST BE ON A NORMATIVE BASIS ONLY.

 CORRECTION FACTOR FOR MOISTURE FOR

LIGNITE, AS ADOPTED BY CEA, SHALL
CONTINUE TO BE FOLLOWED.

 THE ALTERNATE REPORT OF EXPERT

GROUP MAY BE CONSIDERED AS SUCH
FOR ADOPTION. THIS WILL STILL BE
RELEVANT.
 SPECIFIC SECONDARY FUEL OIL
CONSUMPTION
 THE NORM SHOULD NOT BE LESS THAN 3.0 ML /
KWHR BECAUSE OF

1. LIGNITE BEING A HIGH MOISTURE FUEL AND

MINING BY OPEN CAST METHODOLOGY, USAGE
OF OIL CANNOT BE PREDICTED AND WILL NOT
REMAIN THE SAME ALWAYS.

2. CONSTANT LOAD OPERATION IS NO LONGER

POSSIBLE UNDER ABT.
 AUXILIARY POWER CONSUMPTION

 ON NORMATIVE BASIS ONLY.

 SHALL NOT BE LESS THAN 10% FOR THE

FOLLOWING REASONS:

 HIGH MOISTURE CONTENT AND ASSOCIATED

HIGH VOLUME OF FLUE GASES.

 OPERATION BELOW 100% MCR CONDITIONS

FOR MOST OF THE TIME DUE TO TECHNICAL
PROBLEMS, LIGNITE QUALITY ETC.,
 INCENTIVE FOR THERMAL GENERATION
FIXATION OF NORMATIVE VALUE
 TO BE BASED ON FUEL TYPE.

 TO TAKE INTO ACCOUNT THE TECHNICAL PROBLEMS

FACED.

 TO CONSIDER RANGE OF PERFORMANCE AVAILABLE FOR

INCENTIVE.

 THE MAXIMUM PERFORMANCE LEVEL FOR EACH TYPE OF

STATION WILL BE DIFFERENT

 INCENTIVE RANGE GIVEN FOR COAL BASED TPS SHOULD BE

EXTENED TO LIGNITE BASED TPS

 ALL ABOVE FACTORS SHALL BE CONSIDERED AND

EQUITABLE TO ALL TYPES OF GENERATORS.
 INCENTIVE FOR THERMAL GENERATION
BASED ON AVAILABILITY OR SCHEDULED PLF
 AS PER EARLIER CERC NOTIFICATION, THE SAME IS
BASED ON SCHEDULED PLF.

 PERFORMANCE LEVEL ABOVE SCHEDULED PLF

DEPENDS UPON REQUISITIONING BY EBs.

 THUS, INCENTIVE TO THE GENERATOR DEPENDS

UPON THE SEBs RATHER THAN THE PERFORMANCE
LEVEL OF THE GENERATOR.

 ONLY APPROPRIATE IF THE INCENTIVE IS BASED

ON AVAILABILITY OR DEEMED SCHEDULED PLF.
INCENTIVE FOR THERMAL GENERATION
RATE OF INCENTIVE
 RATE OF INCENTIVE MAY BE SAME FOR ALL FUELS,
PROVIDED DIFFERENT RANGE OF PERFORMANCE
LEVELS OF DIFFERENT FUELS ARE CONSIDERED.

 IN THE BPSAs WITH THE SEBs SO FAR, HIGHER RATE

OF INCENTIVE FOR LIGNITE STATIONS WAS
MUTUALLY AGREED. WHILE THERE IS SHARING OF
BENEFITS BETWEEN GENERATOR & EB, 100% FIXED
CHARGES PER KWHR IS ADOPTED AS THE RATE OF
INCENTIVE.

 IN CASE A FLAT RATE IS CONSIDERED, NLC SUGGEST

FOR CONSIDERATION 50% OF FIXED CHARGES
WITHOUT ANY CEILING OR THE UI RATE AT 50 Hz AS
THE RATE OF INCENTIVE.
 DEVELOPMENT SURCHARGE

 DEPRECIATION RATE AT 7.84% APPEARS

TO BE THE RIGHT SOLUTION.

 DELETION OF SURCHARGE MAY BE

CONSIDERED IN VIEW OF THE STRINGENT
CONDITIONS STIPULATED FOR ITS USE.
 TARIFF PERIOD
NLC SUGGEST 5 YEAR TARIFF PERIOD FOR THE
FOLLOWING REASONS:

 LONGER DURATION WILL ENABLE STUDY OF

EFFECTS OF VARIOUS POLICY DECISIONS FOR
SUBSEQUENT FINE TUNING.

 LONGER DURATION WILL ENSURE STABILITY AND

ALSO ENABLE THE GENERATOR TO FINALISE THE
BUSINESS STRATEGY.

 PROCEDURE FOR TARIFF FINALISATION ENTAILS

PROTRACTED DISCUSSIONS.
 REGIONAL TARIFF

 TARIFF TO BE STATION SPECIFIC.

 NLC NOT AGREEABLE TO REGIONAL

TARIFF.
 PEAK AND OFF PEAK TARIFF

 NLC SUGGEST CIRCULATION OF A DRAFT

PROPOSAL SEPARATELY UNDER THE
CHANGED SCENARIO WITH OPERATION OF
THE GRID UNDER ABT.
 DECLARATION OF CAPACITY
EXCEEDING INSTALLED CAPACITY

 NLC IS OF THE VIEW THAT THIS CAN BE

PERMITTED.

 AUXILIARY CONSUMPTION ALONE CANNOT BE A

FACTOR FOR HIGHER INJECTION.

 SO LONG THE ENERGY FED INTO THE GRID IS IN

AID OF THE SAME, IT SHOULD BE PERMITTED.
 UI RATE IN STEPS OF 0.01 Hz

THIS IS SUGGESTED AS

 THE FREQUENCY IS MEASURABLE IN

STEPS OF 0.01 Hz.

 THE ABOVE MEASURE WILL HELP BOTH

THE GENERATOR AND EB.
 TIME FOR REVISION OF FORCED OUTAGE

 ANY FORCED OUTAGE IS TOTALLY

UNINTENTIONAL AND OUT OF CONTROL.

 OPERATING FREQUENCY IS GREATLY

INFLUENCED BY THE SEBs ONLY.

 SO, TOTAL DELETION OF THIS CLAUSE IS

SUGGESTED FOR CONSIDERATION.
 TIME FOR REVISION FOR OTHER REASONS

 PRESENTLY, REVISION TO TAKE EFFECT FROM 6TH

TIME BLOCK.

 SUGGESTED TO EFFECT REVISION FROM 3RD TIME

BLOCK.

 REDUCTION IN TIME POSSIBLE AS ALL HAVE

BECOME USED TO THE SCHEDULING
PROCEDURES AND WITH THE USE OF
ELECTRONIC FACILITIES.
 NOTE UNDER “DEMONSTRATION OF
DECLARED CAPABILITY
 IT IS TO BE EXPLICITLY INDICATED THAT THIS IS
APPLICABLE, IF AND ONLY IF, GAMING IS
ESTABLISHED.

 THIS MEASURE ALONE WILL MAKE THE UI SCHEME

JUST AND EQUITABLE.

 TREATING EVEN NORMAL VARIATIONS IN LOAD

ABOVE DC AS GAMING IS NOT FAIR.

 THIS NEEDS A CRITICAL REVIEW IN VIEW OF

SEVERE FINANCIAL IMPLICATIONS TO
GENERATORS.
Thank You