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 X 250 MW
2080
2. RAJASTHAN
2 X 125 MW
1113
3.

JOINT VENTURE WITH
TNEB COAL BASED
1000 MW at Tuticorin
4000

4. ORISSA 2000 MW 8000
THERMAL PROJECTS UNDER FORMULATION
S.NO. DETAIL ESTIMATED COST
IN Rs.CRORES
1. TPS I EXPANSION
PHASE II 1 X 125 MW
455
2. THERMAL POWER
STATION III 2 X 500
MW
3969
3.

JOINT VENTURE WITH
CPCL REFINERY
RESIDUE BASED IN
CHENNAI 492 MW
2837
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.
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.
TECHNICAL CONSTRAINTS FACED IN
OPERATION OF NLC POWER STATIONS
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.

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


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.



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.

RATE OF RETURN
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.
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.

INCENTIVE FOR THERMAL GENERATION
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.

PRESENTLY, REVISION TO TAKE EFFECT FROM 6
TH

TIME BLOCK.

SUGGESTED TO EFFECT REVISION FROM 3
RD
TIME
BLOCK.

REDUCTION IN TIME POSSIBLE AS ALL HAVE
BECOME USED TO THE SCHEDULING
PROCEDURES AND WITH THE USE OF
ELECTRONIC FACILITIES.
TIME FOR REVISION FOR OTHER REASONS
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