Tariff and Economic Considerations

Tariff and Economic Considerations

Economic Motive: 
In all engineering projects with the exception of the construction of works of art or memorial buildings, the question of cost is of first importance. In fact, in most cases the cost decides whether a project will be undertaken or not although political and other considerations may intervene sometimes. However, the design and construction of an electric power system is undertaken for the purpose of producing electric power to be sold at a profit. Hence, every effort is made to produce the power as cheaply as possible. The problem of calculating the cost of any scheme is often difficult because the cost varies considerably with time, tariffs and even with convention. In general, the cost of producing electric power can be roughly divided into the following two portions:

(a) Fixed Cost. These do not vary with the operation of the plant i.e. these are independent of the number of units of electric energy produced and mainly consist of:
1. Interest on capital investment,
2. Allowance for depreciation (i.e. wearing out of the depreciable parts of the plant augmented by obsolescence, buildings, the transmission and distribution system etc.),
3. Taxes and insurance,
4. Most of the salaries and wages,
5. Small portion of the fuel cost.

(b) Running or Operating Costs. These vary with the operation of the plant i.e. these are proportional to the number of units of electric energy generated and are mostly made up of:
1. Most of the fuel cost, 2. Small portion of salaries and wages, 3. Repair and maintenance.

Depreciation:
It is obvious that from the very day the construction of a generating plant is completed, deterioration starts and due to wear and tear from use and the age and physical decay from lapse of time, there results a reduction in the value of the plant — a loss of some part of the capital investment in the perishable property. The rate of wear and disintegration is dependent upon
(i) conditions under which the plant or apparatus is working,
(ii) how it is protected from elements and
(iii) how promptly the required repairs are carried out.

Indian Currency:
The basic unit of Indian currency is rupee (Re). Its plural form is rupees (Rs.) One rupee contain 100 paisa. Higher multiples of rupees in common use are:

1 lakh (or lac) = Rs. 100,000 = Rs. 10^5 = Rs. 0.1 million

1 crore = 100 lakh = Rs. 10^7 = Rs. 10 million

Factors Influencing Costs and Tariffs of Electric Supply: 

Thermal Power Station

In the succeeding paragraphs we will discuss some of the factors which determine the cost of generating electric energy and hence the rates or tariffs of charging for this energy. The cost is composed of (i) standing charges which are independent of the output and (ii) running or operating charges which are proportional to the output. The size or capacity of the generating plant and hence the necessary capital investment is determined by the maximum demand imposed on the generating plant.

Demand:
By ‘demand’ of a system is meant its load requirement (usually in kW or kVA) averaged over a suitable and specified interval of time of short duration.

It should be noted that since ‘demand’ means the load averaged over an interval of time, there is no such thing as instantaneous demand. 

Average Demand:
By average demand of an installation is meant its average power requirement during some specified period of time of considerable duration such as a day or month or year giving us daily or monthly or yearly average power respectively.

Obviously, the average power demand of an installation during a specific period can be obtained by dividing the energy consumption of the installation in kWh by the number of hours in the period. In this way, we get the arithmetical average.
                    Average power = kWh consumed in the period/hours in the period.

Maximum Demand:
The maximum demand of an installation is defined as the greatest of all the demands which have occurred during a given period.

It is measured, according to specifications, over a prescribed time interval during a certain period such as a day, a month or a year.

It should be clearly understood that it is not the greatest instantaneous demand but the greatest average power demand occurring during any of the relatively short intervals of 1-minute, 15-minute or 30 minute duration within that period.

Demand Factor:
Demand factors are used for estimating the proportion of the total connected load which will come on the power plant at one time. It is defined as the ratio of actual maximum demand made by the load to the rating of the connected load.
                                  Demand factor = maximum demand/connected load.

The idea of a demand factor was introduced because of the fact that normally the kW or kVA maximum demand of a group of electrical devices or ‘receivers’ is always less than the sum of the kW or kVa ratings or capacities of these receivers. There are two reasons for the existence of this condition (i) the electrical apparatus is usually selected of capacity somewhat greater than that actually required in order to provide some reserve or overload capacity and (ii) in a group of electrical devices it very rarely happens that all devices will, at the same time, impose their maximum demands which each can impose i.e. rarely will all ‘receivers’ be running full-load simultaneously.

The demand factor of an installation can be determined if (i) maximum demand and (ii) connected load are known.

Maximum demand can be determined whereas connected load can be calculated by adding together the name-plate ratings of all the electrical devices in the installation. The value of demand factor is always less than unity.

Demand factors are generally used for determining the capacity and hence cost of the power equipment required to serve a given load. And because of their influence on the required investment, they become important factors in computing rate schedules.

As an example, suppose a residence has the following connected load: three 60-W lamps; ten 40-W lamps; four 100-W lamps and five 10-W lamps. Let us assume that the demand meter indicates a 30-min. maximum demand of 650 W. The demand factor can be found as follows:
                                   Connected load = (3 × 60) + (10 × 40) + (4 × 100) + (5 × 10) = 1,030 W

                                   30-min. max.demand = 650 W
Hence, the demand factor of this lighting installation is given as,

                                 = max. Demand 650/connected load =650/1.030 = 0.631 or 63.1%

Demand factors of lighting installations are usually fairly constant because lighting loads are not subject to such sudden and pronounced variations as like power loads. 

Diversity of Demand:
In central-station parlance, diversity of demand implies that maximum demands of various consumers belonging to different classes and the various circuit elements in a distribution system are not coincident. In other words, the maximum demands of various consumers occur at different times during the day and not simultaneously. It will be shown later that from the economic angle, it is extremely fortunate that there exists a diversity or non-simultaneity of maximum demand of various consumers which results in lower costs of electric energy.

For example, residence lighting load is maximum in the evening whereas manufacturing establishments require their maximum power during daytime hours. Similarly, certain commercial establishments like department stores usually use more power in day-time than in the evening whereas some other stores like drug stores etc. use more power in the evening.

Diversity Factor:
The non-coincidence of the maximum demands of various consumers is taken into consideration in the so-called diversity factor which is defined as the ratio of the sum of the individual maximum demands of the different elements of a load during a specified period to the simultaneous (or coincident) maximum demand of all these elements of load during the same period.
                                     Diversity factor* = maximum demand/connected load

Its value is usually much greater than unity. It is clear that if all the loads in a group impose their maximum demands simultaneously, then diversity factor is equal to unity. High value of diversity factor means that more consumers can be supplied for a given station maximum demand and so lower prices can be offered to consumers. Usually domestic load gives higher value of diversity factor than industrial load.

Typical view of transmission line

Load Factor:
It is defined as the ratio of the average power to the maximum demand.

It is necessary that in each case the time interval over which the maximum demand is based and the period* over which the power is averaged must be definitely specified.

If, for example, the maximum demand is based on a 30-min. interval and the power is averaged over a month, then it is known as ‘half-hour monthly’ load factor.

Load factors are usually expressed as percentages. The average power may be either generated or consumed depending on whether the load factor is required for generating equipment or receiving equipment.

When applied to a generating station, annual load factor is

 = No. of units actually supplied per year/ Max. Possible No. of units that can be supplied.

It may be noted that maximum in this definition means the value of the maximum peak load and not the maximum kW installed capacity of the plant equipment of the station.

 ∴ Annual load factor = No. of units actually supplied per year/ Max. Possible demand × 8760

 Monthly load factor = No. of units actually supplied per month/ Max. Possible demand × 24 × 30

When applied to a consuming equipment

Annual load factor = No. of units consumed per year/ Max. Demand × 8760

Monthly load factor = No. of units consumed per month / Max. Demand × 24 × 30

Daily load factor = No. of units consumed per day/ Max. Demand × 24

In general, load factor = (Average power/Max. Demand)* per year or per month or per day 

Significance of Load Factor:
Load factor is, in fact, an index to the proportion of the whole time a generator plant or system is being worked to its full capacity. The generating equipment has to be selected on the basis of maximum power demand that is likely to be imposed on it. However, because of general nature of things, it seldom happens that a generating equipment has imposed on it during all the 8,760 hrs. Of a year the maximum load which it can handle. But whether the equipment is being worked to its full capacity or not, there are certain fixed charges (like interest, depreciation, taxes, insurance, part of staff salaries etc.) which are adding up continuously. In other words, the equipment is costing money to its owner whether working or idle. The equipment earns a net profit only during those hours when it is fully loaded and the more it is fully loaded, the more is the profit to the owner. Hence, from the standpoint of economics, it is desirable to keep the equipment loaded for as much time as possible i.e. it is economical to obtain high load factors.

If the load factor is poor i.e. kWh of electric energy produced is small, then charge per kWh would obviously be high. But if load factor is high i.e. the number of kWh generated is large, then cost of production and hence charge per kWh are reduced because now the standing charges are distributed over a larger number of units of energy.

Plant Factor or Capacity Factor:
This factor relates specifically to a generating plant unlike load factor which may relate either to generating or receiving equipment for the whole station.

It is defined as the ratio of the average load to the rated capacity of the power plant i.e. the aggregate rating of the generators. It is preferable to use continuous rating while calculating the aggregate.

∴ Plant factor = (average load/rated capacity of plant) = (average demand on station / max. Installed capacity of the station).

It may be of interest to note that if the maximum load corresponds exactly to the plant ratings, then load factor and plant factor will be identical.

Utilization Factor (or Plant Use Factor):
It is given by the ratio of the kWh generated to the product of the capacity of the plant and the number of hours the plant has been actually used.
          Utilization factor = {station output in kWh/ (plant capacity × hours of use)}

If there are three units in a plant of ratings kW1, kW2 and kW3 and their operation hours are h1, h2 and h3 respectively, then
         Utilization factor = station output in kWh/ {(kW1 × h1) + (kW2 × h2) + (kW3 × h3)}

Connected Load Factor:
The factor relates only to the receiving equipment and is defined as the ratio of the average power input to the connected load.
To render the above value specific, it is essential*
(i) to define the period during which average is taken and
(ii) to state the basis on which the connected load is computed.
                         Connected-load factor = average power input/connected load

It can be proved that the connected-load factor of a receiving equipment is equal to the product of its demand factor and its load factor.

Connected-load factor = average power input/connected load
                                    = (Average power/max demand)*(Max. demand/connected load)
                                    = load factor × demand factor

Tariffs:
The size and cost of installations in a generating station is determined by the maximum demand made by the different consumers on the station. Each consumer expects his maximum demand to be met at any time of the day or night. For example, he may close down his workshop or house for a month or so but on his return he expects to be able to switch on his light, motor and other equipment without any previous warning to the supply company. Since electric energy, unlike gas or water cannot be stored, but must be produced as and when required, hence the generating equipment has to be held in ‘readiness’ to meet every consumer's full requirement at all hours of the day.

This virtually amounts to allocating a certain portion of the generating plant and the associated distribution system to each consumer for his individual use. Hence, it is only fair that a consumer should pay the fixed charges on that portion of the plant that can be assumed to have been exclusively allocated to him plus the charges proportional to the units actually used by him.

Hence, any method of charging or tariff, in the fairness to the supply company, should take into account the two costs of producing the electric energy (i) fixed or standing cost proportional to the maximum demand and (ii) running cost proportional to the energy used. Such two-part tariffs are in common use. Some of the different ways of rate making are described below:

Flat Rate:
This was the earliest type of tariff though it is not much used these days because, strictly speaking, it is not based on the considerations discussed above. In this system, charge is made at a simple flat rate per unit. But the lighting loads and power loads are metered separately and charged at different rates. Since the lighting load has a poor load factor i.e. the number of units sold is small in relation to the installed capacity of the generating plant, the fixed cost per kWh generated is high and this is taken into account by making the price per unit comparatively high. But since the power load is more predictable and has a high load factor, the cost per kWh generated is much lower which results in low rate per unit.

Sliding Scale:
In this type of tariff, the fixed costs are collected by charging the first block of units at a higher rate and then reducing the rates, usually in many steps, for units in excess of this quantity.

Two-part Tariff:
This tariff is based on the principles laid down in Art. 50.16. It consists of two parts (i) a fixed charge proportional to the maximum demand (but independent of the units used) and (ii) a low running charge proportional to the actual number of units used.

The maximum demand during a specified period, usually a quarter, is measured by a maximum demand indicator. The maximum demand indicator is usually a watt-hour meter which returns to zero automatically at the end of every half hour but is fitted with a tell-tale pointer which is left behind at the maximum reducing reached during the quarter under consideration.

This type of tariff is expressed by a first degree equation like Rs. A × kW + B × kWh where Rs. A is the charge per annum per kW of maximum demand and B is the price per kWh.

Sometimes, the customer is penalized for his poor load power factor by basing the fixed charges on kVA instead of per kW of maximum demand.