“Recent Developments in Electricity Business and the Scope for Cost Accountants”

1. “Recent Developments in Electricity Business and theScope for Cost Accountants”

2. Value Chain of Electricity

3. Installed Capacity of Coal & Lignite based Generating Stations in India as on 31.12.2018

4. Region wise – Thermal Stations(Coal/Lignite)

5. Installed Capacity of Central Generating Stations

6. All India – Per Capita Consumption of Electricity 2013-14 to 2017-2018(Source – CEA)

7. The cost of electricity delivered to the end consumer comprises of costs of various components of value chain - energy charges and fixed charges. The energy charges represent equivalent cost of fuel paid by the end consumer coupled with operational efficiency. It comprises the ex-mine cost of coal, taxes & duties on coal, transportation cost, losses of transmission and distribution network. Fixed charges involve equivalent cost of infrastructure paid by the end consumer comprising of the cost of generating station infrastructure, transmission network and distribution network. The cost of electricity delivered at consumer end varies from station to station due to variations of operational parameters of station, state transmission losses and distribution losses

8. In accordance with the powers conferred under Section.178 of the Electricity Act, 2003, the Central Electricity Regulation Commission notifies the Tariff Regulations for determination of; • Generation tariff in respect of the Central Generating Stations like NTPC/NLC and Other Inter State Generating Stations (ISGS) and • Transmission tariff in respect of the Central Transmission Utility (Power Grid) Section.178: Powers of Central Commission The Central Commission may, by notification make regulations consistent with this Act and the rules generally to carry out the provisions of this Act.

9. Draft CERC( Terms and Conditions of Tariff Regulations) 2019

10. Regulatory Framework • The Central Electricity Regulatory Commission has been vested with the responsibility of regulation of tariff of generating companies owned or controlled by the Central Government, generating companies having composite scheme for generation and sale of electricity in more than one state and inter-State transmission systems under Section 79 of the Electricity Act, 2003 (“the Act”) • The Commission has been regulating generation and transmission tariffs by specifying terms and conditions of tariff since 1998. Multi-year tariff regulations have been issued for the tariff periods 2001-04, 2004-09, 2009-14 and 2014-19 for determination of tariff of the generating stations within its jurisdiction and for inter-State transmission of electricity.

11. Regulatory Framework • While framing the regulations, the critical challenge before the Commission is to balance the requirements of objectives of the Tariff Policy and the principles under Section 61 of the Act. • While specifying Terms and Conditions of Tariff, the Commission has endeavoured to balance the interest of consumers, generators and transmission licensees. The terms and conditions of tariff specified by the Commission are also aimed at providing direction to the power sector keeping in view the economic and financial scenario of the country. Regulatory certainty is an integral part of tariff approach. The Tariff should also reflect the changing market condition and macroeconomic parameters. The multi-year tariff principle is followed to maintain certainty, both to the generators and the procurers

12. Components of Tariff for Generation

13. Average Power Purchase Cost at the National Level

14. Notifications Issued by

15. Recent Notifications of the Ministry of Environment, Forest and Climate Change- having a impact on the Tariff • MoEF&CC Notification issued during December 2015 (7.12.2015) mandates the thermal generators for implementation of emission norms for control of SPM, Sox, Nox, and Hg emissions by ESP Upgradation and FGD Installation. • MoEF&CC Notification issued during January 2016 (25.01.2016) mandates the thermal generators to install dedicated ash silos and to transport the fly ash upto 300 kilometres, the cost of transportation beyond the radius of 100 Kms and upto 300 Kms shall be shared equally between the generator and the utilities.

16. Impact due to the Notifications issued by the Ministry of Environment & Forests, Climate Change • It is estimated that approximately Rs.0.85 lakh per MW need to be spent towards installation of emission control system as per directives of MoEFCC, resulting into a increase of approx. 0.11 paise per kwhr. • Similarly, it is estimated that approximately there will be a increase of 0.13 paise per kwhr due to the transportation cost to be incurred in disposal of fly ash upto 300 kms. • Applicable standards – CAS.14- Pollution control cost

17. Draft CERC (Terms and Conditions of Tariff) Regulations, 2019 • In accordance with the provisions laid down under Section.178 of the Electricity Act, 2003, the Central Electricity Regulatory Commission, New Delhi vide its notification dt: 14.12.2018 has notified the Draft CERC (Terms and Conditions of Tariff) Regulations, 2019 seeking comments from the Stakeholders and Interested persons, fixing the last date for submission of comments as 28th January 2019. • A public hearing in this regard is scheduled on 1st February 2019 at New Delhi.

18. Regulations on Installation of Emission Control Equipments • Chapter.3 – Procedure for Tariff Determination Regulation.8(4)- Assets installed for implementation of the revised emission standards shall form part of the existing generation project and tariff thereof shall be determined separately on submission of the completion certificate by the Board of the generating company.

19. Regulations on Installation of Emission Control Equipments • Regulation.9 – Application for determination of tariff • 9(3) -In case of emission control system required to be installed in existing generating station as per revised emission standards, the application shall be made for determination of supplementary tariff (fixed charges or variable charge or both) based on the actual capital expenditure duly certified by the Auditor; • Auditor – Chapter.X- Section.141(1) of Companies Act, 2013

20. Definition for Auditor as per Draft CERC (Terms and Conditions of Tariff) Regulations, 2014 • Regulation.3(6) – Auditor “Auditor” means an auditor appointed by a generating company or a transmission licensee, as the case may be, in accordance with the provisions of Sections, 224, 233B and 619 of the Companies Act, 1956 (1 of 1956), as amended from time to time or Chapter.X of the Companies Act, 2013 (18 of 2013) or any other law for the time being in force.

21. Regulations on Installation of Emission Control Equipments • Chapter.4 – Tariff Structure Regulation.14- Components of Tariff 14(2) - The supplementary fixed cost for additional capitalization on account of implementation of revised emission standards in the existing generating station or new generating station, as the case may be, shall be determined by the Commission separately;

22. Regulations on Installation of Emission Control Equipments • Chapter.29 – Additional Capitalisation on account of Revised Emission Standards • Regulation. 29(3) - Where the generating company makes an application for approval of additional capital expenditure on account of implementation of Emission Control Standards, the Commission may grant approval after due consideration of the reasonableness of the cost estimates, financing plan, schedule of completion, interest during construction, use of efficient technology, cost-benefit analysis, and such other factors as may be considered relevant by the Commission.

23. Regulations on Installation of Emission Control Equipments • Regulation.29(4) - After completion of the implementation of revised emission standards, the generating company shall file a petition for determination of tariff. Any expenditure incurred or projected to be incurred and admitted by the Commission after prudence check based on reasonableness of the cost and impact on operational parameters shall form the basis of determination of tariff.

24. Regulations on Disposal of Fly Ash • Chapter.6 – Computation of Capital Cost Regulation.18(3) – The Capital Cost of an existing Project shall include the following; • Xxxx • Xxxx • Xxxx • Capital expenditure on account of ash disposal including handling and transportation facility Applicable- CAS.5 Average Cost of Transportation.

25. Regulations for determination of price of Coal from Integrated Mines • Earlier, the Coal price have been determined by the prime agencies like Coal India, with whom the Generators have signed Fuel Supply Agreement. • Now, as per the proposed Draft Tariff Regulations, 2019, CERC will determine the Fuel price (Coal) for the Coal / Lignite excavated from Integrated Mines. • Commission has also proposed to issue a separate Regulations for determination of Fuel Price from Integrated Mines.

26. Regulations for determination of price of Coal from Integrated Mines • Regulation. 8(5) • Variable charge component of Tariff of the generating station sourcing coal or lignite from the integrated mine shall be determined based on the input price of coal or lignite, as the case may be, from such integrated mines: • Provided that the generating company shall maintain the account of the integrated mine separately and submit the cost of integrated mine, in accordance with these regulations, duly certified by the Auditor.

27. Regulations for determination of price of Coal from Integrated Mines • Regulation. 9(4) • Where the generating company has the arrangement for supply of coal or lignite from the integrated mine(s) to one or more of its generating stations, the generating company shall file a petition for determination of the input price for the variable cost along with the tariff petitions for one or more generating stations in accordance with the provision of Chapter 9 of these regulations;

28. Regulations for determination of price of Coal from Integrated Mines • Regulation. 9(4) • Provided that the input for variable cost based on the integrated mines shall be re-determined on achieving the target capacity as per progressive mine plan based on the capital expenditure incurred upto the date of target capacity and additional capital expenditure incurred or projected to be incurred duly certified by the Auditors for the respective years of the tariff period 2019-24.

29. Regulations for determination of price of Coal from Integrated Mines • Regulation. 14(3) • The energy charge of the generating station shall be determined in accordance with the provisions of Chapter 11 of these Regulations. The input price of coal or lignite from the integrated mine shall form part of energy charge of the generating station.

30. Regulations for determination of price of Coal from Integrated Mines • Chapter.9 – Computation of Capital Cost of Integrated Mines and Input Price. • Regulation.36 – Input Price for Variable Charges Regulation 36(1) - Where the generating company has thearrangement for supply of coal or lignite from the integrated mine(s) allocated to one or more of its generating stations as end use project, the variable charge component of tariff of the generating station shall be determined based on the input price of coal or lignite, as the case may be, from such integrated mines in accordance with these regulations. For this purpose, the generating company shall maintain the account of such integrated mine separately.

31. Regulations for determination of price of Lignite from Integrated Mines Regulation 36(3) - The input price of lignite from the integrated mine shall be determined by the Commission for which appropriate regulations shall be notified separately. Till such time, the Commission shall continue to adopt the guidelines specified by the Ministry of Coal, Government of India.

32. Regulations for determination of price of Coal/ Lignite from Integrated Mines Regulation 38 – Application for determination of Input Price. 38(1) - The generating company shallfile a petition before the Commission for determination of the input price for the variable cost along with the tariff petitions for one or more generating stations in accordance with the provisions of these regulations.

33. Regulations for determination of price of Coal/ Lignite from Integrated Mines Regulation 38 (2) The generating company shall submit the details of capital expenditure and additional capital expenditure incurred and projected to be incurred duly certified by the Auditor, wherever applicable.

34. Regulations for determination of price of Coal/ Lignite from Integrated Mines Regulation 39 – Capital Cost 39(1) - The Capital cost for development, operation and closure of theintegrated mine, shall be determined by the Commission after taking into account the approved mining plan, detailed project report, capital expenditure incurred, additional capital expenditure projected to be incurred, mine closure plan, cost audit report.

35. Regulations for determination of price of Coal/ Lignite from Integrated Mines Regulation 39 – Capital Cost • 39(2) The expenditure incurred for development of the integrated mine by the generating companyupto date of commercial operation shall be considered for the purpose of capital cost and the expenditure incurred after the date of commercial operation till the date of achieving target capacity shall be treated as capital work in progress (CWIP) and shall be capitalized on year to year basis as additional capital expenditure corresponding to the coal production level specified in the progressive mining plan or actual production, whichever is higher;

36. Regulations for determination of price of Coal from Integrated Mines Regulation 41 – Additional Capitalisation after date of target capacity The capital expenditure, inrespect of the integrated coal mine of generating station incurred or projected to be incurred, within the scope of production plan, after the date of achieving target capacity, may be admitted by the Commission, subject to prudence check.

37. Regulations for determination of price of Coal from Integrated Mines Regulation 45 – Determination of Input Price 45(2) - The input price of coal of such generating company whose integrated mine has been brought under commercial operation shall be determined by the Commission, after taking into account the information provide as per Appendix V;

38. Regulations for determination of price of Coal from Integrated Mines Regulation 45 – Determination of Input Price 45(3) - The Commission shall approve the input price per Metric Tonne (MT) after the prudence check and considering the information provided by the generating company as specified in clause (2) of this Regulation.

40. Cost Accounting Standards applicable for Determination of Price of Fuel for both Coal / Lignite from Integrated Mines • CAS.2 – Capacity Determination • CAS.3 – Production and Operation Overheads • CAS.4 – Cost of Production for Captive Consumption • CAS.5 – Average Cost of Transportation • CAS.14 – Pollution Control Cost • CAS.23 – Overburden Removal Cost

41. CAS-2 Cost Accounting Standard on Capacity Determination • This standard deals with the principles and methods of classification and determination of capacity of an entity for ascertainment of the cost of product or service, and the presentation and disclosure in cost statements. The objective of this standard is to bring uniformity and consistency in the principles and methods of determination of capacity with reasonable accuracy. • This Standard dealt with; • Installed Capacity, Normal Capacity, Normal Idle Capacity, Abnormal Idle Capacity and Actual Capacity Utilization.

42. CAS.3 - Cost Accounting Standard on Production and Operation Overheads • This standard deals with the principles and methods of classification, measurement and assignment of Production or Operation Overheads, for determination of the cost of goods produced or services provided and for the presentation and disclosure in cost statements. The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the Production or Operation Overheads with reasonable accuracy. • This Standard dealt with; • Abnormal Cost, Absorption of Production or Operation Overheads, Administrative Overheads, Cost Centre, Cost Object, Fixed Costs, Imputed Costs, Indirect Employee Costs, Indirect Expenses and Indirect Material Cost.

43. CAS.4 - Cost Accounting Standard on Cost of Production for Captive Consumption • Captive Consumption means the consumption of goods manufactured by one division and consumed by another division(s) of the same organization or related undertaking for manufacturing another product(s). The purpose of this standard is to bring uniformity in the principles and methods used for determining the cost of production for captive consumption • This Standard dealt with; • Materials consumed, Direct wages and salaries, Direct Expenses, Work overheads, Quality Control Cost, R&D Cost, Administrative Overheads, value of stock in work-in progress and finished goods.

44. CAS.5 - Cost Accounting Standard on Determination of Average (Equalized) Cost of Transportation • This standard deals with the determination of average transportation cost of a product. The objective of this standard is to bring uniformity in the application of principles and methods used in the determination of averaged/equalized transportation cost. To prescribe the system to be followed for maintenance of records for collection of cost of transportation, its allocation/apportionment to cost centres, locations or products. • This Standard dealt with; • Inward Transportation Cost, Outward Transportation Cost, Freight, Cartage and Transit Insurance.

45. CAS.14 - Cost Accounting Standard on Pollution Control Cost • This standard deals with the principles and methods of classification, measurement and assignment of pollution control costs, for determination of Cost of product or service, and the presentation and disclosure in cost statements. The objective of this standard is to bring uniformity and consistency in the principles and methods of determining the Pollution Control Costs with reasonable accuracy. • This Standard dealt with; • Air Pollution, Environment Pollution, Soil Pollution, Water Pollution, Pollution Control, Interest and Finance charges and Cost of Pollution control activities.

46. CAS.23 - Cost Accounting Standard on Overburden Removal Cost • The standard deals with the principles and methods of measurement and assignment of Overburden Removal Cost and the presentation and disclosure in cost statements. The objective of this standard is to bring uniformity, consistency in the principles, methods of determining and assigning Overburden Removal Cost with reasonable accuracy. • This Standard dealt with; • Mines overheads, Mining Plan, Overburden Removal Cost, Repair and Maintenance Cost and Stripping Activity.

47. Industry’s Expectations from Cost Accountants- Duties and Responsibilities • Cost Auditor has been recognised by the Regulator. • Industry is expecting the Cost Audit Report as good as the financial report. The report of the Cost Auditor should meet out the expectations of the Regulator and help the Regulator in the process of determination of tariff. • Opportunities are infront of the Cost Accountants for comprehensive Cost Audit Report.

48. Industry’s Expectations from Cost Accountants- Duties and Responsibilities • Industry is looking at the Cost Accountants and expects Quality Report from them for determination of fixed and variable cost. • Cost Audit report should be competitive with that of the financial statements. • Certifications must ensure the real picture of the cost associated with a component, so as to help the regulator in bringing down the cost and pass on the benefit to end consumers.

50. Emission control descriptions • ESP – Electro Static Percipitator • SPM – Suspended Particulate Matter • Sox – Sulphur Oxide • Nox – Nitrogen Oxide • SO2 – Sulphur Dioxide • FGD – Flue Gas Desulfurization