Time of Use electricity tariffs for industries and hotels

By Damitha Kumarasinghe

1.Background

In the case of public utilities, the tariffs charge by the service provider (utilities) is always debatable. Consumers always bargain for low tariffs while utility operators do the opposite of increasing the prices for them to keep high margins.

Governments and utility regulators are always in a dilemma on how to balance the contradictory interests among different stakeholders. Sri Lanka Electricity Act No. 20 of 2009 provides a broad perspective in terms of electricity tariffs in Sri Lanka which mandate the electricity tariffs to be cost reflective.

Cost reflectivity alone is a complex issue to explain in case of a network industry. However, in simple terms, anyone who consumes any good or service needs to pay for it. That basic principle is common in the case of electricity industry as well.

Time based pricing, where producers charge different rates for a given good or service depending on the time, day, month, and so on, is common in many industries. For an example in the tourism industry charges higher prices during the peak season. The same principle is used in the electricity industry in the case of designing tariffs rates.

It is recognised that Time of Use (TOU) Tariffs plays a vital role as a demand side management measure in electricity industry. Under TOU tariffs, the rates are pre-set for a specific time period and known to consumers in advance.

TOU tariffs are used as a means of incentivising consumers to shift fully or partially their loads/consumption, from peak times to other possible times periods, thereby reducing the demand on the system during the peak period. This gives the opportunity for consumers to manage their electricity bill simply by shifting their consumption, without avoiding consumption.

Further, TOU tariffs send price signals to consumers that reflect the underlying cost of generating, transmitting and supplying electricity at particular time intervals, and enables resources to be allocated more efficiently.

The Public Utilities Commission of Sri Lanka, the regulator of the electricity industry, has mandated Time of Use tariffs, designed to be implement in three time intervals, for large ‘Industrial’ and ‘Hotel’ customer categories effective from 1 January 2011.

However, considering the practical difficulty of programming the existing meters or installing new meters, a three month transition period was offered to licensees for programming/fixing meters. TOU tariffs are fully effective from 31 March 2011 for all consumers in customer categories of I-2, I-3, H-2 and H-3. The applicable rates were published in the press with the announcement of the tariffs applicable from January 2011, and are available in the commission’s website at www.pucsl.lk.

TOU tariffs are not entirely new to Sri Lanka. This was implemented as Time of Day (TOD) tariffs in two and three parts on voluntary basis by the Ceylon Electricity Board. However, the number of consumers who were under TOD tariffs was less than 10% of the customers who were eligible for TOD tariffs.

2.Electronic metering to measure TOU electricity

Utilities have been looking for a means to match consumption with generation since the inception of market-driven pricing throughout the world. Traditional electrical meters only measure total consumption and as such, do not provide information on when the energy was consumed.

Electronic metering provide an economical way of measuring this information, allowing price setting agencies to introduce different prices for consumption based on the time of use. Therefore, the Ceylon Electricity Board and Lanka Electricity Company (Private) Limited has been mandated to install meters by 31 March 2011 for all customers in the customer categories of I-2, I-3, H-2 and H-3 including customers in General Purpose category GP-2 and GP-3 for data collection purposes, even though GP-2 and GP-3 are not charged TOU tariffs.

3.Electricity consumption pattern

Electricity consumption usually peaks at certain predictable time intervals. Sri Lanka has a load curve with a peak in the night, where starting from about 17.30 hours the load grows slightly above 1,800 MW by 18:30 hours and starts falling after about two and half hours. The maximum demand arises only about two-and-a-half hour period.

From a generation point of view, the peak generators run only two-and-a-half hours per day. The investments of such generation plants also need to be borne by the electricity customers. Hence, reducing the peak demand is the ultimate objective of introducing Time of Use tariffs.

To achieve the desired objective electricity consumers, at least those who have minimum disturbances, should try to fine-tune their demand. Because the benefit of such adjustment will not be limited to lowering their own electricity bill but also as a country, it will eventually reduce the peak demand the cost of which is paid by all electricity consumers.

The load falls to as low as 700 MW in the early morning hours and starts climbing by about 04:30 hours. There is again a morning peak at about 1,200 MW at about 06:00 hours in the morning. The daytime demand is relatively stable with industrial demand at about 1,300 MW.

Hence the time intervals have been introduced in-line with the load curve patterns: Day time 05:30-18:30 hours; peak time – 18:30 to 22:30 hours; off-peak 22:30 to 05:30 hours. It is expected to have an impact of about 100 MW reduction on growing peak demand by mandating the TOU tariffs.

4.The way forward

Some might argue that peak demand is created by the electricity consumption for the domestic purposes and why industrialist and hotel customers alone are incentivised to fine-tune their demand. This is a rational argument.

However, from the holistic point of view, peak consumption is the one that needs curtailment. If not, the cost of supply of such peak demand will be paid by all consumers who will eventually bear the bigger portion than by large consumers, i.e. industrial and hotel customers. Hence, it is rational to start from them as they do have sufficient incentive to adapt their consumption.

Does that mean demand side management should be limited to industrial and hotel customers? The answer is ‘certainly not’. TOU tariffs need to be extended to the other customer categories such as general purpose customers as well in near future.

(The writer is Director General, Public Utilities Commission of Sri Lanka.)