TAMIL NADU NATIONAL LAW SCHOOL

TIRUCHIRAPPALLI

ACADEMIC SESSION:
2014-2015

ECONOMICS
PROJECT:
PRICING OF ELECTRICITY

SUBMITTED TO: SUBMITTED BY:

Prof.P.Murugesan

Gunjan Chandavat

1
Acknowledgement

I take the opportunity to express my profound gratitude and deep regards to my

guide Prof.Murugesan for his exemplary guidance, monitoring and constant
encouragement throughout the course of the project. The help and guidance given
by him time to time shall carry me a long way in the journey of life which I will
embark .

I also express a deep sense of gratitude to our Vice Chancellor Prof. N Murugavel
for giving me this opportunity. I am obliged to my parents for showing faith which
helped me in completing the project on time.

Lastly, I thank , my friends for their encouragement without which the assignment
would have not been possible.

2
DECLARATION

I hereby declare that the project entitled Pricing of electricity submitted to

TAMIL NADU NATIONAL LAW SCHOOL is a record of original work and
interpretation drawn therein are based on material collected by me, under the
guidance of Prof.Murugesan.

This project was undertaken as a part of academic curriculum according to college

rules and norms, it has not been submitted to any other institution for any other
purpose.

DATE: 27.4.2015

3
TABLE OF CONTENTS:

CHAPTER 1 - INTRODUCTION 5

CHAPTER 2- REVIEW OF 12
LITERATURE

CHAPTER 3- COLLECTION OF 18
DATA

CHAPTER 4- ANALYSIS 25

CHAPTER 5- CONCLUSION 34

BIBLIOGRAPHY 35

4
CHAPTER 1:
Introduction

India is facing major electricity crises in the recent times. The determination of per
unit of electicity is necessary to be known so that ,we can find out what are the
alternatives which can be used in order to reduce the continuous hike in
electricity .The various costs involved in production of electricity will be dealt in
further chapters.

We know that electricity is need of every individual now a days ,nobody can
imagine a life without it . That is why i have chosen the topic Pricing policy of
electricity.

There is a whole gamut of challenging areas in the power sector that India needs to
address on priority in order to meet its growth targets.

World over the economic growth is driven by energy, either in the form of finite
resources such as coal, oil and gas or in renewable forms such as hydropower,
wind, solar and biomass, or its converted form, electricity. This energy generation
and consumption powers a nation's industries, vehicles, homes and offices. It also
has significant impact on the quality of the country's air, water, land and forest
resources. For growth to be sustainable, it must be both resource efficient and
environmentally-safe.

In India, the demand for electricity has always been more than the supply. The
importance of electricity as a prime driver of growth is very well acknowledged
and in order to boost the development of power system, the Indian government has
5
participated in a big way through creation of various corporations such as, State
Electricity Boards (SEB), NTPC Limited, NHPC Limited and Power Grid
Corporation Limited (PGCL), etc. However, even after this the country is facing
power shortage.

There are many problems faced by the power sector and these need to be
addressed. One of the issues plaguing the power sector in a big way is shortage of
equipment. This has been a significant reason for India missing its capacity
addition targets. While the shortage has been primarily in the core components of
Boilers, Turbines and Generators, there has been lack of adequate supply of
Balance of Plant (BOP) equipment as well. There is a shortage of construction
equipment also.

The current power infrastructure in India is not capable of providing sufficient and
reliable power supply. Some 400 million people have zero access to electricity
since the grid does not reach their areas. Another problem is unstable power
supply. There are frequency fluctuations caused by load generation imbalances in
the system and this keeps happening because consumer load keeps changing.
Frequency is the most crucial parameter in the operation of AC systems. The rated
frequency in India is 50.0 Hz. While the frequency should ideally be close to the
rated frequency all the time, it has been a serious problem in India. Poor power
quality control has knock-on effects on equipment operation, including large-scale
generation capacity.

Equipment damage can, of course, further compromise supply and aggravate the
effects of chronic fuel shortages.

6
To summarize, Indian power sector has made considerable progress in the last
decade and has evolved from a nascent market to a developing market led by
policy reforms and increased private sector participation. Challenges do exist in the
sector, which India has to overcome to evolve from a developing market to a
matured market. Meanwhile, the gap between what can be achieved and what is
currently present, uncovers a number of possibilities and opportunities for growth.

Power crisis may soon hit Asias third-largest economy have spiked in recent
weeks, following a Supreme Court ruling that threatened to cancel more than 200
coal-mining licences belonging to private sector companies, potentially prompting
renewed fuel shortages.

Coal remains Indias most important energy source, supplying more than half of all
power stations. It is also increasingly scarce: stocks are at their lowest level since
2008, with plants responsible for around a third of national capacity holding
supplies of just one week or less.

OBJECTIVES OF STUDY :

1) TO DETERMINE THE COST OF PER UNIT OF ELECTRICITY

AND THE VARIOUS COSTS INVOLVED.
2) TO FIND OUT LEGAL OBLIGATIONS IN FORMATION OF A
COMPANY.
3) TO DETERMINE THE INCREASING DEMAND FOR
ELECTRICTY.

7
CHAPTERISATION:

Chap1-Introduction,Chap2- Reviw of Literature, Chap3-Collection of Data,

Chap4-Data Analysis,Chap4-Conclusion,Bibliography

My study will focus on what all factors determine the price of electricity and
the ways to reduce continuous hike in tariff. So, that it is available to all or its
use without any discrimination.

Limitations:

We have limited resources , money and time .So we have tried to bring out the best
using the available resources and arrived at a conclusion.

CHALLENGES IN THE POWER SECTOR

As the Indian power sector is embarking on increasing the generation and

transmission capacities, key challenges lie ahead which also resulted the historical
underperformance
India has historically failed to meet its power sector targets by a significant margin
and with tremendous opportunities ahead, the power sector continues to be affected
by the shortfall both on generation as well as transmission side. For example, for
the current installed capacity of around 152 GW, the inter-regional transmission
capacity is only about 20 GW (13 percent of the installed capacity). The various
proposals in generation and transmission are currently under different
implementation stages. However, the power sector in India has been plagued with a
set of problems for meeting the planned targets. Although measures have been

8
defined by the policymakers and stakeholders in a sense of complacency that the
issues will indeed be resolved and India will plug the supply deficit of power to
resolve the same but looking at the past record, it can be estimated that the
resolution measures may not be implemented

The biggest indicator of a poor track record is the inability to meet targets on the
power generation capacity additions
Fuel Availability
While additional gas supply from KG Basin has eased shortage to a limited extend,
supply constraints for domestic coal remain and are expected to continue going
forward. Consequently, public and private sector entities have embarked upon
imported coal as a means to bridge the deficit. This has led to some Indian entities
to take upon the task of purchasing, developing and operating coal mines in
international geographies. While this is expected to secure coal supplies it has
again thrown upon further challenges. For example, the main international market
for coal supply to India Indonesia, poses significant political and legal risks in
the form of changing regulatory framework towards foreign companies. Similarly,
coal evacuation from mines in South Africa is constrained by their limited railway
capacity and the capacity at ports is controlled by a group of existing users making
it difficult for a new entrant to ensure reliable evacuation9. In this case it is
essential to manage the risk of supply disruption by different options like
diversification of supply, due diligence on suppliers, unambiguous contracting and
strict monitoring among others. The failure to achieve the planned target from the
captive coal blocks presents itself as a major challenge to the power sector, as only
24 blocks have become operational out of the total 210. Experts believe that the
non-operational status of majority of these blocks is attributed to land acquisition
(R&R) issues, permit delays and infrastructure problems10. In addition, the
9
developers who have been given the charge of captive blocks are not putting
diligent efforts to expedite the mining operations due to their lack of experience in
coalmine development. Coal is the mainstay of the power production in India and
is expected to remain so in the future. Additional power generation is likely to
require incremental amount of coal transportation by Indian Railways within the
country and increasing unloading at ports in India for imported coal. In both cases
India currently faces capacity shortage. Hence, a project developer has to account
for and manage its logistics chain in a manner that minimizes disruption to its fuel
supply. In many cases this is likely to involve self development of relevant supply
infrastructure which poses additional project execution complexity for the
developer. For example, some imported coal based power plants are also forced to
set up an unloading jetty for coal carrying shipping vessels. This has to be ensured
before the commissioning of a power plant which requires an alternate set of
project execution skills in the port sector.

It is evident that the deficit in power availability in India is a significant

impediment to the smooth development of the economy. In this context, bridging
the gap in demand and supply has become critical and consequently, large projects
are being undertaken in different segments of the sector; Generation, Transmission
and Distribution. As India has not witnessed such a large scale of implementation
before, there is a need to review and enhance project execution capabilities to help
ensure targets are met. This strongly necessitates employing a comprehensive
project management structure to address the major challenges of the power sector
projects and to be able to deliver them as per the planned targets. Historical records
also indicate the presence of a weak project management structure which does not
assess all the key project aspects

10
So, we will bring out ways to eliminate the power crises which are prevailing in
india, through understanding the costs and pricing of it , as well as the resources
available.

11
CHAPTER-2 : REVIEW OF LITERATURE

This chapter includes the previous researches done by any individual or

organisation in the similar field.
Although not very similar studies have been done previously in area.Two research
studies have been mentioned below.

JSW steel waste gas use how company accounting tricks ensnare the EBJindal
South West Steel (JSW Steel), before 2005 Jindal Vijayanagar Steel, is operating
alarge integrated steel plant at Vijayanagar in the state of Karnataka. Current
capacity is 2.5million t per year which is being expanded to 4 million t in 2006.
Further expansion to 10million t is scheduled in the near future.
JSW Steel and its affiliate JSW Energy (formerJindal Thermal Power Company
Limited) have developed three CDM Project DesignDocuments for large scale
waste heat recovery projects. All projects use the consolidatedbaseline
methodology ACM 4, have been supported by the consulting
companyPricewaterhouseCoopers (PwC) and are validated by SGS.The first
project Use of waste gas use for electricity generation at Jindal Thermal
PowerCompany Limited (JTPCL) was submitted on September 23, 2005. It
relates to a 260 MWpower plant with two units partially fired by gases from the
Corex iron smelting process.Imported coal is used for co-firing and about 50%

of the power is sold to Karnataka PowerTransmission Corporation Limited

(KPTCL). Annual emission reductions are estimateat1.3 million CERs. The 10
year crediting period started in January 2001. The plant wasoriginally owned by
Tractebel. Its plant load factor reached 84% in 2001, 96% in 2002-04while falling
back to 86% in 2005 due to lower electricity demand. The share of coal

12
reached30% in 2002-2004 but rose to 65% due to commissioning of the second
project that has thepriority in using Corex waste gases. CER volumes would be
reduced accordingly.Electricity generation from COREX gases was always a key
element of the project investment(this is a well known fact in India) and thus the
assertion that "during March 2001, JTPCLmanagement took the decision for the
current project activity" is blatantly wrong.Moreover, the first tranche (130 MW)
of the project started production well before 2000and thus that tranche is not
eligible for the CDM. The CDM has a cut-off-date of Jan. 1, 2000; projects that
started before that date are noteligible. According to Ghorai et al. (2001) the first
Corex plant for iron smelting as well asthe first 130 MW unit of the power plant
was operational in August 1999. The second unitfollowed in mid-2000. According
to the documents available in the plant, the planningprocess for using Corex gas in
the power plant already started in the mid-1990s. KarnatakaPollution Control
Board (KPCB) approved the use of 80% of Corex gases and 20% coal in thepower
plant on March 6, 1996. While the plant was standing in 1999, it was only fired by
coal.

The first Corex waste gas was fired on January 28, 2000. So eligibility depends on
theinterpretation of project start date. If the power plant commissioning date is
used, the projectwould not be eligible; if the first operation of the process (i.e. gas
firing) is used, the projectwould pass the test.Overall, the argument about the role
of CDM in decision on investing in the tank seemssound and the timeline is
convincing. One could not have asked the companies to startwriting CDM
project documentation before the ink on the Marrakech Accords was dry.However,

13
it is surprising that local stakeholder consultation was only done on April, 7,
2005despite the rules on stakeholder consultation being clear from 2002 onwards

Under normal circumstances, use of waste gases instead of imported coal should
reduce thecosts of power production, making the power plants the commercially
most attractivealternative for power production. This is confirmed by Ghorai et al.
(2001): More than 40% ofthe total energy input in the COREX process is
subsequently available as a valuable export gas.COREX export gas can be used for
the generation of electricity, enabling the steelworks to berun independently of
external electricity supplies. The economy of the process istherefore improved
strongly when this export gas can be put to use. According to the plantoperators,
coal-fired power costs 4.5 ct/kWh; so the investment in the gas storage tank
paysoff after just 100 GWh of electricity produced from Corex gas.

JSW Energy now cleverly avoids a reduction of its electricity sales price this by
asking JSWSteel to charge a price for delivery of Corex gas which is equivalent to
the coal price in termsof energy content. Such a price can be charged according to
the rules defined by CentralElectricity Authority. Obviously this means that JSW
Steel increases its profits due to the sale ofthe Corex gas while JSW Energy
increases its costs accordingly; the total cost level at the JSWcompany group
level remains unchanged. Thus the validators conclusion This meant thatthere
was no incentive for JTPCL to invest in additional equipment to facilitate the
burningof the COREX gases is incorrect from a JSW company group standpoint
where the cheapestoption is to maximize use of Corex gas.While a request for
review was launched by the EB, the project was allowed to get registeredafter an
insubstantial correction (making clear the link to the other two projects). It has
14
thusbecome a key precedent for allowing large non-additional energy efficiency
projects in theCDM.(Clean Development Mechanism).

This was done by INTERNATIONAL JOURNAL OF ADVANCED

RESEARCH IN MANAGEMENT AND SOCIAL SCIENCES

2) Factors influencing electricity price in competitive market

The role of a power exchanges is to match supply and demand of electricity so as

to determine the market
clearing price (MCP) or the spot electricity price. Factors influencing Electricity
Prices can be classified under a)
Fundamental factors like price of fuel (i.e., Coal, oil, gas), weather conditions,
temperature, precipitation,rainfall, time indices such as day of the week, month of
the year, season of the year and the cost of production of
electricity per unit. b) Operational factors like electricity load electricity production
levels (deficit/surplus),
power transmission congestion in the grid, power system operating condition and
also network maintenance. c)Strategic Factors like power market design, power
purchase agreements, bilateral contracts between power
market participants, Power Exchange and bidding strategies adopted by market
players. d) Historical factors likeprices and demand.

Factors influencing Electricity Prices

Fundamental Factors
Fuel Prices
15
 Temperature
Weather Conditions
Time indices such as day of the week,
month of the year, season of the year
Cost of production of electricity per
unit
Operational Factors
Power Transmission
Congestion
Power System Operating
condition
Electricity production
(deficit/surplus)
Network Maintenance
Electricity Load
Strategic Factors
Power Purchase
Agreements
Bilateral Contracts
Power Exchange
Bidding Strategy
Market Design
Historical Factors
Price, Demand
Summary of the research:

16
Electricity, like any other commodity, can be bought, sold and traded at market
rates. Many developing and developed nations around the world have embraced
power market deregulation and liberalization with an objective of introducing
competition. In the present study, we have investigated the factors which determine
electricity prices in competitive power markets and reviewed the important factors
to be considered while modelling and forecasting electricity prices. We have also
addressed the issue of electricity spot price pre-processing techniques to be
employed before modeling and forecasting spot electricity prices. The results ofthe
study highlight factors influencing electricity prices which can be considered for
modeling electricity prices and gives a new perspective for entrepreneurs and other
power market participants to look at power trading sector, which, till 1990s, had
been a bastion of technical expertise, but now, has stakeholders from all sections
of society and businesses. With a growing influx of investments related to energy
for securing energy supply particularly in this most important man-made
commodity, investments in energy commodities by investors as anew asset class
and the fact that many financial experts have stepped into energy trading due to
deregulation,liberalization of electricity markets and introduction of power/energy
exchanges around the world, we believe,energy trading is all set to catapult to a
new level and the separation between technical business and financialservice will
shrink even further in days ahead

This was done by Department of Finance, IBS Hyderabad, IFHE University,

India
Correspondence: Girish, G. P., Department of Finance, IBS Hyderabad, IFHE
University, India

17
CHAPTER-3: COLLECTION OF DATA
Year of Per Unit Per Unit Per Unit Per Unit Per Unit Per Unit Per Unit Levelise
Operation Interest on Depreciation Return on O&M Interest on Energy Generation Tariff
Loan Charge Equity Expense Working Charge at Charges
Charge Charge Charge Capital Bus Bar

1 0.88 0.59 0.63 0.24 0.09 0.60 3.02 3.07

2 0.85 0.59 0.63 0.26 0.09 0.64 3.04 3.07
3 0.77 0.59 0.63 0.27 0.09 0.67 3.02 3.07
4 0.69 0.59 0.63 0.29 0.09 0.71 2.99 3.07
5 0.61 0.59 0.63 0.30 0.09 0.75 2.97 3.07
6 0.53 0.59 0.63 0.32 0.09 0.80 2.95 3.07
7 0.45 0.59 0.63 0.34 0.09 0.85 2.95 3.07
8 0.37 0.59 0.63 0.36 0.10 0.90 2.93 3.07
9 0.29 0.59 0.63 0.38 0.10 0.95 2.93 3.07
10 0.21 0.59 0.63 0.40 0.10 1.01 2.93 3.07
11 0.13 0.59 0.63 0.42 0.10 1.07 2.94 3.07
12 0.05 0.59 0.63 0.45 0.10 1.13 2.94 3.07
13 0.00 0.23 0.78 0.47 0.11 1.20 2.79 3.07
14 0.00 0.23 0.78 0.50 0.11 1.27 2.88 3.07
15 0.00 0.23 0.78 0.53 0.11 1.34 2.99 3.07
16 0.00 0.23 0.78 0.56 0.11 1.42 3.10 3.07
17 0.00 0.23 0.78 0.59 0.11 1.51 3.22 3.07
18 0.00 0.23 0.78 0.62 0.12 1.60 3.35 3.07
19 0.00 0.23 0.78 0.66 0.12 1.69 3.48 3.07
20 0.00 0.23 0.78 0.70 0.12 1.79 3.62 3.07
21 0.00 0.23 0.78 0.74 0.13 1.90 3.77 3.07
22 0.00 0.23 0.78 0.78 0.13 2.01 3.93 3.07
23 0.00 0.23 0.78 0.82 0.13 2.13 4.10 3.07
24 0.00 0.23 0.78 0.87 0.14 2.26 4.28 3.07
25 0.00 0.23 0.78 0.92 0.14 2.39 4.47 3.07

1) HOW PRICE IS DETERMINED PER UNIT OF

ELECTRICITY?

18
 5.00
4.50
4.00
3.50
3.00
Tarif
2.50
Levelised tarif
2.00
1.50
1.00
0.50
0.00

About JSW Energy True to JSW values, JSW Energy believes

in the efficient utilization of all available resources. Our goal is to

become a leading full-service integrated power company in the Indian

power sector with a presence across the value chain.

The company was one of the earliest private entrants into the power sector after the
liberalisation in the 1990s. By managing our operations, enhancing social and
economic benefits, minimizing environmental impact and employing cutting age
innovation, JSW Energy has consolidated its place at the top of the ranks

19
 One of Indias premier integrated power companies, JSW Energy produces
3,140MW of power, with a capacity of another 8,630MW under implementation
and development. We envision achieving 11,770MW in power generation. With
transparent operations, stringent corporate governance norms and a clear vision
JSW Energy is setting benchmarks in the power sector

The Companys presence extends across several Indian states and includes stakes
in natural resource companies in South Africa. JSW Energy is a full-spectrum
integrated power Company with presence across the power value chain.

Power generation
Power transmission
Mining
Power Plant equipment manufacturing
Power trading

The ability to leverage opportunities, technologies and competencies to set up

greenfield projects rapidly and efficiently, makes JSW unique. This allows us to
aggressively mine new opportunities for growth.

The companys strategic approach to expansion, ensuring diversity in geographic

locations, fuel sources and power off-take arrangements, helps de-risk the business.
During the last 4 years JSW Energy has enhanced the power generation capacity
from 260MW to 3140MW.

Power generation: Incorporated in 1994, JSW Energy began commercial

operations in 2000, with the commissioning of its first 260MW thermal power

20
plant at Vijayanagar, Karnataka. Since then, the Company has grown rapidly in
terms of both size and scope.

The Vijayanagar plant produces 860MW of power. The company have set up a
1,200MW imported coal-based thermal plant in Ratnagiri, Maharashtra. Our
wholly owned subsidiary, Raj WestPower Ltd operates the 1,080MW lignite-based
thermal power plant in Barmer, Rajasthan. The company has also identified
projects which are under implementation and development phase in Himachal
Pradesh, Chhattisgarh, Jharkhand, West Bengal, Karnataka, Maharashtra and
Rajasthan.

JSW Energy is one of the most efficient power generation companies in India. Our
plants are the industry benchmark for the high plant load factor achieved, which is
a measure of efficient capacity utilisation. The Vijayanagar plant has been awarded
the Best Operating Power Plant by the Ministry of Power in 2012 for the fifth
consecutive year. Our competitiveness is reflected in our high rate of returns and
the profitability of our commercial operations.

The Vijayanagar plant comprises of two separate business units

SBU I: Consists of two units of 130MW each, commissioned in 2000. The plant is
designed to operate on dual fired boiler using imported coal and waste gas
generated from the JSW Steel plant in Vijayanagar. It is the first of its kind in India
which is operating on multi fuel technology of any combinations. The 2X130MW
units have set standards for the rest of the country in the area of operation. The
units have emerged as some of the most efficient operating plants in India and
maintain the highest standards in the power sector.

21
SBU II: Comprises two units of 300MW each, which became operational in 2009.
The units run on imported coal. For operational efficiency, they use a blend of coal
from different sources that help boost cost effectiveness. The Central Electricity
Authority (CEA) has rated the units as some of the most efficient plants in the
country.

LEGAL FORMALITIES:

22
Before starting a new company it is required to register with the Registrar Of
Companies ( ROC ) which is under The Ministry of Corporate Affairs (MCA),
Government of India. There will be penalties for failures in making returns. For a
public limited company, all details of the company are available for public
inspection so there can be no secrecy. As the director, you will be treated as an
employee and is entitled to pay tax.

As compared to a Public Limited Company, Private Limited Company has less

agreement constraints. Private Limited Company is the best choice when there is
no need of elevating investments through a public issue and the proprietorship is
projected to be strictly owned by limited number of persons.
The minimum paid up capital at the time of incorporation of a private limited
company is Rs 1,00,000/- and there is no upper limit on having the authorized
capital and the paid up capital. This can be enhanced at any time by making
payment for additional stamp duty and registration fee.
Procedures.

The first step in company registration is submitting an application in Form No. 1A

with the Registrar of Companies (ROC) in the concerned state in which the
Registered Office of the proposed Company is / to be situated. The application is
to be signed by any of the promoters.

very public limited company should appoint a qualified auditor. The auditor's duty
is to check and report to the treasurer about the books of the company, the balance
sheet, profit and loss account etc are a true and reflects a fair view of the
company's affairs and also its compliance with the Companies Act. Auditors are
appointed or re-appointed at general meetings at which annual accounts are

23
presented, and they hold office from the conclusion of the meeting until the next
general meeting.

Companies Act lays down strict rules on accounting that all companies are
supposed to maintain a set of records, which reflects the financial position of the
company with accuracy. A company's first accounting period begins on its
incorporation until the following financial year ending (31st March). Within ten
months of the end of an accounting period, an audited set of accounts must be laid
before the shareholders at a general meeting and a set delivered to the registrar of
companies.

In addition to the accounts books, companies are required to have the following
registers:

Register mentioning its members and share ledger

Register of directors and secretaries
Register of share transfers
Register of charges
Register of debenture holders

All companies must have and use engraved seal. It must be impressed on share
certificates and should be used whenever the company needs to execute a deed.
Again, it is included in the ready-made company package.

If application for registration is done through internet with e-forms, everything

should go with the digital signature, requisite fees and also the hard copy of
Memorandum and Article of Association should reach to the RoC. Many problems
which earlier related to registration of a Company in India have been substantially
cut down with better and user friendly processes.

24
CHAPTER 4:

ANALYSIS OF DATA

Here secondary data has been used in the project, for analyzing the cost of
electricity in Jindal Power Plant.

Secondary Data:

Secondary data is the data that have been already collected by and readily available
from other sources. Such data are cheaper and more quickly obtainable than the
primary data and also may be available when primary data can not be obtained at
all.

Advantages of Secondary data

1. It is economical. It saves efforts and expenses.

2. It is time saving.

3. It helps to make primary data collection more specific since with the help of
secondary data, we are able to make out what are the gaps and deficiencies
and what additional information needs to be collected.

25
 4. It helps to improve the understanding of the problem.

5. It provides a basis for comparison for the data that is collected by the
researcher.

Disadvantages of Secondary Data

1. Secondary data is something that seldom fits in the framework of the

marketing research factors. Reasons for its non-fitting are:-

a. Unit of secondary data collection-Suppose you want information on

disposable income, but the data is available on gross income. The
information may not be same as we require.

b. Class Boundaries may be different when units are same.

Thus the data collected earlier is of no use to you.

2)Accuracy of secondary data is not known.

3)Data may be outdated.

Evaluation of Secondary Data

Because of the above mentioned disadvantages of secondary data, we will lead to

evaluation of secondary data. Evaluation means the following four requirements
must be satisfied:-

1. Availability- It has to be seen that the kind of data you want is available or
not. If it is not available then you have to go for primary data.

26
 2. Relevance- It should be meeting the requirements of the problem. For this
we have two criterion:-

a. Units of measurement should be the same.

b. Concepts used must be same and currency of data should not be

outdated.

3. Accuracy- In order to find how accurate the data is, the following points
must be considered: -

a. Specification and methodology used;

b. Margin of error should be examined;

c. The dependability of the source must be seen.

4. Sufficiency- Adequate data should be available.

PRECAUTIONS WHILE USING SECONDARY DATA:

The investigator should take precautions before using the secondary data. In this
connection, following precautions should be taken into account.

1. Suitable Purpose of Investigation: The investigator must ensure that the data are
suitable for the purpose of enquiry.

2. Inadequate Data: Adequacy of the data is to be judged in the light of the

requirements of the survey as well as the geographical area covered by the
available data.

27
3. Definition of Units: The investigator must ensure that the definitions of units
which are used by him are the same as in the earlier investigation.

4. Degree of Accuracy: The investigator should keep in mind the degree accuracy
maintained by each investigator.

5. Time and Condition of Collection of Facts: It should be ascertained before

making use of available data to which period and conditions, the data was
collected.

6. Comparison: Investigator should keep in mind whether the secondary data'

reasonable, consistent and comparable.

7. Test Checking: The use of the secondary data must do test checking and see that
totals and rates have been correctly calculated.

8. Homogeneous Conditions: It is not safe to take published statistics at their face

value without knowing their means, values and limitations.

Now, we will analyse the data which we have collected and look into the various
factors which determine the pricing of electricity in any power plant.

Steps in pricing policy:

setting a pricing strategy and policy for products/services for the first time when
you develop it or when you introduce product / service into a new geographical
area, can be a big headache. Reason being, that price is not just a tag on the
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 product or service, it communicates to your customers your businesss intended
value positioning and also determines your profitability.

When setting a pricing strategy you have to consider the following 6 factors;

1. Select the pricing objective to decide where you want to position your market
offering. The five major objectives that you can pursue are survival, maximum
current profit, maximum market share, maximum market skimming or product
quality leadership. Having a clearer objective makes it easier to set a price.

2. Determine the demand. The price you set will affect the demand level and
impact your business objectives differently. In normal situations, price and demand
are inversely related, in that the higher the price the lower the demand and vice
versa.

3. Estimate the costs. While doing this, you want to charge a price that covers your
cost of production, distribution and selling of the product plus a decent return for
your efforts and risks.

4. Analyze competitor costs, prices, offers and possible reactions. You should
consider your nearest competitors price, product features and evaluate them to
check their worth to the customers. You can then decide to charge more, same as
competitor or less.

5. Select a pricing method. When selecting, consider the cost of the product or
service, competitor prices and the customers assessment of the unique features.
The pricing method you decide should include one or more of these considerations.
6. Finally, select the price. Here, you must consider the following: 1) Impact of
other marketing activities like brand quality and advertising in relation to

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competition.2) Companies pricing policy, 3) Impact of the price on other parties
like the distributors and dealers.

Price is not just a number on your product or service, it produces revenue and can
determine if you reap in huge profits or suffer losses. Effective designing and
implementation of a pricing strategy is thus important for your profitability.

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VARIOUS COSTS INVOLVED IN PRICING OF ELECTRICITY

Fixed Cost

Fixed costs recovered from consumers can be organized under the following five
major heads.

O&M Costs: Operating and Maintenance costs cover the cost of repairs of
transmission and distribution lines, meters, transformers or power stations. The
routine operation and essential maintenance expenses are charged to this head. The
salaries directly attributed to these functions and the cost of jobs contracted out can
also form part of it. The cost of insurance against accidents, natural calamity etc
payable in the form of annual installments is included under O&M head or shown
under a separate head. All these costs are recovered from consumers through tariff
in the same year.

Return (Profit) on Equity: It is legitimate for the project owner to seek a profit on
his equity. For the most private projects in the past, the allowed profit varied
between 12 to 30 % of the equity amount. This is directly recovered from the
consumers through the tariff. This charge remains till the project remains in
operation. The recent regulatory orders indicate a base return on equity around 12-
14 %. But actual profitability can vary depending upon the performance linked
incentives / disincentives

Income Tax The income tax of the utility on the base return (profit excluding
incentive) is a pass through implying that it is recovered through tariff. Hence the
consumers pays not just utility profits but also tax on the profit.

Interest on Loan The project owner has to pay the interest on loan taken to
construct the project. The interest burden goes on reducing as the principal amount

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of loan is repaid and finally vanishes along with the loan. Interest payment
expenses are also directly recovered from the consumers in the same year.
Therefore, for consumers it is important that the power project gets a low interest
loan so that this charge is low.

Repayment of Loan / depreciation Loan repayment is a cost to the project and is

paid through tariff. However, accounting norms do not allow this to be charged
directly to the tariff, but use a concept called depreciation. Depreciation measures
the reduction of value of an asset due to aging and use. Towards the end of the life
of an asset, the asset value drops to a negligible amount. Depreciation is recovered
through the life of the equipment, and hence the longer the life, the less the
depreciation per year. Therefore, the rate depreciation is different for different
equipment or assets. Depreciation is calculated as a percentage of cost of assets
and this percentage is called allowed rate of depreciation. The repayment period
of loans availed by private sector projects is shorter (8 to 10 years) compared to
that of government loans availed by SEBs (15 to 20 years).

Cost of Working Capital The last and relatively small component of fixed cost is to
cover the cost of obtaining working capital. The spares or the stored fuel are
funded through working capital. The owner of the project can charge interest on
the working capital in the tariff.

Variable cost Variable cost is a significant cost for fuel based (coal, naphtha,
furnace oil, diesel, LNG, CNG etc) power projects. Fuel cost is dependent on the
unit price of the fuel, specific fuel consumption, actual generation of the plant or
PLF (Plant Load Factor). Hence, this cost is a variable cost. In some situations,
part of O&M cost is also linked to usage of plant or equipment. This is can also
form part of variable cost.

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The fixed and variable costs have to be recovered from consumers through tariff.
All costs are clubbed and divided by the useful output to arrive at the tariff of that
project.

The costa are calculated with taking into consideration of 1st year.

Here in this the fixed costs accounts to 2.1 and the variable cost to 0.93

Hence the total cost arrives at: 3.03 ( This is nominal tariff)

The levalised Tariff is :3.07

The selling price ranges from 5.25 to 5.50 Rs

Where as in the table below the competitors price is shown:

Tariffs

Nominal tariff Discount Tariff Levelized Tariff

Nominal Tariff: The tariff calculated at for each year (fixed cost + variable cost)
Discount Tariff: The tariff calculated at present value of the future tariffs. This is
done by discounting future tariffs by discount rate (given by CERC) Discount
tariff= Nominal tariff x Discount factor Levelized tariff: The tariff calculated for all
years. This is a simple tariff representing the tariffs throughout the plant life. In
concept, this is Weighted Mean of all tariffs with weights as discounting factors.
Nominal Tariffi x Discount RateiLevelized Tariff = Discount Rate i where i
varies from 1 to n. n is the life of plant

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In the above table the price per unit is 5.81 charged by Reliance and 4.24 by Tata
Power.

So, any company in the power sector will determine its per unit price of electricity
by looking at its competitors price though it may be just one or two private
companies there .

The state govt. negotiate with the power producing companies in order to arrive at
at a price at which govt. will purchase electricity and distribute to its users.

The below diagram shows the consumption of electricity by different sectors.

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CONCLUSION:

From the above data collected and analysed we come to the conclusion that the
pricing is affected by many factors such as the price of coal , then other variable
costs.

In Vijaynagar Plant the cost of per unit of electricity is a bit high as compared to
that of plant at Barmer because the coal at Vijaynagar Plant is imported from South
Africa, Brazil and Indonesia where as in Barmer there are mines close by the plant.

Here the transportation charges are also included in the cost.

The pricing method is Mark up price:

They mark up 30% -35% above the cost .

Eg. Cost per unit generation costs Rs.3.03 and sell it to the govt. at Rs.5.25

The difference is the profit which they get.

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BIBLIOGRAPHY:

http://www.npti.in/Download/Distribution/Tariff
%20Determination%20-%20Write%20up.pdf
https://www.google.co.in/?
gfe_rd=cr&ei=Gdk9VZvbLafv8weO4oHADw#q=interest+on+
working+capital+is+fixed+cost+or+variable+cost
http://switchme.in/blog/2014/04/electricity-rates-revised-2014-
reliance-energy-cheaper-than-tata-power/
https://www.dartmouth.edu/~neudc2012/docs/paper_292.pdf
https://www.google.co.in/?
gfe_rd=cr&ei=DU88VfbXBe_V8gfspYDYCw#q=price+of+elec
tricity+per+unit+charged+by+hindalco

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