Two-Part Tariff for Electricity Generation

A two-part tariff divides the regulated tariff of a thermal generating station into separate payments for keeping capacity available and for producing electricity. Its two core elements are the capacity charge and energy charge. This structure is commonly used for cost-based regulation because fixed and variable generation costs arise differently.

Regulatory basis

Under the Electricity Act, 2003, tariff regulations are framed according to Sections 61 and 62. The CERC regulates specified central and inter-state generating stations, while SERCs regulate generation within their respective jurisdictions.

The two components

• The capacity charge recovers the annual fixed cost, including depreciation, interest on loan, return on equity, operation and maintenance expenses, and interest on working capital.
• Recovery of capacity charges is linked primarily to the station's declared availability relative to the normative availability, rather than to the electricity actually scheduled.
• The energy charge compensates variable costs, principally fuel consumed in generating electricity. It is calculated by applying the energy charge rate to scheduled ex-bus energy.
• The energy charge rate reflects landed fuel cost and normative operating parameters, such as heat rate and auxiliary consumption, under the applicable regulations.

Economic logic and incentives

The structure separates the cost of maintaining generation capacity from the cost of using it. It permits fixed-cost recovery when a plant remains available even if it is not dispatched, while merit-order dispatch can compare stations mainly by their variable energy charges.

• Fuel-price changes are generally reflected through energy charges, subject to regulatory norms.
• Norms for availability and operating efficiency prevent the arrangement from becoming an unconditional reimbursement of every actual cost.
• Consumers may bear capacity charges even during low dispatch because they are paying for the plant's readiness to supply.