REVISED FINAL REPORT July 2017 Task C: GECOL Institutional dev. and perform. improvement Deliverable 3: • Tariff framework review • Tariff structure set-up and reform pathway • Tools (excel model) development and trainings Disclaimer and copyright note This document has been prepared only for the International © 2017 Bank of Reconstruction and Development ("IBRD") and solely PricewaterhouseCoopers for the purpose and on the terms agreed with the IBRD in our LLP agreement dated 21 March 2017 relating to Task A. All rights reserved. In this The scope of our work was limited to a review of documentary document, 'PwC' refers to the evidence made available to us. We have not independently UK member firm, and may verified any information given to us relating to the services. sometimes refer to the PwC network. Each member firm We accept no liability (including for negligence) to anyone else is a separate legal entity. in connection with this document. 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Strategy& | PwC Prepared for The World Bank The focus of this report is the phase 3 of Task C, focused on the financial performance assessment and financial models Focus of this report Focus of this report 1 2 3 4 5 Financial performance Customer service Project set-up / Institutional Review and final assessment & performance Inception report Development report financial models improvement 1.1 2.1 Strategy for 3.1 4.1 Improving financial 5.1 Tariff framework Findings review and Data collection institutional performance of review final report development customer service 1.2 2.2 Process mapping & 3.2 4.2 Methodology, team and Tariff structure identification of gaps in Improving technical approach validation set-up and reform staff, skills, perform. performance pathway 2.3 3.3 Manpower / org. Tools (excel model) rationalization review and trainings 2.4 ERP System review 6 Workshop & Training 7 PMO (progress reporting) Source: Task C inception report Strategy& | PwC Prepared for The World Bank 1 The deliverables have been combined in a comprehensive presentation and an excel-based toolkit for tariff design Approach for new tariff structure set-up 3.1 3.2 3.3 Tariff framework review Tariff structure set-up Tools (excel model) and reform pathway and trainings New tariff Training Excel-based Current tariff design process Multi-stage tariff Cost to serve material and tariff design framework and decisions reform roadmap user guide toolkit required Focus of current presentation Excel file Task C Phase 3 – Financial performance assessment and financial models End of July Final deliverable Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 3 Report objective is to share cost-tariff analyses & new tariff design approach, and present how to use the excel toolkit Report objectives Area Objective • Present an analysis of electricity cost for GECOL Cost to serve and full cost to serve for Libya, including subsidies on fuel • Present an external view on current tariff Current tariff framework, implicated issues and framework recommendations for transitioning economies New tariff design • Present new tariff structure set-up and calculation process and methodology, and discuss on the key required decisions required decisions enabling the design process • Share current approach for the identification of Multi-stage tariff tariff implementation roadmap and discuss reform reform roadmap pathway • Present yearly tariff design process and share the Training material training material guiding the use of excel-based and user guide toolkit for tariff calculation and design Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 4 Cost to serve Current tariff framework New tariff design process and decisions required Multi-stage tariff reform roadmap Excel toolkit user guide Strategy& | PwC Prepared for The World Bank 5 Over the last 6 years, the cost of supply for GECOL has remained within the range of 65 and 79 Dirhams / kWh Average electricity cost for GECOL(1) GECOL costs (Bn LD) 2.5 Average cost of 1 kWh (Dirhams/ kWh) 2.1 1.9 1.8 1.9 1.4 (2)79(2) 72 73 67 67 65 2010 2011 2012 2013 2014 2015 Energy consumed (TWh) ÷ 29 32 30 27 26 20 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 1) Based on GECOL P&L costs (subsidized fuel prices); 2) 2014 costs contributed by a peak in power purchases (focus on next slide) Source: GECOL data collection ID2 and ID13, Strategy& analysis Strategy& | PwC Prepared for The World Bank 6 Salaries contribution to electricity cost has grown with +19% CAGR, while Generation has decreased with -9% CAGR GECOL costs breakdown (Dhs/ kWh, 2010-15) by item by function 79 79 72 73 8 72 73 67 67 67 67 12 10 9 65 9 9 65 10 7 7 6 10 13 7 6 10 4 5 9 10 11 7 16 8 18 6 14 17 19 33 20 30 6 7 20 15 25 34 35 7 7 7 0 6 1 3 11 0 1 36 31 32 36 26 26 23 21 18 20 18 15 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Depreciation and financial expenses -8% Support +7% Services, maintenance, O&M material, other -15% Supply +7% Salaries +19% Distribution +7% Power purchases N/A. Transmission +0.5% Fuel -11% Generation(1) -9% CAGR CAGR 2010-15 2010-15 1) Includes cost of power purchases Source: GECOL data collection ID2 and ID13, Strategy& analysis Strategy& | PwC Prepared for The World Bank 7 Fuel incidence on total cost has dropped from 39% to 23%, while Salaries in Distribution have increased from 9% t0 24% GECOL costs by function and item (Dhs/ kWh, 2010-2015) 2010 2015 Percentage of GECOL % = electricity cost 7 67 Percentage of GECOL % = electricity cost 10 65 4% 4 4% 5% 14 4% 6 11% 4% 8% 20 8% 9% 4% 6 4% 36 2% 24% 6% 100% 6 100% 7% 3% 23 6% 4% 6% 39% 23% Gen. Transm. Distr. Supply Support El. cost Gen. Transm. Distr. Supply Support El. cost 53% 9% 21% 6% 11% 100% 35% 10% 31% 9% 15% 100% Depreciation, fin. exp. Services, O&M, other Salaries Power purchases Fuel Source: GECOL data collection ID2 and ID13, Strategy& analysis Strategy& | PwC Prepared for The World Bank 8 Including the cost paid by government to subsidize fuel, full cost to serve on average is 3 times the cost paid by GECOL Cost to serve (Dhs/ kWh, 2010-2015) Costs on government (subsidies on fuel) Fuel costs (Bn LD) based on actual fuel volumes and mix Costs on GECOL P&L 243 241 7 234 15% discount on avg. 211 6 market prices 5 175 167 4 171 162 161 3.6 3.5 ~3x 3 Government 107 SUBSIDIES 102 2 on fuel 1 0.7 0.4 avg. 71 0 79 2010 2011 2012 2013 2014 2015 67 67 72 73 65 Theoretical cost from international market prices Cost paid out by NOC 2010 2011 2012 2013 2014 2015 Costs inviced to GECOL Source: GECOL data collection ID2, ID13, ID20 and ID24, Strategy& analysis Strategy& | PwC Prepared for The World Bank 9 Based on GECOL data, most of the cost to serve is in Generation, even though decreased from 82% to 75% Cost to serve (Dhs/ kWh, 2010-2015) 2010 2015 82% Generation 11% T&D network 175 75% Generation 16% T&D network 167 4% 6% 2% 4% 8% 3% 12% 4% 61% 100% 100% 61% 21% 14% Gen. Gen. Transm. Distr. Supply Support El. cost Gen. Gen. Transm. Distr. Supply Support El. cost (subsidy) (subsidy) Source: GECOL data collection ID2, ID13, ID20 and ID24, Strategy& analysis Strategy& | PwC Prepared for The World Bank 10 Cost to serve Current tariff framework New tariff design process and decisions required Multi-stage tariff reform roadmap Excel toolkit user guide Strategy& | PwC Prepared for The World Bank 11 Four key principles are generally regarded as the fundamental dimensions regulating tariff design Regulatory principles in tariff design Regulatory principles Attributes I Ensuring sector financial health, by entirely covering allowed SUSTAINABILITY costs and effectively yielding revenue requirements and cash flow stability from year to year II Promoting accountability for the use of electricity, avoiding EQUITY / non- undue discrimination in allocating costs to the different cost discrimination(1) drivers, customer classes, time periods III Maximizing short- and long-term social welfare, promoting ECONOMIC efficient use of energy, assets and competing products and EFFICIENCY services IV Being transparent to customers and ensuring scheme simplicity, TRANSPARENCY understandability and stability, to facilitate public acceptability / application feasibility 1) Rates are regarded as non-discriminatory if consumers are charged the same amount for using the same good or service, regardless of the purpose for which it is used Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 12 Current Libyan tariff framework is not aligned with three out of such four regulatory principles Libya status quo vs. regulatory principles Met Not met Regulatory principles Libyan tariff Overview I • Libyan tariff is set far below cost-recovery levels, causing a huge burden on SUSTAINABILITY government & GECOL budget preventing the financial viability of the sector II • Tariffs are also cross-subsidized between EQUITY / non- customer classes, not reflecting the costs discrimination(1) each class is responsible for III • In addition, tariffs are applied to customers ECONOMIC with a flat rate, which does not incentivize an EFFICIENCY Focus on efficient use of energy & assets next slides IV • Customers are charged by means of a basic tariff rate scheme, characterized by the TRANSPARENCY highest level of simplicity and understandability 1) Rates are regarded as non-discriminatory if consumers are charged the same amount for using the same good or service, regardless of the purpose for which it is used Strategy& | PwC Prepared for The World Bank 13 Sustainability Tariff has a key balancing role, enabling consumers to pay for the service they use and to cover the costs they cause... Tariff key balancing role Σ TARIFF by customer X ENERGY USAGE by class, time, volumes, etc. customer class, time, etc. Σ Generation Transmission Supply Support Residential Small agriculture & Distribution Commercial Light industrial CAPEX (D&A) Public Large agriculture + OPEX - Variable O&M Street lighting Heavy industrial + OPEX - Fixed O&M = = Revenues Cost to serve sustainability Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 14 Sustainability …however, Libyan tariff is set far below cost-recovery levels, causing a large burden on government & GECOL budget Libyan cost-tariff unbalance (Dhs/ kWh, 2015) 167 Subsidized tariff scheme Tariffs do not reflect the economic cost of the supply Government 102 SUBSIDIES Tariffs are far below on fuel cost-recovery levels 65 Gov. SUBSIDIES Avg. tariff 36 in GECOL P&L Comm. loss and DEFICIT in • Equity erosion non-collection GECOL P&L • Increase in payables 6 Cost on Subsidies Cost to Average Structural GECOL on fuel serve collection unbalance BURDEN on BURDEN on the MARKET the SECTOR (consumers) (gov./GECOL) Note: Average tariff weighted by consumption by customer class Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 15 Equity Tariffs are also cross-subsidized between customer classes, not reflecting the costs each class is responsible for Libyan tariff by customer class (2011-2017) Generation Unit cost GECOL tariff Cross-subsidization (Illustrative) (Dhs/ kWh) between customer classes Lower network Residential tariff is lower High- & energy costs than industrial, despite the voltage Heavy industrial 31 higher costs incurred in the consumers supply, which are driven by: Large agriculture 32 • More facilities needed (e.g. transformers and T&D Light industrial Responsibility 42 distribution lines / network in the cost by substations) • Higher losses incurred Small agriculture customer class 30 (supply at lower voltage) Commercial, Street Low- lighting, State offices 68 voltage consumers Residential 20 Higher network & energy costs Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 16 Economic efficiency In addition, tariffs are applied to customers with a flat rate, not incentivizing an efficient use of energy and assets Libyan rate scheme and efficiency indicators (2011-2017) 4.7 High consumption LD / month Energy consumed 2.7 (fixed/ customer charge) 1.8 1.4 1.4 pro-capita 0.9 Typology of (MWh / capita) LD / kW Libya Jordan Egypt Algeria Tunisia Morocco charge applied (demand charge) to consumers LD / kWh 80% Libya Worsening peak- (energy charge) average ratio 70% 69% Rate varying with the TIME of USE (e.g. time of day, day of week, season) Load factor Typology of (average load) / 60% Progressive rate varying with (peak load) 59% rate applied to VOLUMES CONSUMED consumers 50% Flat rate, regardless of time Indication of of use and volumes consumed plant / assets 40% utilization 2008 2010 2012 2014 2016 Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 17 Economic efficiency Only residential class experienced volume-dependent tariffs, even though “lighter” than those applied by regional peers Libyan residential rate scheme Benchmark vs. regional peers Morocco Algeria Libya Egypt Libya (A) A Tariff Tariff as % Tunisia Libya (B) B Dhs / kWh of min rate 60 180% A 160% 50 B 2004-05 140% 40 120% Regional 2006-10 100% 30 peers Higher 80% rise in price 2011-17 20 60% Faster ramp-up 40% 10 20% Libya kWh / kWh / 0 0% month month 0 500 1,000 1,500 2,000 0 500 1,000 1,500 2,000 Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 18 As a result, current tariff framework has exposed electricity sector to a set of relevant issues and related implications Major issues driven by current tariff framework Issues Implications I Lack of required Utilities do not have required cash flow/fund to pay suppliers and Worsening SUSTAINABILITY cash/ investment maintain/ replace retired assets or expand the system to meet growing technical capabilities demand, thus causing a reduction in the reliability and quality of supply performance Unattractiveness Investors and traders are unlikely to make deals with power companies Slower for potential that are in a precarious financial position (unable to pay for the service sector investors provided), or will require a significant mark-up, or risk premium development II Residential class tariff is subsidized by industrial/ commercial Lower Non-true cost customers, while the opposite may occur in developed countries, as economic allocation EQUITY these sectors are supposed to create jobs and drive economic growth growth Distortion in When tariff by customer class does not reflect the costs each class is Inequality, pricing signals responsible for, customers receive a distorted / non-true pricing signals, and distorted to customers and are not aware of the actual cost they are causing load pattern III Inefficient asset Subsidized and flat prices lead customers to make unwise decisions and energy that result in increased and inefficient load patterns (asset utilization, EFFICIENCY utilization load factor), and implied higher unit costs of the energy supply Higher system Distortion in Subsidized sales may be insufficient to meet domestic needs and lead costs resources to inefficient resource allocation and higher costs (distorted investment allocation decisions, e.g. over-reliance on gas production due to subsidized price) Source: Desktop research, Strategy& analysis Strategy& | PwC Prepared for The World Bank 19 Tariff design process shall lead to the definition of a new framework, guided by some key recommendations Recommendations for transition economies Met Not met Next-chapter focus Regulatory principles Current tariff framework New tariff design process New tariff I • Lack of required cash/ Recommendations SUSTAINABILITY investment capabilities • Unattractiveness for potential investors for transition economies ? • Smooth transition from subsidized II scheme • Non-true cost allocation EQUITY / non- • Avoidance of cross-subsidies and discrimination • Distortion in pricing signals to customers application of subsidies for low- income customers rather than ? generalized to customer classes III • Inefficient energy usage • Introduction of time-varying rates on ECONOMIC EFFICIENCY and assets utilization • Distortion in resources allocation customers ready to react to them (1) • Avoidance of complex ? methodologies (controversy, information availability) IV Issues • Tradeoff between cost-causation TRANSPARENCY rule and desirable tariff design simplicity ? 1) Typically, industrial customers Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 20 Cost to serve Current tariff framework New tariff design process and decisions required Multi-stage tariff reform roadmap Excel toolkit user guide Strategy& | PwC Prepared for The World Bank 21 The tariff design process is based on three key steps... Tariff design process ILLUSTRATIVE 1 2 3 DETERMINATION of COSTS COST ALLOCATION RATE DESIGN Determination of allowed Allocation of cost Design of cost-based rate cost of service / revenue components by cost driver elements for tariffs requirement for each activity and by customer class Residential Residential Energy Dhs / kWh N. customers Commercial Commercial charge Peak demand Agriculture Agriculture Demand charge Consumption Industrial Industrial Gen. T&D Supply Support Public Public Fixed G T S S charge kWh • Overall service costs are • Cost components are allocated by • Each customer class is charged classified by function along the the driver which caused the cost for its respective overall supply chain to be incurred contribution to cost along the value chain (by cost driver) • The allowed part of cost • These cost quantitates are then determines the allowed allocated to customer classes • Final tariff is computed as a revenues to be recovered by according to their responsibility in combination of charges by cost charging tariffs on customers that cost (allocation weights) driver Strategy& | PwC Prepared for The World Bank 22 …and requires some key decisions to be made Key decisions required ILLUSTRATIVE 1 2 3 1.1 1.2 2.1 2.2 3.1 3.2 Tariff Pricing Allocation Cross sub- Active Rate rationale regulation method sidization charges scheme ? ? ? ? ? ? Dependent upon Dependent upon Dependent upon Dependent upon COST ALLOCATION tariff design (excel Approach identified Approach identified tariff design (excel tariff design (excel tariff design (excel toolkit) toolkit) toolkit) toolkit) Strategy& | PwC Prepared for The World Bank 23 1 2 3 Determination of costs (revenue requirements) Design process starts with the determination of the allowed revenues to be recovered by charging tariffs on customers Determination of the revenue requirements ILLUSTRATIVE Determining which utility costs can be Allowed cost of service Cost to serve by function passed through to ( = revenue requirement) customers by function depend on tariff rationale Subsidies + Penalties/ = incentives Efficiency factors Generation T&D Supply Support Generation T&D Supply Support Return • Overall service costs are classified by depend on pricing • Based on tariff rationale, and historical function along the supply chain regulation and best-practices data, the allowed part of costs is determined • Cost classification is necessary as, in the second step of the design process, • Allowed costs represent the allowed each function requires function-specific revenues to be recovered by charging criteria to allocate cost components tariffs on customers Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 24 1 2 3 Determination of costs (revenue requirements) 1.1 Tariff rationale Libya might either maintain its heavily subsidized pricing framework or move to cost-reflective schemes Tariff rationale ILLUSTRATIVE Residential tariff benchmark Tariff rationale scenarios for Libya ($/ kWh) (vales as % of GECOL P&L costs) 325% Libya 0.02 300% Fully cost-reflective 275% (cost to serve) Qatar 0.02 250% 225% Lebanon 0.06 Fuel 200% subsidy Egypt 0.10 175% 150% Algeria 0.15 125% Cost-reflective 100% (GECOL costs) Jordan 0.16 P&L subsidy 75% Subsidized 50% Tunisia 0.21 25% Morocco 0.30 0% 2010 2015 2020 UK 0.22 Cost to serve (incl. subsidies on fuel) GECOL P&L costs Italy 0.24 Costs charged on customers (max theoretical revenues) 0.30 Invoiced revenues USA Collected revenues 1) Residential tariff for average consumption of 300 kWh/month and monthly peak demand of 3 kW estimated based on load factor. FX adjusted for differences in PPP Source: Strategy& analysis, Countries regulatory authorities websites and annual reports, Players websites and annual reports Strategy& | PwC Prepared for The World Bank 25 1 2 3 Determination of costs (revenue requirements) 1.1 Tariff rationale Cost-reflective tariffs offer substantial benefits but depend on public acceptability when moving from subsidized schemes Tariff rationale options 1.1 Description Pros Cons Tariff rationale Tariffs reflect the full cost to • Foster complete cost- • May have a relevant impact serve, including the price structure accountability on vulnerable customers Fully cost- paid by the government to • Guarantees sector financial • Requires macro-economic reflective pricing provide utility subsidized independency from external considerations (e.g. cash fuel pricing support transfer, salary adjustment) • Guarantees independency • Depends on public accepta- Customers are charged from government cash bility – requires strategies to Cost-reflective with tariffs that reflect utility injections on utility P&L enhance customer uptake(1) pricing P&L costs, which benefit • Foster utility financial health • May worsen commercial from subsidized fuel pricing and attraction of investors loss / collection levels Tariffs are set below cost- • Depends on government recovery levels: unbalance • Provides short-term support funding capabilities Subsidized is covered by government, to national economy by • Distort resources allocation pricing through partial coverage of mean of a lighter burden on • Impact user and non-users fuel costs (subsidies) and electricity consumers regardless of their direct injections on P&L responsibility in the cost 1) Key influencers in the process can be. scheme convenience, perceived fairness, mechanism awareness and understanding Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 26 1 2 3 Determination of costs (revenue requirements) 1.1 Tariff rationale Thus, a first decision is required on the desired level of State intervention and the costs to be charged on customers Tariff rationale options INDICATIVE 1.1 Tariff rationale Interactive session • Which costs shall be charged on ? customers? • What is the desired level of State intervention in the sector? Fully cost- reflective pricing Cost of fuel subsidies on customers 0% ? ? ? Available Cost-reflective options pricing GECOL P&L costs on customers ~60% ? ? ? Subsidized pricing 2017 2021 2024 2027 Indicative Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 27 1 2 3 Determination of costs (revenue requirements) 1.2 Pricing regulation Depending on market structure, different pricing regulation formula can apply Pricing regulation options 1.2 Description Pros Cons Pricing regulation No regulation In deregulated markets, pricing Liberalized • Provides strong efficiency • Requires mature market – over the is set through bilateral contracts market under mutually agreeable terms incentive (competition) levels counter Revenue that can be generated • Provides efficiency and cost • Limits powerful incentive to Revenue cap are based on previous-year cap, savings incentives increase sales and CPI & required efficiency factors • Can align with DSM(1) competition Prices have upper limits based • Can conflict with socially • Provides efficiency and cost Price cap on previous-year cap, CPI & desirable (e.g. DSM(1) required efficiency factors savings incentives mandatory) programmes Regulated market Utility is reimbursed for the • Allows utility to cover its • Does not provide efficiency Cost plus costs incurred (both operating/ operating and capital costs and cost saving incentives (RoR) D&A) and guaranteed a return as well as return on capital (rewards overinvestment) Subsidies and pricing are set by • Does not require specific Political • Is uniquely applicable with gov.t (rather than calculated) on analyses and capabilities expediency subsidized tariff schemes the basis of political expediency (ease of implementation) 1) Demand Side Management Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 28 1 2 3 Determination of costs (revenue requirements) 1.2 Pricing regulation Among peer countries considered, only Libya has a tariff still set on the basis of political expediency Pricing regulation benchmark 1.2 Political Cost Price Revenue Regulatory expediency plus cap cap period Pricing regulation Discretionary Libya P (2004-2006-2011) No regulation Liberalized market – over the Tunisia P 1 year counter Morocco N/A 1 year Discretionary Revenue cap Egypt P (2004-2008-2014) Algeria P 1 year Price cap Jordan P Discretionary Regulated market Lebanon N/A Discretionary Cost plus (RoR) Qatar N/A Discretionary Italy P 6 years Political expediency UK(1) P N/A USA P N/A 1) The price cap is temporary (introduced in 1st April 2017), and is due to expire at the end of 2020 at smart-meter rollout completion Source: Strategy& analysis, Countries regulatory authorities websites and annual reports, Players websites and annual reports Strategy& | PwC Prepared for The World Bank 29 1 2 3 Determination of costs (revenue requirements) 1.2 Pricing regulation For transitioning countries, Cost Plus is considered the preferred pricing regulation formula in the short term Pricing regulation options 1.2 Pricing regulation Pricing regulation formula • What is target market structure? ? Short term: Why Cost plus Long term: Why Revenue cap • What is the formula by which government/ specific authorities • Allows to cover operating costs • Performance based measure shall regulate pricing? and possibly make profit allows utility to share cost savings • Provides incentive for investments and quality of • Provides incentives for Liberalized No regulation – service improvement efficiency –cost minimization market over the counter and productivity improvement • Implies low complexity degree: • Aligns well with demand side Revenue cap – Typically applied as starting management point and initial input for price cap or revenue cap • Provides greater certainty and Available freedom for regulated company Price cap – Does not require the regulator as allowed revenues are known options Regulated to have detailed knowledge of in advance market utility costs Cost plus • Review is usually done on (Rate of Return) • Review is usually performed multi-year period, so cost of annually regulation is reduced Political expediency Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 30 1 2 3 Cost allocation The second step of tariff design process is the allocation of costs to customer classes Cost allocation by cost driver and customer class ILLUSTRATIVE Cost-causation principle Cost-causation principle What caused the cost to be incurred? Which driver? Who caused the cost to be incurred? By what extent? WHAT WHO e.g. are capacity-addition costs driven by energy e.g. what part of capacity-addition costs should be consumption or by peak demand requirements? charged to residential customers? Classification of Allocation of costs by the primary classified costs to driver for that cost customer classes Cost driver Class weight Customer class Heavy industrial N. of Customer-driven Customer allocation customers costs factor Large agriculture Light industrial Allowed Peak Demand-driven Demand allocation Small agriculture costs demand costs factor Commercial Street lighting Energy Energy-driven Energy allocation State offices consumption costs factor Residential Note: Some costs can be identified as not being incurred by particular customers: e.g. distribution lines and substations are not used to serve customers that take power at higher voltages; Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 31 1 2 3 Cost allocation Allowed costs are firstly classified by the primary driver that caused those costs to be incurred... Cost allocation by cost driver ILLUSTRATIVE Cost-causation principle Cost-causation principle What caused the cost to be incurred? Which driver? Who caused the cost to be incurred? By what extent? WHAT WHO e.g. are capacity-addition costs driven by energy e.g. what part of capacity-addition costs should be consumption or by peak demand requirements? charged to residential customers? Classification of the functionalized costs Cost driver by the primary Possible classification on three drivers driver for that cost Metering and N. of billing D&A and customers service cost Overhead, (cust. mgmt.) costs for functioning Different of system Allowed Peak Generation Lines and tran- operator, cost by allocation capacity D&A, sformers D&A, demand regulatory fixed O&M costs fixed O&M costs function options commission, subsidies to Fuel, energy (Energy losses renewable Energy purchase, water cost), quality energy, etc.) consumption and lubricants penalties/ The process is impacted by cost incentives Function the n. of drivers considered and the identification of the primary driver to which Generation T&D Supply Support allocate each cost component Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 32 1 2 3 Cost allocation …and resulting quantities are then allocated to customer classes according to class responsibility in that cost driver Cost allocation by customer class ILLUSTRATIVE Some costs can Cost-causation principle be identified as Cost-causation principle What caused the cost to be incurred? Which driver? Who caused the cost to be incurred? By what extent? WHAT not being incurred WHO e.g. are capacity-addition costs driven by energy by particular e.g. what part of capacity-addition costs should be customers consumption or by peak demand requirements? (2) charged to residential customers? Allocation of functionalized and Customer class(1) classified costs to customer classes Residential LOW-voltage consumers Commercial Cost by function Public P P P P & driver Different Street lighting allocation Cost by MEDIUM-/HIGH-voltage consumers options Small agriculture function & driver Light industrial Only Large agriculture P partial ‘’costs(2) P P The process is impacted by Function the allocation factors Heavy industrial selection by cost driver and the identified level of detail Generation T&D Supply Support (e.g. time-block) 1) Customer classes are defined as homogenous categories with similar load profile and responsibility in the costs, e.g. energy consumed, delivery voltage, metering characteristic; 2) e.g. distribution lines and substations are not used to serve customers that take power at higher voltages; Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 33 1 2 3 Cost allocation 2.1 Allocation method Allocation methods are based either on a single driver (energy consumption) or on multiple cost drivers Three-driver vs. single-driver approach ILLUSTRATIVE 2.1 Allocation method Advanced Cost allocation Required data approach Three-driver N. of based customers Consumption, Three- (consumption, Peak demand and peak demand, driver demand customer data by customer n.) based Energy customer class Basic approach consumption N. of customers Single- Single-driver based Peak Consumption data driver (consumption by demand by customer class based customer class) Energy consumption 1) Non-coincident peak demand by customer class; 2) Average of class average demand and class maximum demand, weighted by system Load Factor and (1-LF) respectively Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 34 1 2 3 Cost allocation FOCUS 2.1 Allocation method In a three-driver Basic approach, costs are assigned to customer classes in relation to a specific allocation factor… Three-driver Basic approach 2.1 Three-driver based N. customer- Basic approach driven costs Allocation method Demand- Cost components are Costs are divided by classified by function driven costs customer classes and by 3 cost drivers: Energy- through cost-driver- energy, demand and driven costs specific allocation Advanced n. of customers factors Gen. T&D Supply Support approach Three-driver based (consumption, Cost items Possible allocation factor Weight options: peak demand, – Meters costs customer n.) – Billing costs Basic N. customer- • Number of customers – Service line costs approach driven costs • Weighted number of customers – Meter-reading costs • Maximum demand(1) Coincident Peak options: Demand- • System peak responsibility – Annual peak (1-CP) driven costs • Average-excess demand(2) – Average of four highest monthly peaks (4-CP) Single-driver based – Average of full-year (consumption by Energy- • Energy sold (at supply level) monthly peaks (12-CP) customer class) driven costs • Energy sold (at generation level) basic option 1) Non-Coincident Peak (NCP9 by customer class; 2) Average of class average demand and class maximum demand, weighted by system Load Factor and (1-LF) respectively Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 35 1 2 3 Cost allocation FOCUS 2.1 Allocation method …while in an Advanced approach – before being allocated to customer classes – costs are firstly divided by time block Three-driver Advanced approach Basic approach 2.1 Three-driver based N. customer- 5 Advanced approach driven costs Allocation method Demand- Cost components are The resulting 6 cost driven costs 1 3 6 classified by function buckets are allocated and by 3 cost drivers: Energy- to customer classes energy, demand and driven costs 2 4 through specific steps Advanced n. of customers by cost bucket Gen. T&D(1) Supply Support approach Three-driver based Advanced approach steps by cost bucket Allocation factor in dividing costs (consumption, 1.1 Costs are divided by TIME BLOCK 1.1 Incidence of yearly highest-demand hours peak demand, 1 1.2 Costs are divided by CUSTOMER CLASS 1.2 Peak demand at generation level by time block customer n.) Basic 2.1 Costs are divided by TIME BLOCK 2.1 Average block marginal cost (2) x duration 2 2.2 Costs are divided by CUSTOMER CLASS 2.2 Consumption at generation level approach 3.1 Costs are classified by VOLTAGE LEVEL 3.1 / 3 3.2 Costs are divided by TIME BLOCK 3.2 Incidence of yearly highest-demand hours 3.3 Costs are divided by CUSTOMER CLASS 3.3 Peak demand by voltage level and time block 4.1 Optional: costs are divided by TIME BLOCK 4.1 Average block marginal cost (2) x duration 4 4.2 Costs are divided by CUSTOMER CLASS 4.2 Consumption at voltage level Single-driver based (consumption by 5.1 N. of bills issued or n. of phone calls (or other 5 5.1 Costs are divided by CUSTOMER CLASS services per year and per customer) customer class) 6.1 Costs are classified by FUNCTION & DRIVER 6.1 / 6 6.2 Costs are divided by TIME BLOCK & CLASS 6.2 Current allocation of costs by function 1) Coefficients to allocate T&D costs to demand and energy can be estimated on the basis of other tariff design processes (or, in more advanced approaches, calculated by voltage level through a network-reference model); 2) More advanced approaches are based on the short-term marginal cost (e.g. by hour). However, in developing countries, merit-order dispatch concept may be not fully implemented; Source: Energy Policy, Economics, Strategy& analysis Strategy& | PwC Prepared for The World Bank 36 1 2 3 Cost allocation FOCUS 2.1 Allocation method Time blocks are defined as reference time bands in relation to daily, weekly and seasonal load patterns Multiple-driver Advanced approach ILLUSTRATIVE 2.1 Cost allocation on time Allocation method Example of time-block definition blocks allows to send customers accurate signals about the cost of the system with time differentiation Time blocks are usually Advanced defined by using daily, weekly Average load Peak block (8h) approach (e.g. weekday-weekend), or Three-driver Intermediate block (7h + 1h) pattern (GW) seasonal patterns Base block (8h) based (consumption, 6.0 peak demand, BASE INTERMEDIATE PEAK customer n.) 5.5 Basic approach 5.0 4.5 4.0 Single-driver based (consumption by 3.5 customer class) 3.0 01:00 08:00 16:00 22:00 Source: GECOL, Strategy& analysis Strategy& | PwC Prepared for The World Bank 37 1 2 3 Cost allocation 2.1 Allocation method Allocation methods based on three drivers reflect costs more fairly, but require a set of data that might not be available Allocation method options 2.1 Description Pros Cons Allocation method • Allows to send customers • Requires information that Cost allocation is based on Advanced accurate/fair signals about might be not available in three drivers and detailed approach the cost of the system with transition economies (e.g. Three-driver data at time-block level time differentiation data by time block & class) based (consumption, peak demand, customer n.) Cost allocation is based on • Guarantees a simplified • Does not provide indication Basic three drivers and a single process enhancing fairness of costs incidence by time approach allocation factor by each in the allocation of costs to block cost driver the different cost drivers Cost allocation is entirely • Provides a simplified Single-driver based • Does not require highly- based on consumption and criteria which only partially (consumption by detailed data and complex introduces simplified cost- reflects customer classes customer class) levels of analysis causality criteria responsibilities in the costs Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 38 1 2 3 Cost allocation 2.1 Allocation method For Libya, a tailored approach is identified, based on the data available in GECOL Allocation method options 2.1 Allocation method Allocation method • Is any cross-subsidization Identified tailored approach based ? mechanism required? on data available in GECOL • What is the desired level of cross-subsidization by customer class? Three-driver approach Allocation factors Weighted n. of N. of Customer-driven customers by customer Advanced customers costs class Three-driver approach based Maximum demand by Tailored (consumption, Peak Demand-driven voltage level, by approach peak demand, demand costs customer class, and Available customer n.) Basic time block options approach Consumption at Energy Energy-driven generation level by consumption costs customer class and time Single-driver based block (consumption by customer class) Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 39 1 2 3 Cost allocation 2.2 Cross-subsidization Due to public acceptability reasons, the true allocation of costs might be adjusted by introducing cross-subsidies Allocation method ILLUSTRATIVE Allowed cost Tariff recovery of class-driven costs by customer class (1) by customer class (1) True allocation, based on customer class Cross- True responsibility in cost occurrence subsidized allocation allocation Heavy industrial Heavy industrial Large agriculture Large agriculture Light industrial Light industrial Small agriculture Small agriculture 115% Cross- 100% Commercial subsidy Commercial Street lighting Street lighting State offices State offices Residential Residential 30% 30% 70% Illustrative Illustrative 1) Illustrative unit cost by customer class Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 40 1 2 3 Cost allocation 2.2 Cross-subsidization More developed countries have already moved away from cross-subsidized schemes in favor of residential class Cross-subsidization benchmark Tariff cross-subsidy benchmark Tariff ($/kWh) (1) Tariff RATIO Costs allocation Residential Industrial (res. / ind.) Cross- Fair Comments subsidiz. allocation Libya 0.02 0.03 0.6x • Residential unit cost is expected to be higher than Jordan 0.16 0.42 0.4x industrial, as a result of: Lebanon 0.06 0.13 0.4x – More facilities needed (e.g. transformers, lines, etc.) Qatar 0.02 0.04 0.6x – Higher losses incurred Egypt 0.10 0.17 0.6x (supply at lower voltage) • Thus, the ratio of residential Tunisia 0.21 0.24 0.9x to industrial tariffs may 0.30 0.27 provide an indication of the Morocco 1.1x possible cross-subsidies Algeria 0.15 0.14 1.1x applied in costs allocation 0.24 0.19 • A residential-to-industrial ratio Italy 1.2x lower than 1 is a clear signal UK 0.22 0.14 (2) 1.6x of cross-subsidization in favor of the residential class USA 0.30 0.13 2.4x 1) Tariff for average consumption of 300 kWh/month (Residential) and 100 GWh/month (Industrial) and peak demand of 3 kW and 20 kW (estimated based on load factor). FX adjusted for differences in PPP; 2) Based on 453 GWh consumption; Source: Countries regulatory authorities, Companies data, Strategy& analysis Strategy& | PwC Prepared for The World Bank 41 1 2 3 Cost allocation 2.2 Cross-subsidization For Libya, a decision is required on the cross-subsidies to be applied in the short term, and their evolution going forward Cross-subsidization options INDICATIVE 2.2 Cross-subsidization Interactive session • Is any cross-subsidization ? mechanism required? • What is the desired level of cross-subsidization by customer class? Tariff recovery of class-driven costs True allocation Heavy Ind. 150% Large Agr. 120% Light Ind. 150% Small Agr. 80% Available options Commercial Street Lighting N/A 210% 140% ? ? ? State Offices 280% Residential 45% Cross-subsidized allocation 2017 2021 2024 2027 Indicative Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 42 1 2 3 Rate design The last step of the process is rate design, which starts from the identified costs by class to define final tariff rates Rate design process and applicable charges Costs by customer class etc. Unit costs by customer class Small industrial customers Commercial customers etc. Tariff Residential customers Small industrial customers Customer-driven costs LD Commercial customers = C Demand-driven costs LD Residential customers Customer charge LD / cust. Energy-driven costs LD Customer unit cost LD / cust. + D Rate Demand charge LD / kW ÷ Demand unit cost LD / kW design Factor by customer class Energy unit cost LD / kWh + E Energy charge LD / kWh etc. Small industrial customers Commercial customers Consumption data Residential customers by time block allow N. customers # the calculation of energy unit cost by Avg. monthly peak (1) kW TIME BLOCK Consumption (1) kWh 1) At supply voltage level Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 43 1 2 3 Rate design Overall tariff can be obtained as the sum of 3 charges, whose viability is also dependent on the billing variables available Applicable charges E D C Tariff = Energy charge + Demand charge + Customer charge Units LD / kWh LD / kW LD / customer Volumetric-based pricing Pricing based on the Pricing dependent on energy maximum monthly peak(1) Fixed monthly fee consumed registered by customer Covers customer-driven costs Covers energy-driven costs Covers demand-driven costs Rationale (e.g. supply variable costs) (e.g. fixed system costs) (e.g. access, metering and billing costs) Note: may require variable-rate meters Note: requires demand meters(2) Charges shall be adapted to active billing variables (e.g. kWh and kW meter-readings) for each customer class: demand/ customer charges, if not active, shall be “energized” by dividing related costs by energy consumed 1) e.g. average 1-3-5 highest instances of demand (readings) in peak hours (demand charge may not apply in off-peak hours) 2) Certain types of traditional meters can measure the customer’s non -coincident peak load during the billing period in addition to the customer’s energy consumption Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 44 1 2 3 Rate design Energy, demand and customer charges can then be applied through a various set of different rate schemes Applicable rate schemes ILLUSTRATIVE E D C Energy Demand Customer charge charge charge Note: requires demand meters I Peak Winter options Dynamic pricing(1) may vary: • By time band (e.g. nigh-day, LD / kWh Summer Time-varying base-intermediate-peak) rate • By day (e.g. weekday-weekend) Intermediate • By season (e.g. winter-summer) Base Time (hour) Note: requires variable-rate meters 00:00 06:00 12:00 18:00 24:00 II Pricing grows with the monthly volumes consumed, generally in 3- LD / kWh Avg. class rate Progressive 5 tiers (kWh ranges) with the rate highest rate between 2 and 5 times baseline rate. May introduce intra- Monthly class subsidies volumes 0 200 400 600 800 (kWh) III Price is fixed regardless of time and volumes consumed. Flat rate has LD / kWh persisted due to lack of advanced Flat rate metering, political expediency or belief that customers are not ready Time and for change Volumes 1) In addition to Time-of-Use pricing, developed countries may also offer Real Time Tariffs (RTT), with pricing determined by the spot at the power exchange price (30-60 minutes intervals), or additional schemes as Critical peak pricing (CPP), Peak time rebate (PTR), Variable peak pricing (VPP); Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 45 1 2 3 Rate design ILLUSTRATIVE Energy time-varying rate allows to influence customers’ consumption pattern by using variable-rate meters… Focus on energy dynamic rate Load pattern (kW) Energy Demand Customer Tariff = charge charge charge Energy consumed Time-varying rate (kWh) by time block Energy consumed (kWh) Progressive rate Rate (LD/kWh) Rate (LD/kWh) by time block Flat rate Time Rationale Purpose Requirements • Utility system costs vary according to • Incentivize consumers to modify • Measuring electricity use in peak, time of day, day of week and energy usage towards more efficient off-peak necessarily entails that season, in relation to assets and patterns (e.g. energy saving, load special meters are installed variable costs required to serve shifting) and improve social welfare • Variable-rate meters permit 2 to 3 • Peak periods account for a large • Enhance equity in cost recovery tariffs via simple electromechanical proportion of overall cost of power • Gain savings in peak-period high time switch; Time-of-use meters generation and supply generation costs and foster optimal have multiple registers(1) and switch • Dynamic pricing permits to charge level of investments, and limit through radio-signal / ripple-control customers more fairly for the costs capacity additions for the peak • Given associated costs, rates are incurred and influence their period load typically levied on large businesses consumption pattern • Secure a reliable supply with energy use exceeding a consumption monthly limit 1) In addition to smart maters, associated technologies usually offered to support Time-of-Use / Peak-demand pricing are: in-home displays, direct load control devices and interactive web portals where consumers could access real-time data and manipulate their own consumption history; Source: Desktop research, Strategy& analysis Strategy& | PwC Prepared for The World Bank 46 1 2 3 Rate design ILLUSTRATIVE …while demand charges aims to limit customers’ monthly peak, but necessitate advanced demand meters Focus on demand rate Load pattern (kW) Max demand (kW) Energy Demand Customer Tariff = charge charge charge Maximum monthly Time-varying rate demand (kW) Progressive rate Rate (LD/kW) Rate (LD/kW) by month Flat rate Time Rationale Purpose Requirements • Generation and T&D facilities are • Strongly incentivize customer to • Demand response programs require designed to cope with extreme level out their demand profile (e.g. at least hourly meter readings, and cases of peak power demand, which peak reduction, load shifting) to require electronic Automatic Meter are of very rare occurrence improve inefficient average-load to Reading systems or smart meters(1) • Dimensioning the grid and keeping peak-load ratio (Load Factor) • Measurement intervals are dictated power reserve plants for the purpose • Foster equity in cost recovery, by metering / billing constraints, and of meeting temporary high loads is levying higher costs on consumers typically register highest 15-minute- vastly expensive with spikier-loads, passing savings interval average demand • Demand charge permits to equally on those with consistent loads • Demand charges are initially offered share the burden of satisfying / • Limit capacity additions, promote exclusively to large commercial reducing peak demand among the wiser asset utilization and improve and industrial customers exceeding consumers causing its occurrence security of supply a minimum demand requirement 1) Certain types of traditional meters can measure the customer’s non -coincident peak load during the billing period in addition to the customer’s energy consumption Source: Desktop research, Strategy& analysis Strategy& | PwC Prepared for The World Bank 47 1 2 3 Rate design 3.1 Active charges The application of both energy and customer charges is an easy option not necessarily requiring metering upgrades Active charges options 3.1 Charges Pros Cons Active charges E D C Energy Demand Customer • Strongly incentivize to shift • Requires peak-demand load and level out demand meters / smart meter Energy, demand • and customer charge P P P profile: fosters load factor / efficiency improvement (thus, Require strategies to enhance appropriate demand response security of supply, savings) (peak pricing can be perceived • Fosters equity in cost recovery as unfair and unacceptable) • Provides not-optimal equity in • Addresses cost-shift issue (1) Energy and customer charge P P • Does not require advanced metering technology • cost recovery Provides no incentive to shift usage to non-peak periods • Provides a simplified cost allocation and limited equity in Energy charge P • Does not require advanced metering technology • cost recovery Provides no incentive to shift usage to non-peak periods 1) Some costs such as metering and billing are clearly fixed and vary with the number of customers, not with the amount of electricity consumed Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 48 1 2 3 Rate design 3.1 Active charges Peer countries do not typically apply demand charges on residential class, but they do it on industrial consumers Active charges benchmark Residential Industrial Energy Demand Customer Energy Demand Customer charge charge charge charge charge charge Libya P P Comments Tunisia P P P Morocco P P P P • Majority of peer countries apply a customer charge, not requiring meters Egypt P P P P P upgrade and reflecting fixed costs such as metering & billing that vary Algeria P P P P P P with the n. of customers rather than the amount of electricity consumed Jordan P P P P P • Demand charges require advanced and more expensive customer Lebanon P P connections / metering technology Qatar P P • Developed countries usually start activating demand charges on Italy P P P P P P selected high-consuming customers (e.g. industrial class), as they can UK (1) P P P P P influence a relevant share of total load acting on a limited n. of consumers USA P P P P P Total P 11 2 6 11 8 7 1) No direct info was found on industrial tariffs, since the terms are usually negotiated in private Source: Strategy& analysis, Countries regulatory authorities websites and annual reports, Players websites and annual reports Strategy& | PwC Prepared for The World Bank 49 1 2 3 Rate design 3.1 Active charges Thus, GECOL has the opportunity to decide the combination of charges that shall be activated by each customer class Active charges and rate scheme options 3.1 Active charges Interactive session • What is the identified technology ? to measure electricity usage? • What are the charges that shall be applied to customers? E D C Energy, demand and customer charge (E+D+C) Heavy Ind. E+D+C Large Agr. E C Light Ind. Energy and Small Agr. Available options customer charge Commercial Street Lighting E E+C ? ? (E+C) State Offices E Residential Energy charge (E) 2017 2021 2024 2027 Illustrative Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 50 1 2 3 Rate design 3.2 Rate schemes Flat or progressive rate schemes do not require metering upgrades, but do also not provide any load-shift incentive Rate scheme options 3.2 Description Pros Cons Rate scheme • Provides an incentive to limit • Requires smart meters consumption on peak periods: Tariffs are higher during • Require strategies to enhance Time-varying fosters load shifting & periods of higher usage (peak appropriate demand response rate efficiency, enhancing security pricing) (peak pricing can be perceived of supply and savings as unfair and unacceptable) • Fosters equity in cost recovery • Offers a simplified intra-class cross-subsidy between low- • Provides no incentive to shift and high-income consumers usage to non-peak periods Progressive Pricing grows with the monthly (usage generally increases • Provides limited equity in cost rate volumes consumed with income) recovery and introduces intra- • Does not require advanced class cross subsidizes metering technology • Provides no incentive to shift • Provides the simplest and usage to non-peak periods most understandable pricing • Provides limited equity in cost Rate is fixed regardless of Flat rate scheme recovery: customers time and volumes consumed • Does not require advanced consuming less in peak metering technology periods subsidize those who consume more Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 51 1 2 3 Rate design 3.2 Rate schemes Peer countries typically charge progressive rates to residential consumers, and time-varying rates to industrial Rate schemes benchmark Residential Industrial Energy charge Demand Customer Energy charge Demand Customer Flat Progressive Time-var.(1) charge (2) charge (2) Flat Progressive Time-var.(1) charge (2) charge (2) Libya P P Tunisia P P (seasonal) P Morocco P P (seasonal) P P Egypt P P (progressive) P P P Algeria P P P P P P P Focus on next slides Jordan P P P P P Lebanon P P Qatar P P Italy P P (weekly) P P P (weekly) P P UK P P P P P P USA P (seasonal) P (seasonal) P (seasonal) P (3) (seasonal) P Total P 2 8 3 2 6 1 1 9 7 6 1) Varies exclusively by time of day unless additional variability is indicated (e.g. weekly: weekday-weekend differentiation); 2) Fixed monthly tariff unless indicated differently; 3) Applies on peak time only; Source: Countries regulatory authorities websites and annual reports, Players websites and annual reports; Strategy& analysis Strategy& | PwC Prepared for The World Bank 52 1 2 3 Rate design Egypt CASE STUDY 3.2 Rate schemes Egypt combines a progressive energy rate with a customer rate, and applies a demand charge only on industrial class Focus on tariff framework in Egypt Residential Industrial (1) Energy Demand Customer Energy Demand Customer charge charge charge charge charge charge Time-varying Time-varying Time-varying Time-varying Time-varying Time-varying Progressive Progressive Progressive Progressive Progressive Progressive Flat Flat Flat Flat Flat Flat 9.7 9.3 $/kW/month $/month Energy charge Customer charge Energy charge ($/kWh/month) ($/month) ($/kWh/month) 0.35 20 0.25 18 0.30 16 0.20 0.25 14 0.20 12 0.15 10 0.15 8 0.10 0.10 6 4 0.05 0.05 2 0.00 0 0.00 Base Intermediate Peak 0 150 300 450 600 750 900 1050 Energy Charge Consumption Energy Charge Time block Customer Charge (kWh/month) 1) Refers to heavy industries with high voltage (i.e. 66.33 KV); 2) EgyptEra does not specify time intervals; Source: EgyptEra website, Strategy& analysis Strategy& | PwC Prepared for The World Bank 53 1 2 3 Rate design Algeria CASE STUDY 3.2 Rate schemes Algeria displays an advanced tariff framework composed of energy, demand and customer charges Focus on tariff framework in Algeria Residential Industrial (1) Energy Demand Customer Energy Demand Customer charge charge charge charge charge charge Time-varying Time-varying Time-varying Time-varying Time-varying Time-varying Progressive Progressive Progressive Progressive Progressive Progressive Flat Flat Flat Flat Flat Flat 1.0 1.0 6.3 18.1 $/kW/month $/month $/kW/month $/month Energy charge Energy charge ($/kWh/month) ($/kWh/month) 0.30 0.35 0.25 0.30 0.25 0.20 0.20 0.15 0.15 0.10 0.10 0.05 0.05 0.00 0.00 Base Mid-peak Peak Off-peak Peak (21-06h) (06-17h) (17-21h) (21-17h) (17-21h) Time block Time block Energy Charge Energy Charge 1) Refers to heavy industries with high voltage (i.e. voltage between 40 kVA and 15000 Kva) Source: CREG website, Strategy& analysis Strategy& | PwC Prepared for The World Bank 54 1 2 3 Rate design Italy CASE STUDY 3.2 Rate schemes Italy applies energy, demand and customer charges for both residential and industrial segments Focus on tariff framework in Italy Residential Industrial (1) Energy Demand Customer Energy Demand Customer charge charge charge charge charge charge Time-varying Time-varying Time-varying Time-varying Time-varying Time-varying Progressive Progressive Progressive Progressive Progressive Progressive Flat Flat Flat Flat Flat Flat 1.1 4.7 3.3 14.2 $/kW/month $/month $/kW/month $/month Energy charge Energy charge ($/kWh/month) ($/kWh/month) 0.35 0.20 0.30 0.15 0.25 0.10 0.20 0.05 0.15 0.10 0.00 Base (1) Peak (2) 0 500 1000 1500 2000 2500 3000 08-19h on Mon-Fri Consumption Energy Charge Time block 19-08h on Mon-Fri, and (kWh/year) 24h on weekends & holidays 1) 08-19h on Mon-Fri 2) 19-08h on Mon-Fri, 24h on weekends & holidays Source: AEEGSI website, Strategy& analysis Strategy& | PwC Prepared for The World Bank 55 1 2 3 Rate design 3.2 Rate schemes For Libya, a final decision is required on the rate schemes to be applied by customer class in the short & in the long term Rate scheme options 3.2 Rate schemes Interactive session • What is the identified technology ? to measure electricity usage? • What are the rate schemes that shall be applied to customers? I Time-varying rate Heavy Ind. Time- Large Agr. varying II Light Ind. Small Agr. Available options Progressive rate Commercial Street Lighting Flat Flat ? ? State Offices Residential Progress. III Flat rate 2017 2021 2024 2027 Illustrative Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 56 Cost to serve Current tariff framework New tariff design process and decisions required Multi-stage tariff reform roadmap Excel toolkit user guide Strategy& | PwC Prepared for The World Bank 57 Current tariff framework in Libya is defined by a set of traditional solutions, and has never varied across 2011-17 Libyan current tariff framework 2011-2017 Libya 1.1 1.2 2.1 2.2 3.1 3.2 Tariff Pricing Allocation Cross sub- Active Rate Developed solutions rationale regulation method sidization charges scheme Liberalized Energy, Fully cost- Three-driver market - OTC demand, Time-varying reflective advanced True customer rate pricing approach Complexity allocation charge Revenue cap Three-driver Energy and Cost-reflective Progressive Price cap basic customer pricing rate approach charge Cost plus Cross- Single-driver subsidized Subsidized allocation Energy based Flat rate pricing Political charge (consumption) Traditional expediency solutions Note: No allocation method identified, as current tariff is set on the basis of political expediency rather than calculated Source: GECOL, Strategy& analysis Strategy& | PwC Prepared for The World Bank 58 Target milestones help define a tariff reform roadmap, which is leveraged as input guideline in tariff design excel toolkit Tariff reform roadmap Wave I Wave II Wave III ILLUSTRATIVE 2017 2021 2023 2024 2027 1.1 100% 100% Tariff 90% GECOL P&L rationale costs on customers 60% 2.2 100% Cross sub- 90% Coverage of sidization residential- 75% driven costs 45% 3.1 Residential State offices Active Street light. Commercial charges Demand Small Agr. Light Ind. P Large Agr. charge Heavy Ind. P 3.2 Residential State offices P Rate Street light. Commercial schemes Time-varying Small Agr. Light Ind. P energy charge Large Agr. Heavy Ind. P Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 59 1.1 Tariff rationale For instance, tariffs might increasingly cover GECOL P&L costs and start reflecting part of the cost of fuel subsidies Tariff rationale roadmap Wave I Wave II Wave III ILLUSTRATIVE 2017 2021 2024 2027 Cost of fuel subsidies on 50% customers 20% 0% 0% 100% 100% GECOL P&L 90% costs on customers 60% Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 60 2.2 Cross subsidization Cross-subsidies between customer classes might be gradually decreased… Cross subsidization roadmap Wave I Wave II Wave III ILLUSTRATIVE Coverage of class- 2017 2021 2026 2030 driven costs(1) State offices 280% Commercial 210% 200% Heavy Industrial 150% 170% Light Industrial 150% 130% 135% 135% Street Lighting 140% 120% Large Agriculture 120% 110% 100% 100% 90% Small Agriculture 80% 90% 75% Residential 45% 1) Based on allowed costs by customer class (which benefit from subsidies); thus, values higher than 100% do not necessarily imply full coverage of overall class-related costs Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 61 3.1 Active charges 3.2 Rate schemes …and more advanced charges and rate schemes applied, enabled by metering technology deployment and upgrade Charges and rates roadmap Wave I Wave II Wave III ILLUSTRATIVE 2017 2021 2024 2027 2020 Customer [all cust. charge classes] Customer charge Heavy Ind. Large Agr. Demand charge Light Ind. Active Demand Small Agr. charge Commercial charges Street light. State offices Residential Energy [all cust. charge classes] Energy charge 2020 Customer [all cust. charge classes] Flat rate Demand [all cust. charge classes] Flat rate Heavy Ind. Rate Large Agr. Flat rate Time-varying rate schemes Energy Light Ind. Small Agr. charge Commercial Street light. State offices Residential Progressive rate Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 62 Guided by a gradual and tailored improvement pathway, tariff framework would thus experience a smooth transition Average tariff evolution INDICATIVE (1) ILLUSTRATIVE Customer Demand Energy charge charge charge 2017 2021 2024 2027 LD / Dhs / Dhs / month kW kWh Customer Demand Energy Customer Demand Energy Customer Demand Energy Customer Demand Energy charge charge charge charge charge charge charge charge charge charge charge charge Heavy Industrial 31 187 5 14 160 4 31 160 3 59 Large Agriculture 32 118 5 12 120 4 32 120 3 61 Light Industrial 42 21 44 18 5 34 18 4 63 Small Agriculture 30 15 36 19 5 34 19 3 65 Commercial 68 24 63 21 7 45 16 4 63 Street Lighting 68 22 75 21 79 21 103 State offices 68 60 59 45 68 34 78 Residential 20 10 39 13 64 14 98 120 120 120 120 102 100 100 100 100 91 82 72 Focus on 80 80 80 80 61 Residential - 60 60 47 60 60 38 41 40 40 40 40 Energy charge 29 20 20 20 20 20 20 20 (Dhs / kWh) 0 0 0 0 0 200 400 600 800 0 200 400 600 800 0 200 400 600 800 0 6 12 18 24 Flat rate (kWh / month) Progressive rate (kWh / month) Progressive rate (kWh / month) Time-varying rate (kWh/ month) 1) True tariff calculation and design process is enabled by year-by-year financial and technical performance data projection; Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 63 Cost to serve Current tariff framework New tariff design process and decisions required Multi-stage tariff reform roadmap Excel toolkit user guide Strategy& | PwC Prepared for The World Bank 64 On the basis of a specific set of input data, excel-based Tariff Design Toolkit enables tariff calculation and setting… Tariff Design Toolkit introduction • Tariff Design Toolkit has been developed to support tariff calculation activity in Libya and enable a full design process, with visibility of the financial impact on the sector Description • The tool is built so to provide results on annual basis (typically, from one year to the following) according to a specific set of input data (mainly one-year projections), and is set-up to design tariff rates for up to 10 distinct customer classes • The recommended way to utilize the model is to start by completing the “Input” section, making sure to provide all the required inputs General • The user-friendly “Control Panel” section then allows to adjust several parameters directions and quickly run simulations, without the need to work on “Input” and “Calculation” sheets | Input | Calculation | Control Panel | • The model requires a set of specific inputs in order to deliver accurate results (e.g. projection of P&L costs, consumption by time block, demand by voltage level, etc.) Warnings • The user is responsible for inputting all the required data (explored in the following slides), and remains responsible for their accuracy Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 65 …supporting whole design and review process, which shall be developed on annual basis by GECOL and the regulator Tariff design and review process Year n-1 Year n Year n+1 e.g. 2018 e.g. 2019 e.g. 2020 Q1 Q2 Q3 Q4 Activities Data collection related to year n-1 Data projections for year n+1 Preliminary rate design for year n+1 Preliminary-tariff submit to the regulator Review of projections (regulator) Review of tariff rates (regulator) Launch of new tariff framework Application of new tariff Time Color code: details on next slides Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 66 Excel toolkit is built on three major sheets, two of which support the user in the design process Tariff Design Toolkit sheets ILLUSTRATIVE Input sheet Calculation sheet Control Panel sheet FORECAST ACTUAL DECISION REQUIRED and RATE DESIGN Year n+1 Historical data Year n-1 Receives data and rate- e.g. 2020 e.g. 2008-2017 e.g. 2018 design parameters from 368 368 361 Input and Control Panel 312 295 312 295 306 289 sheets 137 137 134 351 351 344 262 262 257 Elaborates data (e.g. cost 223 223 219 allocation) and performs 331 331 325 317 317 311 calculations (e.g. unit cost by customer class) RATE DESIGN To be filled in with desired parameters defining final Returns output values rates by customer class FORECAST ACTUAL leveraged as reference To be filled in To be filled in data in the Control Panel / with projections with actual data DASHBOARD for year n+1 for year n-1 dashboard No need to work on Calculation sheet Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 67 Input Input sheet is organized in 4 main chapters, each divided in two main sections, “Forecast” and “Actual” Input sheet structure ILLUSTRATIVE FORECAST ACTUAL Input sheet section section Chapter 1 REVENUE / COST EVOLUTION Sub-chapter 2.1 COSTS OVERVIEW 2.2 FUEL COST 2.3 SALARIES 2.4 DEPRECIATION 2 COSTS BREAKDOWN 2.5 T&D COSTS 3.1 CONSUMPTION and SALES 3.2 CONSUMPTION by TIME BLOCK 3.3 MAXIMUM DEMAND 3 SUPPLY-DEMAND 3.4 MAXIMUM DEMAND by TIME BLOCK 4.1 CUSTOMERS and CONSUMPTION PATTERN 4.2 METERING TECHNOLOGY 4.3 BILLING 4 CUSTOMER SERVICE 4.4 COMMERCIAL PERFORMANCE Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 68 Input On annual basis, Forecast and Actual shall be filled in with following-year projections and historical data respectively Input sheet data Current year Year n Tariff for Year n+1 FORECAST ACTUAL (“reference year”) section section To be filled in To be filled in with historical data up to year n-1, which represent a with projections reference for the calculation and the review of year n+1 projections for year n+1 in the “Forecast” section Color code Projections Actual historical data Calculated cells Illustrative historical data (actual data to be filled in) (shall not be edited) To be filled in with actual data up to year n-1 (on annual basis) Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 69 Calculation According to the identified tariff design methodology, data are automatically elaborated in the Calculation sheet Calculation sheet structure ILLUSTRATIVE No need for the user to work on Calculation sheet Calculation sheet Chapter 1 DETERMINATION of COSTS input 2 COST ALLOCATION output 3 RATE DESIGN I II III Receives data from Returns output values Input sheet and rate- Elaborates data and leveraged as reference design parameters from performs calculation data in the Control Control Panel sheet Panel / dashboard Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 70 Control Panel Control Panel sheet interactively supports the core rate- design activity, and displays results within a dashboard Control Panel sheet structure ILLUSTRATIVE Control Panel sheet I II III IV Decisions required on Decisions required on Final RATE DASHBOARD TARIFF RATIONALE and ACTIVE CHARGES and DESIGN CROSS-SUBSIDIZATION RATE SCHEMES 1.1 2.2 3.1 3.2 Tariff Cross sub- Active Rate rationale sidization charges scheme Dependent upon tariff Dependent upon tariff design (excel toolkit) design (excel toolkit) Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 71 Control Panel The sheet is organized in 4 distinct panels, and allows to adjust a set of design parameters, highlighted as blue cells Control Panel sheet structure I IV Decisions required on TARIFF RATIONALE and DASHBOARD CROSS-SUBSIDIZATION II III Color code Input parameters for rate design Decisions required on ACTIVE CHARGES and Final RATE DESIGN Note: cells formatted with colors different RATE SCHEMES than blue are calculated cells and shall note be edited Focus on next slides Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 72 Control Panel I II III IV The first panel allows to set the costs charged on customers, as well as the possible set of cross-subsidies between classes Decisions required 1.1 and 2.2 I IV II III Customer classes with no constraints (empty cells) may be charged for the discounts accorded to subsidized classes Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 73 Control Panel I II III IV The second panel allows to choose the charges to be activated and the rate schemes to be applied by customer class Decisions required 3.1 and 3.2 I IV II III Energy charge allows different rate scheme options Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 74 Control Panel I II III IV The third panel displays resulting rates, and allows further manual adjustments to define ultimate Designed rate Final rate design I IV The panel provides an The rates resulting from the indication of the incidence of applied set parameters can be II III the Costs related to each used as reference in ultimate charge on Total allowed costs rate design (blue column) Coverage of allowed costs Further manual adjustments resulting from Designed rates allows to define the ultimate Rate schemes is an additional reference Designed rate (to maximize different than Flat are guiding ultimate rate design political / public acceptability) displayed in a chart Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 75 Control Panel I II III IV On residential class, available parameters also allow to set Progressive-rate intervals and possible lifeline discounts Final rate design – Focus on Residential class I IV II III On residential class Flat rates, the user can either decide to apply a lifeline discounted tariff or not On residential class Flat rates, the user is allowed On residential class Progressive to arbitrarily set the lifeline rates, the user is allowed to set discounted tariff for low- first-consumption tier rate, while consuming customers following tiers (black cells) are automatically calculated to cover allowed class costs The panel allows to set Progressive rate monthly- Focus on Residential class volume pricing ranges Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 76 Control Panel I II III IV The dashboard exhibits tariff impact on revenue/cost and resulting contribution required from government Dashboard – Results I IV II III Expected subsidies on fuel Expected subsidies on GECOL P&L Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 77 Control Panel I II III IV The dashboard also provides a snapshot of the designed rates, including achieved level of coverage of allowed costs Dashboard – Designed rates I IV II III Ultimate Designed rate may have altered coverage of allowed costs by customer class (and overall) Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 78 Control Panel In addition, the forth panel displays the impact of commercial performance, with different scenario options Impact of commercial performance I IV II III Scenario selection (as per scenarios defined in Input Expected deficit in sheet) GECOL P&L due to commercial losses Expected non collection Source: Strategy& analysis Strategy& | PwC Prepared for The World Bank 79