ppa conference 2015 paper final

24TH PPA ANNUAL CONFERENCE 2015 MAJURO, MARSHALL ISLANDS, JULY 13–17

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Achieving Balance between Fuel and Non-fuel Tariffs

Ajith Fernando, Nikolasi Fonua, Michael Lani ‘Ahokava

Tonga Power Limited, Tonga

Abstract

Tonga’s electricity tariff is regulated through a strict regulatory framework under the Electricity Act 2007. The electricity tariff in Tonga contains two components: Non-fuel Tariff (NFT) component (derived from operational & capital expenses and shareholder dividends) and Fuel Tariff (FT) component (the cost of fuel which is directly collected from the customer and passed through to the supplier). Under the regulatory framework, the electricity tariff is reset through a process undertaken every five years to determine the new NFT component for the next five years. Tonga Power Limited (TPL) is currently in the process of resetting its NFT component for the 2016-2020 period through the Reset Process 2015. Like other Pacific Island nations, Tonga faces the challenge of reducing its high electricity tariff caused by rising oil prices as 92% of Tonga’s electricity is from diesel generation. In order to reduce Tonga’s high reliance on imported diesel fuel, TPLs contribution is to implement three main strategies that would reduce fuel use for power generation. These strategies require TPL to invest a substantial amount of money in capital expenditures that leads to an increase of the NFT component. However, it is expected, in the long run, that heavy investments on capital expenditure would largely reduce the FT component of the electricity tariff. This paper attempts to examine whether continuous increase of NFT would eventually result in diminishing of decreasing effect on the FT component.

1. Introduction

Tonga Power Limited is a 100% state owned enterprise whose mission is to provide reliable, safe, sustainable and affordable electricity to the people of Tonga. TPL was established in July 2008 to act as the concessionaire in Tonga’s concession based electricity regulation regime. TPL generates, distributes, and sells electricity to around 20,000 commercial and domestic customers in Tongatapu, Vava’u, Ha’apai and ‘Eua. Tonga Power’s core purpose is to fully support the government’s goals of reducing Tonga’s vulnerability to oil price shocks, and achieving an increase in quality access to modern energy services in an environmentally sustainable manner via its strategies and Business Plan and to be financially sustainable. The Business Plan 2015 identifies the following three major diesel fuel reduction strategies.

(a) Reducing distribution line losses from current level of 10% to 8% by 2020

(b) Improving generation fuel efficiency from current level of 4.0kWh/L to 4.1kWh/L by 2020

(c) Increasing renewable energy penetration from current level of 8% to 50% by 2020

The objective of the above strategic initiatives is to reduce FT component in the long run. The implementation

of these strategic initiatives however requires substantial amount of capital investments leading to increase

of the NFT component. The key to the Tariff Reset Process (2015) is the achievement of balance between

NFT and FT components.


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2. Theory

2.1 Price Regulation

A firm is a monopoly if it is the sole seller of its product/service and if its product/service does not have close

substitutes. TPL is a monopoly because the government of Tonga has given TPL the exclusive right to generate

and sell electricity to consumers in Tonga.

Because TPL, as a monopoly, can charge its consumers whatever the price they want, the government heavily

regulates electricity prices in Tonga. To protect the customers from the risk of exploitation, the Electricity

Commission (EC) was established by the Electricity Act 2007 as the regulator to ensure the activities

conducted by TPL are socially efficient and benefit all customers in Tonga. Ensuring a lowest possible tariff is

also one of the major objectives of the EC.

Figure 1: Natural Monopoly Price Setting

As shown in Figure 1, price regulation requires TPL to charge a price equal to the Average Total Cost (ATC) so

that TPL earns exactly zero economic profit. Yet the ATC price regulation leads to non-achievement of socially

efficient quantity of electricity generation (qe). This is because in order to generate a socially efficient quantity

of electricity (so that every household that demands electricity enjoys electricity), TPL should charge a price

equal to its marginal cost (TMC). However, MC Price regulation leads TPL to earn negative profits resulting in

TPL going out of business. Currently, TPL’s TATC is 80.15 seniti/kWh, qTPL is about 55GWh and TMC is estimated

to be around 42 seniti/kWh.

2.2 Tariff Setting Process

Tonga’s electricity tariff has two components:

(a) Non-fuel Tariff (NFT) component, and

(b) Fuel Tariff (FT) component


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NFT component of the electricity tariff enables TPL to recover all of its operational and capital expenditures

including the return (dividend) to the shareholder, the government. The NFT component is reviewed and

reset every five years whereas, the FT component of the electricity tariff represents the cost of fuel which

TPL recovers from the customer and directly passes through to the supplier. The FT component is reviewed

on a frequent basis whenever the fuel price increases or decreases.

Non-fuel Tariff Setting

TPL uses Rate-of-Return1 as the price setting methodology to set the NFT component. Under this method of

regulation, the EC examines TPL’s Regulatory Asset Value (RAV)2, Cost of Capital (i.e. Rate of Return), overall

depreciation and the operational expenditures. The NFT component is determined in such a way that total

revenue needed is equal to the total expenditures so that the economic profit becomes zero. This

phenomenon is explained in the following formula.

𝑁𝑃𝑉(𝑁𝐹𝑇𝑥𝐷𝑒𝑚𝑎𝑛𝑑^ + 𝑁𝑇𝑅^) = 𝑁𝑃𝑉(𝑂𝑝𝑒𝑥^ + 𝐷𝑒𝑝𝑛^ + 𝑅𝐴𝑉^𝑥𝑅𝑂𝑅)

𝑁𝐹𝑇 =𝑁𝑃𝑉(𝑂𝑝𝑒𝑥^ + 𝐷𝑒𝑝𝑛^ + 𝑅𝐴𝑉^𝑥𝑅𝑂𝑅 ) − 𝑁𝑃𝑉(𝑁𝑇𝑅^)

𝑁𝑃𝑉(𝐷𝑒𝑚𝑎𝑛𝑑^)

Where: ^ denotes a forecast (next regulatory period, normally five years) NPV means Net Present Value of the values of that variable over each of the five years Demand = demand for supply of electricity by TPL NTR = Non- Tariff Revenue Opex = Reasonable operating expenses Depn = Depreciation of overall assets RAV = Regulatory Assets Value is a value of TPL’s fixed assets as determined by the regulator ROR = Post tax nominal Rate of Return required by the shareholder

The NFT, once set at the beginning of the five year regulatory period, will be adjusted for annual inflation

over the next five year period.

Fuel Tariff Setting

The higher the diesel fuel consumption the higher the FT component will be. The FT component is collected

from the customers and directly passed through to the fuel supplier. The FT component is reviewed

whenever the fuel cost increases ordecreases in the market and/or fuel savings due to renewable energy

generation is passed through to the customers. Thus, at the end of the tariff review period, the previous FT

component is adjusted to:

(a) account for new fuel price increase/decrease (fuel adjustment(1))

(b) Fuel savings from renewable energy (RE) (fuel adjustment(2))

1 Another commonly use price regulation methodology is Price-Cap Regulation where a firm’s tariff is adjusted by a price cap index which reflects the inflation rate in the economy. 2 Regulatory Assets Value (RAV) is a value of TPL’s fixed assets as determined by the regulator


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The formula for the new FT component is shown below:

𝐹𝑇𝑡ℎ𝑖𝑠 𝑝𝑒𝑟𝑖𝑜𝑑 = 𝐹𝑇𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝐹𝑢𝑒𝑙 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡(1) + 𝐹𝑢𝑒𝑙 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡(2)

Where: Fuel Adjustment (1) is determined by the following formula, and

𝐅𝐮𝐞𝐥 𝐀𝐝𝐣𝐮𝐬𝐭𝐦𝐞𝐧𝐭(𝟏)𝐭𝐡𝐢𝐬 𝐩𝐞𝐫𝐢𝐨𝐝 =𝐍𝐏𝐕(𝐏𝐞𝐫𝐦𝐢𝐭𝐭𝐞𝐝 𝐅𝐮𝐞𝐥 𝐂𝐨𝐬𝐭^

^)

𝐍𝐏𝐕 (𝐤𝐖𝐡𝐛𝐢𝐥𝐥𝐞𝐝^^

)− 𝐅𝐮𝐞𝐥 𝐂𝐨𝐦𝐩𝐨𝐧𝐞𝐧𝐭𝐩𝐫𝐞𝐯𝐢𝐨𝐮𝐬 𝐩𝐞𝐫𝐢𝐨𝐝

Fuel Adjustment (2) is determined by the following formula.

Fuel Adjustment (2)this period =−Fuel Savings from RE

NPV(kWhbilled^^

)

Where: ^ denotes a forecast (next 12 months) NPV means Net Present Value of the values of that variable over next 12 months Permitted Fuel Cost^ = allowed fuel costs by the regulator3 kWh billed^ = demand for electricity over next 12 months period

3. Methodology

The methodology used in the paper is to forecast NFT and FT components from first principles for the 2016-

2020 period. In calculating the NFT component, formula (A) shown in Section 2.2 was used. NFT component

was estimated at the Reset Process 2015. Operational expenditures, regulatory asset value (RAV),

depreciation vales, electricity demand and non-tariff revenue values were forecasted accurately in

accordance with the company’s five year budget. The NFT component calculation is not the main focus in

this paper because it is not directly concerned with any fuel savings. Therefore, attention was given mostly

to the determination of FT component where fuel reduction strategies were directly involved.

In determination of FT component, quantities of diesel reduction was estimated from three main strategic

initiatives: reduction of distribution line losses, enhancing generator fuel efficiencies with the proposed

generator replacement program, and increasing renewable energy (RE) penetration. In estimating diesel

reduction due to reduction in distribution line losses, a correlation analysis was conducted using past

distribution capex, line losses and fuel saving data. The strong correlative relationships between these

variables enabled estimation of the quantity of fuel reduction due to reduction of line losses from the

distribution capital expenditure program on improving the distribution network. Manufacturer’s fuel-

efficiency charts were used in estimating fuel efficiency values before and after generator replacement

programs. These ratios were then adjusted with electricity demand forecasts so as to allow translation to

quantities of diesel reductions. RE penetration was directly used to calculate diesel reduction using fuel-

efficiency ratios. They were then discounted for spill and load-factor effects. The total quantities of diesel

reduction from these strategic initiatives were then translated into reductions in FT for the 2016-2020 period.

3 after adjusting for allowed distribution line losses (kWh) and fuel efficiency (kWh/L) targets


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4. Analysis

4.1 Line Losses vs. Fuel Reduction

In this section how new investments on distribution capex impact on distribution line losses is examined.

Then the amount of fuel savings achieved due to the reduction of line losses from the distribution network

improvement program is estimated.

In order to understand how distribution capex expenditure relates to distribution line losses, a correlation

analysis was conducted between these two variables using past data since 2010. A strong correlation

(R2=0.9224, P-Value<0.05), as shown in the Figure 2 was found.

Figure 2: Impact of Distribution Capex on Line Losses

The correlation equation predicts distribution capex requirement in order to achieve the yearly line loss

targets throughout the 2016-2020 regulatory period. As shown in the Table 1, TPL requires $27.7 million to

reduce line losses from the current level of 10% to 8% by 2020.

Table 1: Impact of distribution capex on line losses

Similarly, a relationship between line losses (%) and fuel losses (litres) was investigated using the past data.

Again, as shown in the figure 2, a statistically significant relationship (R2=0.91, P-Value<0.05) was found.

Year Current 2016 2017 2018 2019 2020 Total

Line Loss Target 10.00% 9.50% 8.50% 8.25% 8.00% 8.00%

Capex

Requirement$7,648,607 $6,117,880 $5,080,389 $4,471,121 $4,452,425 $27,770,422


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Figure 2: Impact of Line losses on Fuel Consumption

From the above relationship, fuel savings due to reduction in line losses from distribution capex investments

for the 2016-2020 period was estimated as shown in the Table 2. It is shown that $27.7 million distribution

capex investment yielded 2.3 million litres of diesel fuel saving.

Table 2: Impact of Distribution Capex on Fuel Savings

4.2 Fuel Efficiency vs. Fuel Reduction

In this section how new investments on generation capex impact on fuel efficiency is examined. Then the

amount of fuel savings achieved from the increase in fuel efficiency is estimated.

Figure 3 below illustrates TPL’s generator replacement program for all four island groups over the 2016-2020

period. The program is designed to achieve N-1 security4 to provide for the maximum peak demand in an

event of a loss of one of its generators. However, one of the by-products of this program is a small quantity

of fuel savings achieved due to generator fuel efficiency improvement.

4 N-1 security policy refers to TPL’s ability provide a reliable power supply (i.e. maximum peak demand) in an event of an emergency leading to loss its largest generator.


Line Loss Target 10.00% 9.50% 8.50% 8.25% 8.00% 8.00%

Capex

Requirement$7,648,607 $6,117,880 $5,080,389 $4,471,121 $4,452,425 $27,770,422

Fuel Savings (L) 361,107 435,427 491,511 521,772 539,139 2,348,956


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Figure 3: TPL Generator Replacement Program (All Islands)

Currently, TPL achieves a fairly high level of fuel efficiency (about 4.0 to 4.1kWh/L) due to introduction of

two brand new 2.7MW diesel generators. However, fuel efficiency is expected to decline over time due to

ageing by about 1% per annum between two overhauls (according to the manufacturer).

Using manufacturer’s fuel efficiency-load factor charts, variation of fuel efficiency ratios was calculated as

and when old generators are being replaced with new ones. As shown in Figure 4, fuel efficiency ratios with

generator replacement program was found to be stable at about 4.0kWh/L over the next five year period.

Figure 4: Impact of Generator Replacement Program on Fuel Efficiency


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Fuel savings due to generator replacement program, which otherwise would have been lost due to generator

ageing, is shown in Table 3. Fuel savings in the main island, Tongatapu, are greater than the outer islands as

85% of the electricity demand is supplied from Tongatapu. It is estimated that over the next five-year period,

about 774,943 litres of diesel fuel will be saved due to the generator replacement program.

Table 3: Island-wide Fuel Savings from Generator Replacement

Table 4 shows the summary of the capex investment on the generator replacement program, fuel

efficiencies achieved and amount of litres saved.

Table 4: Impact of Generator Replacement Program on Fuel Savings

4.3 Renewable Energy Penetration vs. Fuel Reduction

Figure 5 shows modelling of RE penetration scenarios conducted by AECOM NZ Limited in May, 2015. In

accordance with this study, TPL would not be able to achieve 50% RE penetration with solar energy alone. As

marked ‘Case 6’, a combination of solar and wind energy project portfolio is needed. The recommended

portfolio of projects is shown in Table 5.

Table 5: Portfolio of RE Projects to Achieve 50% RE Penetration

Year Tongatapu Outer Islands Total

2016 30,690 5,599 36,289

2017 62,828 20,821 83,649

2018 96,449 26,786 123,235

2019 162,842 32,771 195,613

2020 297,394 38,763 336,157

Total= 650,203 124,740 774,943


Fuel Efficiency (kWh/L) 4.10 4.00 4.04 4.01 3.99 3.99

Capex Requirement $2,300,250 $5,044,250 $1,290,000 $400,000 $3,703,000 $12,737,500

Fuel Savings (L) 36,289 83,649 123,235 195,613 336,157 774,943

Case Plant Involved Incremental kW Capacity Year BuiltPeak Output

(kW)

Annual Energy

Output (MWh)

Likely Spill

(%)

Renewable

Energy %

1 Maama Mai 2012 1,300 2,040 0% 4.5%

2 Maama Mai + Vaini PV +1,000 PV 2015 2,300 3,348 1.0% 7.4%

3Maama Mai + Vaini PV +

Lapaha Wind+2,200 Wind 2017 4,500 8,748 16.0% 19.3%


Lapaha Wind + 300 kW PV+300 PV 2017 4,800 9,140 17.0% 20.2%

5 4 MW PV + 4.4 MW wind +1,400 PV + +2,000 Wind 2018 8,400 16,615 23.0% 35.0%

6 8.6 MW PV + 6.6 MW wind +4,600 PV + 2,200 Wind 2019 15,200 29,000 30.0% 50.0%


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Figure 5: RE Penetration Scenarios with Spillage (AECOM, 2015)

In accordance with the ‘Case-6’ scenario, TPL will have to invest in 8.6 MW solar and 6.6MW wind (15MW

in total) plants to achieve 50% RE penetration. The proposed locations for the combination of solar and

wind farms are shown in Figure 6.

Figure 6: Proposed Locations for the Solar and Wind Projects in Tongatapu


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These added RE capacities can be directly converted in to fuel savings using the corresponding fuel efficiency

ratios. However, these fuel savings could have been incorrect if they were not adjusted for two effects: spill

effect and load factor effects.

Spill Effect

The maximum peak demand in Tonga is about 8MW. Since diesel generators should be run at least at 30%

load, 2.5MW should be set aside for diesel generators. Then only up to 5.5MW is all left for solar and wind

generation. Since the additional RE capacity added after year 2017 (i.e. Case 3) could be greater than the

average demand, there will be always spillage after Case 3. Table 6 shows likely percentage spillages from

each RE project. Greater the additional RE capacity greater the percentage of spill will be. The spillage is

estimated to be 30% when 15MW RE capacity is added by 2019.

Table 6: Fuel Savings from RE Adjusted for Spillage

Load Factor Effect

Load factor is defined as the average load divided by the peak load in a specified time period. The “duck

chart” in Figure 7 shows how the increase of spinning reserve (due to addition of RE) reduces the average

load (area below the generation load curve) with respect to the peak load. This phenomenon leads to the

reduction in the load factor and in turn the reduction in the fuel efficiency.

The reduction in fuel efficiency leads to additional fuel consumption by the diesel generators. Since this

additional fuel consumption is triggered by the addition of more and more RE, the original fuel savings by RE

must be adjusted for extra fuel consumed by diesel generators as losses. Table 7 shows reduction in fuel

efficiency ratios after addition of RE and fuel losses caused by the load factor effect.

Case Plant Involved Year BuiltFuel Savings

(L)

Likely

Spill (%)

Fuel Loss Due

to Spill (L)

1 Maama Mai 2012 496,350 0% -

2 Maama Mai + Vaini PV 2015 822,604 1.0% 8,226


Lapaha Wind2017 2,149,386 16.0% 343,902


Lapaha Wind + 300 kW PV2017 2,262,376 17.0% 384,604

5 4 MW PV + 4.4 MW wind 2018 4,143,392 23.0% 952,980

6 8.6 MW PV + 6.6 MW wind 2019 7,250,000 30.0% 2,175,000


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Figure 7: Variation of Diesel Generator Load Profiles with additional RE Capacities

Table 7: The Fuel Loss Due to the Load Factor Effect

Figure 8: Fuel Losses Due to Both Spill and Load Factor Effects

Case Plant Involved Year BuiltFuel Savings

(L)

Fuel Efficiency

Before RE (kWh/L)

Fuel Efficiency

After RE (kWh/L)

Fuel Loss Due

to RE (L)

1 Maama Mai 2012 496,350 4.11 4.10 25,474

2 Maama Mai + Vaini PV 2015 822,604 4.07 4.00 183,924


Lapaha Wind2017 2,149,386 4.04 3.95 297,785


Lapaha Wind + 300 kW PV2017 2,262,376 4.04 3.90 352,369

5 4 MW PV + 4.4 MW wind 2018 4,143,392 4.01 3.80 491,032

6 8.6 MW PV + 6.6 MW wind 2019 7,250,000 4.00 3.60 814,844


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Figure 8 shows the quantities of fuel losses from both spill and load factor effects. The losses are greater as

more and more RE is added to the energy mix. Table 8 shows the net fuel savings from proposed RE projects

in all four islands. Outer island net fuel savings from RE is very small because outer islands will have only

1.2MW RE capacity. It can be seen from Table 8 that the total fuel savings achieved will be about 4.8 million

litres by the year 2019. Diesel displacement from RE alone is about 35% of TPL’s overall annual diesel

requirements which is around 13 million litres.

Table 8: Net Fuel Savings from RE after Adjusting for Spill and Load Factor Effects

Table 9 shows capex investment requirement to build all the proposed RE plants. Most of the capital costs

are expected to be funded by donors. TPL’s contribution of TOP$ 4 million covers such capital costs as land

acquisition, fencing, grid connection, and security monitoring.

Table 9: Capital Requirement for all RE Projects

5. Results

5.1 Overall Fuel Savings

Table 10 shows the total fuel savings from all three strategic initiatives: reduction distribution line losses, fuel

efficiency improvements and increase in RE penetration. Total fuel savings achieved will be about 5.5 million

litres by the year 2019. Diesel displacement from all three strategic initiatives will be about 42% of TPL’s

overall annual diesel requirements of 13 million litres. Figure 9 shows the overall fuel saving split from all

three strategic initiatives.

Year 2016 2017 2018 2019 2020 Total

Fuel Saving (without spill

& load factor effect) (L) 814,599 2,262,376 4,143,391 7,250,000 7,250,000 21,720,366

Loss Due to Load Factor

Effect (L) 183,925 352,369 491,033 814,844 830,154 2,672,324

Loss Due to Spill Effect (L) 8,146 384,604 952,980 2,175,000 2,175,000 5,695,730

Net Fuel Savings (L) 622,528 1,525,403 2,699,378 4,260,156 4,244,846 13,352,311

Outer

IslandsNet Fuel Savings (L) 481,980 481,747 481,512 481,272 481,029 2,407,540

Total Fuel Savings (L) 1,104,508 2,007,150 3,180,890 4,741,428 4,725,875 15,759,851

Tongatapu

Year 2016 2017 2018 2019 2020 Total

Capex Requirement (TPL

Funded) TOP$ - 1M 1M 1.5M - 4M

Capex Requirement

(Grant Funded) NZD - 12M 15M 30M - 56M

Net Fuel Savings (L) 1,104,508 2,007,150 3,180,890 4,741,428 4,725,875 15,759,851


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Table 10: Total Fuel Savings from Reduction in Line Losses, Fuel Efficiency Improvement and RE

Figure 9: Overall Fuel Savings from All Three Strategic Initiatives

5.2 Estimation of FT and NFT Components

As shown in Table 11, reduction of FT components due to the overall fuel savings is estimated using Fuel

Adjustment (1) 5 of Formula (B) shown in Section 2.2. It can be noticed that greater FT reduction is achieved

towards the later years due to the addition of large size RE plants.

Table 11: Forecast of FT and NFT Components (without Storage)

5 Note that the Fuel Adjustment (2) is zero because it was assumed that current fuel price will stay the same over the 2016-2020 period as future fuel prices cannot be predicted. Thus the fuel adjustment due to fuel price increase/decrease is zero.

Year 2015 2016 2017 2018 2019 2020 Total

Fuel Savings due to Line Loss

Reduction (L) 278,086 361,107 435,427 491,511 521,772 539,139 2,348,956

Fuel Savings due to Generator

Replacement Program (L) 26,685 36,289 83,649 123,235 195,613 336,157 774,943

Fuel Savings due to RE

Penetration (L) 953,612 1,112,320 2,006,915 3,180,651 4,741,186 4,725,876 15,766,948

Total Fuel savings (L) 1,258,383 1,509,716 2,525,992 3,795,397 5,458,571 5,601,173 18,890,848

Year Current 2015 2016 2017 2018 2019 2020 Formula

FT Reduction due to Fuel

Savings (seniti/kWh) - 3.34 3.91 6.39 9.38 13.17 13.51

NFT Increase Due to Capex

Investments (seniti/kWh) - 1.48 0.67 0.68 0.69 0.61 0.60

The Balance - 1.86 3.24 5.71 8.69 12.56 12.91

FT Component (seniti/kWh) 36.38 33.04 32.47 29.99 27.00 23.21 22.87

NFT Component (seniti/kWh) 43.77 45.25 45.70 46.16 46.62 47.09 47.56

Tonga Full Tariff (seniti/kWh) 80.15 78.29 78.17 76.15 73.62 70.30 70.43

B

A


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About 13 seniti/kWh FT reduction is seen with 50% RE penetration (i.e. 15MW RE penetration).

Similarly, as shown in Table 11, NFT is estimated using Formula (A) shown in Section 2.2. The initial NFT at

the start of the 2016-2020 period was estimated at 45.25 seniti/kWh6 during the Reset Process 2015. The

NFT component was then adjusted for 1.5% annual inflation increase throughout the five year period. The

results show that increase in NFT component reduces FT component largely without a diminishing effect.

This was because donor funded capital expenditure was not included7 in the Regulatory Asset Value (RAV)

which was a large component of the NFT calculation. Therefore, a large increase of NFT was not observed.

Table 11 also shows that the overall decrease of full electricity tariff in Tonga is about 10 seniti/kWh (decrease

from its current value of 80.15 seniti/kWh to 70.43 seniti/kWh in 2020) due to the overall fuel savings. Figure

10 shows the tariff path with and without RE. Tariff without RE shows a flat line because it is assumed that

the fuel price is constant throughout the 2016-2020 period as future fuel price cannot be predicted.

Figure 10: Tariff Path With and Without RE (Without Storage)

5.3 Effect of Storage

The effect of battery storage on the tariff reduction is also examined. Since the storage devices eliminate fuel

loses from both spill and load factor effects, the reduction of FT has seen a greater effect. Assuming, 6 hour

storage devices are sufficient to eliminate fuel losses from both spill and load factor effects, the reduction of

FT component is now arrived at about 20 seniti/kWh which is about 7 seniti/kWh increase as compared to

the 13 seniti/kWh case without storage devices. As shown in Table 12, full electricity tariff in Tonga is to be

reduced to 63.84 seniti/kWh by 2020 from the current level of 80.15 seniti/kWh.

6 The NFT component of 45.25 seniti/kWh is yet to be approved by the Regulator. The approved value may be slightly different. 7 In accordance with the International Financial Reporting Standards (IFRS), donor funded assets are not recorded as part of RAV.


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Figure 11 shows the tariff path with storage devices.

Table 12: Forecast of FT and NFT Components (with Storage)

Figure 11: Tariff Path With and Without RE (With Storage)

6. Conclusion

In order to reduce its heavy reliance on imported diesel fuel, TPL embarks on three major fuel use reduction strategies as highlighted in the Business Plan 2015. These three strategic initiatives together are expected to decrease diesel use by about 5.5 million litres (42% of diesel displacement) by the year 2020. Fuel reduction in turn is expected to decrease FT component by about 13 seniti/kWh (without storage) and 20 seniti/kWh (with storage) by 2020. The relationship between the NFT and the FT component shows that the increase in the NFT component continues to decrease the FT component without any diminishing effect resulting in an overall tariff decrease.

References

AECOM NZ Ltd. (2015), Upgrade of Grids and Preparing the Utility for Operations with RE Plants-Stage 2,

Modelling of RE Penetration Scenarios, Auckland, New Zealand.

Year Current 2015 2016 2017 2018 2019 2020 Formula

FT Reduction due to Fuel Savings

(seniti/kWh) - 4.30 4.40 8.30 13.00 20.40 20.10

NFT Increase Due to Capex

Investments (seniti/kWh) - 1.48 0.67 0.68 0.69 0.61 0.60

The Balance - 2.82 3.73 7.62 12.31 19.79 19.50

FT Component (seniti/kWh) 36.38 32.08 31.98 28.08 23.38 15.98 16.28

NFT Component (seniti/kWh) 43.77 45.25 45.70 46.16 46.62 47.09 47.56

Tonga Full Tariff (seniti/kWh) 80.15 77.33 77.68 74.24 70.00 63.07 63.84

Estimated Battery Capacity

Required (MWh), 6 Hours - 1.07 4.08 7.93 16.38 16.46

B

A

ppa conference 2015 paper final

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