Regulatory Framework for Long-Term Demand Forecasting and Power Procurement Planning

Abstract

Electricity supply chain is a capital intense activity requiring a long gestation period for setting up generation, transmission and distribution assets. A robust and stable regulatory and policy framework provides adequate incentive for investment in such capacities. Further, availability of adequate generation and transmission capacities in future needs to be ensured for reliable operation of the power system. A reliable electricity demand projection can not only help the distribution utilities to plan power procurement in advance, but also assist in creation of transmission infrastructure to ensure reliable electricity supply to consumers. Cost of power procurement is the most important element of the Aggregate Revenue Requirement (ARR) of distribution utilities and accounts for about three-fourth of the final consumer tariff. Power procurement plans and contracts typically have a long-term horizon and, therefore, need to be worked out well in advance, based on a reliable and dependable forecast. A national-level exercise for long-term electricity demand estimation is carried out by Central Electricity Authority (CEA), which projects state-wise long-term peak demand for electricity. The Electric Power Survey (EPS), published every five years by CEA, projects electricity demand using partial end use method, which is now supplemented with econometric estimates. Our analysis reveals that there is a deviation of up to 25 percent between the electricity demand projections in the EPS Reports and the actual demand of electricity. This mismatch can be attributed to quality of data as well as methodological shortcomings. Application of a standardised approach across states which vary in terms of economic development, consumption profile, agroclimatic conditions, etc. may also explain the range of deviations in demand projections across states. At the state level, the respective distribution (DISCOMs) and transmission licensees (TRANSCOs) also undertake such an exercise. The objectives, forecast horizon and methodology adopted for such forecasts vary widely. The objectives of some forecasts include transmission capacity planning, power procurement planning and/or regulatory compliance for tariff filings. While licensees in a few states revise their estimates annually, others undertake this activity every five years or more. CEA’s projections are adopted for transmission as well as generation planning in some states. A holistic sectoral approach combining long-term electricity demand forecast with power procurement would not only help utilities economise their overall cost of power procurement but also alleviate supply risks, especially with the growing share of renewable energy sources. We analysed historical demand projections and relevant regulations of selected states – Andhra Pradesh, Assam, Delhi, Gujarat, Madhya Pradesh, Maharashtra, Odisha, Punjab and Uttar Pradesh. Whereas some of the State Electricity Regulatory Commissions (SERCs) have issued specific regulations for demand forecasting and power procurement planning, others have covered only short-term aspects through tariff regulations. The prevailing regulatory framework of the sector across many states does not address the matter of long-term demand forecasting and power procurement planning in an integrated manner. Based on our analysis of different states and some international practices, we identified key aspects that should be considered in formulation of regulations for long-term demand forecasting and power procurement planning. SERCs can consider these key aspects, with appropriate modifications if necessary, while framing model regulations for long-term demand forecasting and power procurement planning.