Energy crisis? Blame it on the tariff

For many developing countries, electricity is a precious commodity and can be costly. In India, for example, the transmission and distribution system accounts for immense amounts of wastage – electricity that is generated and not paid for. But a new tariff system encouraging consumers and appliance manufacturers to be more cost-conscious could cause an electrical revolution.

Dr Vithal N. Kamat,

Baroda Electric Meters Ltd, Gujarat, India

If there exists in India an essential commodity that is being sold to the consumer in an unfair manner, then it is low tension (LT) electrical energy. Primarily, this is because the electric bill that the consumer pays has no bearing on the total consumption.

The existing LT tariff takes into consideration only one component of the total energy, namely the “active energy”. The other component, “reactive energy” sneaks through the present meters and goes unregistered. This is the root cause of most of India`s problems in the LT system.

With electrical energy being a precious commodity in developing countries, it is imperative that the generated energy be utilized in the most efficient manner.

Although the World Bank report sets the norms for technical loss at 8.25 per cent, the losses in the transmission and distribution (T&D) system are increasing at an alarming rate (see Table 1). These figures are for India, and although they could vary widely for other developing countries, the analysis and conclusions would still hold true.

Types of T&D losses

Broadly speaking, there are two types of T&D losses – technical and non-technical. While technical losses are essentially due to flow of current in the lines, cables, transformers, and other electrical elements of the power system, the non-technical losses are due to theft. Table 2 shows that technical and non-technical losses have an almost equal share in the total T&D losses.

High losses in the low tension sector: The LT sector essentially comprises domestic, commercial, light industrial and agricultural consumers, and accounts for more than 60 per cent of consumption. The losses in this sector amount to 53 per cent of its consumption (see Table 2). This is disproportionately high in comparison to the high tension (HT) heavy industry sector, where losses are only 12.5 per cent of its consumption. Therefore, T&D losses in the LT sector is very significant at 86.4 per cent of the total losses.

Out of the total T&D losses in the LT sector, line losses account for almost half – which amounts to 25.5 per cent of the LT consumption. This means that 15.3 per cent of the total energy lost in India is through line losses in the LT sector. Considering that in 1996 a total of about 400 billion units was generated in India, at an average cost of 120 Paise/kWh unit, the annual line loss in the LT sector amounts to Rs 7344 crores (approximately $2 billion).

Low power factor: The total electrical energy, also called apparent energy (measured in kVAh), consists of two components – active and reactive. The active component (measured in kWh) does useful work or generates useful heat in an appliance. The reactive component (measurement unit kilo-Volt-ampere-hour-reactive, kVArh), does no useful work nor generates any useful heat.

The reactive energy contributes to the line losses and blocks the capacity of the T&D lines and equipment. Reactive energy therefore, is an undesired and wasteful form of energy.

Average power factor (PF) is the ratio of active energy consumed to the total (apparent) energy consumed. If the reactive energy is zero, the PF is unity and this is ideal. PF can be used as a measure of line losses and hence efficiency of the T&D system. A load operating at 0.5 PF would contribute to four times (400 per cent) the line losses when compared with the same load operating at unity.

Unblocking the capacity of the existing power system by improving PF or loss reduction is far superior to other methods such as adding new power plants. Not only does the commissioning of new power plants have environmental implications, they also increase the overall cost of energy.

On the other hand, if the PF improvement can be achieved through a new tariff and practically no demand on capital or infrastructure by the utilities, then there simply can be no better alternative.

The LT sector contributes 86.4 per cent of total losses in India, due to the poor PF at which it is operating. Whilst the HT sector operates at 0.9 and above, the LT sector operates at 0.6.

By raising the average PF to 0.9 it would be possible to obtain a 55.6 per cent reduction in losses (see Table 3). This represents a saving of more than Rs. 4000 crores in terms of generated energy saved.

Tariff structures

The only reason for the vast difference in PFs between the LT and HT sectors is that the HT sector is governed by a tariff structure which incorporates incentives and penalties promoting usage at high PFs.

Conversely, the LT tariff is driven by the `antiquated` Ferraris meter technology and is based only on active energy consumption. The reactive energy consumption remains essentially unaccounted for within this tariff. Thus there is no motivation for consumers nor appliance manufacturers to opt for efficient appliances that operate at high PFs.

Under the current tariff there is nothing to differentiate between two LT consumers operating at different PFs. A consumer who is operating at unity and whose energy consumption is less, will be paying the same amount as a consumer who is operating at 0.5 PF consuming more energy – because their active energy consumption is the same.

To illustrate the fairness issue in greater detail it is necessary to start with the generation cost of energy. As shown in Figure 1, 70 per cent of the total cost of energy is governed by the apparent energy unit, kVAh, and includes the capital, fuel, losses and maintenance costs. Only the cost of fuel to drive productive load is governed by the active energy unit, kWh, and accounts for the 30 per cent balance.

The revenue collection against the active energy and the apparent energy tariffs can be respectively plotted for different PFs. If the two graphs were normalized with respect to the total cost of energy, the resultant graphs would appear as shown in Figure 2. The revenue curve of a good tariff should either match Curve B, or have a negative slope. This would ensure that efficient consumers who operate at higher PFs can avail of a discount while inefficient consumers would be penalized. Curve D meets this requirement.

Instead, the steep slope of Curve C shows that under the current kWh tariff, efficient consumers operating near unity pay more than inefficient ones operating at 0.5 PF. As a limiting case, if a consumer operates close to zero PF he is practically drawing current from the utility free of charge.

New tariff proposal

A new tariff – total (apparent) energy tariff – proposes to charge consumers for total energy consumed, including all capital, fuel, maintenance, generation costs, and the losses. A consumer under this tariff method would solely pay for their independent consumption and would benefit from incentives to improve their power efficiency and reduce losses. The current tariff does not accommodate any of these primary objectives.

The tariff is simple to use and easy to implement and the material costs (meters) are relatively inexpensive. It is a single reading (register)-based tariff where the apparent energy static meter is cheaper than the active energy static meter – Rs 1000 ($25) compared with Rs2500 ($62).

The overriding incentive to use the new tariff will be for consumers to use appliances that operate as near unity as possible, thus reducing their personal consumption, availing them of discount prices. The demand created for near unity appliances would encourage manufacturers to concentrate on producing efficient appliances that operate at high PFs.

The implementation of the new tariff would trigger an electrical revolution similar to those seen in the automobile and telecom sectors.

Setting the correct rates for a total energy tariff is crucial. Using the following assumptions: PF on the LT system is 0.6; active energy is Rs2.50/kWh unit. Apply a value about 10 per cent higher than the average PF of the LT. This represents the improvement in the revenue collection by utilities under the new tariff. Thus the value of the PF is 0.66. This value is multiplied by the current active energy rate giving us equivalent total energy tariff rate.

Total Energy tariff rate: Rs2.50 x 0.66 = Rs1.65/kVAh unit.

The total energy tariff is thus seen to be significantly lower than the active energy rate.

A number of groups will benefit from such a tariff.

Consumers will benefit from reduced cost who will only pay for individual consumption. Discounts of up to 35 per cent can be offered to consumers using appliances operating near unity. The consumer has a choice to improve his power factor or pay higher bills.

Utilities would also benefit. Revenue collection of the utilities would increase by about ten per cent. The utilities do not have to bear the burden of fixing capacitor banks and maintaining them. Supply voltage variations can be kept within prescribed limits. They can boast lower losses, better quality of supply voltage and better capacity utilization of their infrastructure.

Perhaps most importantly, the entire nation would benefit. Reduction of losses means lower fuel consumption. Lower fuel consumption means less pollution of both air and water. With its own fossil fuels getting fast depleted, India has to depend increasingly on imports, therefore lower fuel consumption means less burden on foreign exchange.

In practice the savings would be much higher than the figures mentioned earlier. The Rs 4000 crores refer only to savings in technical (line) losses. An equal amount will be saved in non-technical losses as the static (electronic) energy meters that support the proposed tariff are more tamper resistant.

The problem of poor PF is endemic in developing countries yet unobserved in the developed world. The PF in Canada and USA is better than 0.9, essentially because heaters and incandescent bulbs (both operating at unity PF) constitute a major portion of their load. In India the lighting load operates at a low PF because essentially lighting comprises of PF uncompensated fluorescent tubes that operate at 0.5 PF – accounting for 18 per cent of the total load.

Implementation of the new tariff consists of the following steps:

• Two LT categories can initially be identified for the implementation of the new tariff. The new tariff can be introduced as an optional system that would co-exist with the current tariff in these two categories.

• The tariff be retained as optional for a five year period.

• During the initial five-year period restrict the application of the new tariff to two sub-categories: a) old connections that need meter replacements, and b) new connections. The sites identified for the new tariffs to be fitted with apparent energy meters.

• After an initial three-year trial period an optional energy tariff is introduced to the balance of LT categories.

• After ten years, the total energy tariff can be made mandatory in high consumption LT categories. The old kWh meters can then be phased out

• After 15 years the total energy tariff can be made mandatory to the balance of LT categories.


The entire LT load, single or three phase, should be metered using a total energy tariff rather than the unfair active energy tariff. Static meter technologies are available that can provide total energy registration instead of active energy at no extra cost.

Thus, digital static energy meters have an important role in improving efficiency by supporting the more appropriate kVAh based tariff. The Indian Electricity Boards can spearhead the movement to reduce T&D losses by Rs8000 crores by enforcing the total energy tariff for the LT consumers under the guidelines featured in the proposal.

Moreover, the tariff introduction would mark the beginning of a new electrical revolution – where the market will see rapid sale of efficient electrical appliances.

Some leading Indian electricity organisations, Gujarat and Maharashtra Electricity Boards, and the Surat Electric Company have taken a lead by procuring a few apparent energy meters.

Although none of them have introduced an apparent energy category in their tariff document, we can only hope that it will not be long before one of the Indian utilities takes the lead to get recognized as the first environmentally friendly utility to reduce losses by way of implementation of the apparent energy tariff.

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Figure 1. Factors contributing to energy cost

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Figure 2. Normalized graph showing revenue collection using different tariffs

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Figure 3. Compared to the LT sector, the HT sector operates with a much higher power factor