"Enlightenment comes from Realizing the Unreality"
Sunday, November 2, 2014
Should we move from a cost plus method of calculating electricity tariff to a price cap method?
Bhutan Power Corporation and the Druk Green Power Corporation today uses
the cost plus method of electricity pricing which means, these companies will
account of all the cost that goes into construction, generation, operation and
maintenance while calculating the rate at which electricity will be sold to the
After recovering the cost, they will keep a certain margin as their
profit. Sounds legit.
However, this allows room for inefficiency as they are allowed to
recover all the cost. What if for example, BPC decides to invest in an area
that does not necessary add value to the company.
This extra cost that it bears will ultimately be reflected in the final
price of electricity when consumers like you and I buy electricity from BPC. We
have also seen how electricity prices have increased as a result of several cost
escalations in the hydropower projects.
What if someday, electricity becomes so expensive that our industries
find it difficult to sustain. Electricity is the only cheapest raw material
for the local industries, since they have to import labor and raw materials
A price cap method however ensures that companies like BPC and DGPC do
not increase their price of electricity beyond a certain cap after accounting
for all factors like cost, inflation etc. This would ensure predictability for
businesses and industries.