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 consumers.
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 from abroad.

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. 

1 comment:

  1. Nice and good reflection on the recent hike the present government is doing now...still...thanks