Charges and Tariffs

Capacity Charges and Energy Charges are common features of many power contracts.

A Capacity Charge is a fixed monthly amount, the value of which depends on the available generating capacity of the power station. This charge is intended to meet the fixed costs incurred by the private power company, including the cost of constructing and financing the power station, repayment of loans and interest, staff costs, insurance and administration costs, plus fixed operating and maintenance costs. These costs are incurred whether or not the power station is running. The PPA will normally specify a guaranteed availability and the charges will be reduced if the private power company fails to meet this availability guarantee over time.

A Capacity Charge is not unique to the electricity industry and is actually a very common commercial arrangement when a supplier is selling to a single customer. A single customer will have exclusive use of the service even if he chooses not to use that service all the time. In such cases the customer will pay a fixed cost (i.e. capacity charge) plus a variable cost when he uses the service.

An investor, whether it is a state-owned utility or a private power company, wants to be sure that its funds will be paid back over time (plus a reasonable return on that investment). As a private power company does not control its own production levels, it needs a way of making sure there is a stable cash flow coming from the project.

A stable cash flow can justify the construction of the project and ensure the project can pay the fixed costs of its operation. Under the terms of a PPA, these fixed costs are reimbursed through a Capacity Charge. As noted above, the Capacity Charge is a fixed payment each month, regardless of whether TANESCO chooses to run the plant or not.

However, the Capacity Charge is only fully paid if the private power company meets its guaranteed availability targets. The payment will be reduced if the plant suffers reduced availability. This incentivises a private power company to maintain a high availability, typically well above 90%.

In addition to fixed costs, a project will incur variable costs when it is running. An Energy Charge is designed to cover the variable costs of running a power station. The charge is usually a sum per unit of electricity (known as a kilowatt hour or kWh). The chief variable cost is fuel but it also includes variable operating and maintenance expenses which are significantly affected by production levels.

Under the terms of a PPA, these variable costs are reimbursed through an Energy Charge which is paid in accordance with the amount of electricity delivered per month, measured in kilowatt hours (kWh).

Songas guarantees capacity at 178.114 MW. It also guarantees availability of 91.3%. If Songas is not available at this level, then we are penalised. TANESCO decides if we generate or not, but Songas still must be available.

The all-in cost of electricity is the total cost billed (Capacity Charge + Energy Charge) divided by the amount of electricity delivered. This is typically expressed in terms of USD/kWh or TZS/kWh.

The all-in cost of electricity provided by Songas will vary slightly, depending on the amount of electricity delivered each month, but is typically around US 6 cents per kWh (TZS 132 per kWh). This is much less than the TANESCO’s average selling price of US 12 cents per kWh (TZS 270 per kWh); making Songas the cheapest supplier of thermally-produced electricity in East Africa.