chapter  8
20 Pages

Tariffs and power factor correction

Capital charges In order to build a power station or a transmission Hie money Is borrowed and Interest paid annually. Borrowing may be from an Institution such as a bank when the Interest will be determined by the bank and this together with some repayment of capital will be made according to a plan. In the case of a public company the money may be the result of a share Issue when the "interest’ paid Is in fact a dividend to shareholders, the amount of which will depend upon the profitability of the enterprise. Capital Is not normally repaid In this case. To regain money spent on ordinary shares it Is necessary to find a buyer. The company borrowing the money will generally make a depredation allowance which means that the book value of the power station or transmission system is decreased year by year. This amount (more, or less; dependent on the outlook for the future) will be Invested In new plant. Interest Is payable whether the plant is used or not and dividends are paid based at least In part on the profitability of the company. To sum up, the money borrowed buys new plant which has to generate or transmit electricity. Customers pay for the energy and for transmission and the income gradually pays for new plant

(depreciation allowance), pays the lenders their dividends, possibly pays off some fixed loans and runs the operating company.