Hydrological Uncertainty and its Tariff Implications: Rethinking Power Purchase Pricing for Bhutan Power Sectors

Abstract

Bhutan's electricity tariff determination is based on forecasted electricity generation and demand under a cost-plus regulatory framework. However, hydrological variability has resulted in deviations between forecasted and actual hydropower generation, affecting power purchase prices (PPP), Bhutan Power Corporation Limited (BPC) cost recovery, and tariff stability. The power purchase price accounts for approximately 60% of the total cost for BPC. Although the Tariff Determination Regulation (2025) introduced a quarterly Power Purchase Price Adjustment (PPPA) mechanism, its effectiveness in addressing short-term variations has not been empirically evaluated. This research studies the implications of hydrological conditions, measured by river inflow, together with deviations between forecasted and actual hydropower generation and electricity demand on PPP during Bhutan's 2022–2025 tariff period. Historical monthly and annual data obtained from the Electricity Regulatory Authority (ERA), Bhutan Power Corporation Limited (BPC), and Druk Green Power Corporation Limited (DGPC) were analyzed using comparative analysis, year-wise and month-wise trend analysis, Pearson correlation analysis, and a historical simulation of the PPPA mechanism. The research study shows that the actual average PPP increased from the approved forecasted of Nu 1.60/kWh to Nu 1.78/kWh, resulting in an estimated additional electricity procurement cost of approximately Nu 3 billion. Pearson correlation analysis revealed a very strong positive relationship between actual river inflow and hydropower generation (r = 0.952, p < 0.001) and a strong negative relationship between actual hydropower generation and PPP (r = –0.810, p < 0.001). In contrast, generation variation showed a moderate positive relationship with PPP (r = 0.365, p = 0.028), while demand variation showed no statistically significant association. Month wise analysis further revealed that reduced hydropower generation during the lean season increased reliance on higher-cost electricity purchase, resulting in substantial PPP variations. The findings show that hydrological conditions influence power purchase prices indirectly through their effect on hydropower generation and the electricity purchase mix. The study recommends evaluating a monthly PPPA mechanism, differentiated power purchase pricing, and greater integration of solar photovoltaic systems to improve tariff responsiveness, cost recovery, and the long-term resilience of Bhutan's electricity sector.