IPP Tariff Structure in Pakistan and Evaluation of ... · PDF fileIPP Tariff Structure in Pakistan and Evaluation of ... state/private owned KESC ... in Pakistan and Evaluation of

IPP Tariff Structure in Pakistan

and Evaluation of Decision Making of NEPRA

November 2010 Prepared by: Grue + Hornstrup A/S

Axis Environment Services Abdul Khaliq & Co. (REVIEWER)

IPP Tariff Structure in Pakistan and Evaluation of Decision Making of NEPRA

November 2010 P a g e | 1



INDEX

1 Introduction ........................................................................................................................... 3

2 General Power Generation Structure in Pakistan.......................................................................... 3

2.1 National Electric Power Regulatory Authority (NEPRA) .......................................................... 4

2.2 Independent Power Producers (IPPs) in Pakistan ................................................................. 4

3 IPP Tariff Structure in Pakistan ................................................................................................. 5

3.1 IPP Purchase Price Mechanism .......................................................................................... 5

4 IPP Tariff Decision Making of NEPRA .......................................................................................... 7

4.1 Method of Analysis of Decision Making by NEPRA ................................................................ 8

4.2 Results of the Analysis and Persuasive Precedents............................................................... 8

4.2.1 Decisions on Original determinations of Reference Tariffs.................................................. 8

4.2.2 General Decisions Effecting the Tariffs ............................................................................ 9

4.2.3 Decisions Effecting the Energy Charge ............................................................................ 9

4.2.4 Decisions Effecting the Capacity Charge ......................................................................... 9

4.2.5 Decisions on Unique Tariff Cases ................................................................................. 12

5 Conclusions .......................................................................................................................... 13

ANNEX 1 – Listed IPPs Tariffs (NEPRA) .......................................................................................... 15

ANNEX 2 – NEPRA Tariff Engro Energy Ltd. .................................................................................... 17

ANNEX 3 – Simple Example Application of the IPP Tariff .................................................................. 19



1 Introduction

In a long standing effort since 1994, the Government of Pakistan has made considerable effort to encourage growth within the power generation sector by introducing a more free market approach by the establishment of laws and regulations focusing on Independent Power Producers (IPPs). These efforts have gain success, especially in recent years as IPPs power plants have been commissioned and are now generating power, where for example fossil fuel based IPPs equalled 30% of the power generation capacity in 2008/2009 period. The implementation and success of the IPPs policies and the general structure of the tariff system is continuing to allow for further growth and investment within the power sector in Pakistan.

This includes not only the traditional power generation in Pakistan based on hydro, gas and oil, but as well the new introduction of coal, wind and biomass based power generation.

As a means to encourage this trend of investment (particularly foreign) and continued growth within the IPPs sector, this report’s goal is to shed a transparent light on (1) the tariff structure of the IPPs and (2) the decision making and persuasive precedents of the authority regulated the IPP tariff structure (NEPRA).

In order to meet this goal, this report is divided into three main sections

“General Power Generation Structure in Pakistan” which focuses on the types and magnitude of

power generation in Pakistan, as well as a description of the National Electric Power Regulatory Authority (NEPRA) and the types (and numbers) of planned and operating IPP power plants in Pakistan;

“IPP Tariff Structure in Pakistan” is explained in a manner to allow for general understanding of what is included and how is it applied;

“IPP Tariff Decision Making of NEPRA” it then reviewed through and analysis and discussion of the past decisions for NEPRA.

The conclusion of this report then address what are identified as the most important aspects of the IPP tariff system as devised in Pakistan and the important precedents which NEPRA has made in its decision making regarding the tariffs.

2 General Power Generation Structure in Pakistan

In accordance with the latest available national information (i) Pakistan has a national power generation capacity installed of 19,786 MW. This is broken down into:

6,444 MW (32.6%) of hydro power from state owned WAPDA

37 MW (0.2%) of hydro power from AJKHEB & others

4,900 MW (24.8%) of thermal fossil fuels power from state owned WAPDA

1,955 MW (9.9%) of thermal fossil fuels power from state/private owned KESC

5,987 MW (30.2%) of thermal fossil fuels power from Independent Power Producers (IPPs)

462 MW (2.3%) of nuclear power from state owned facilities

Annual generation for the July 2008 – June 2009 period was 91,843 GWh of which is mostly based on thermal fossil fuels (67.7%), followed by hydro electric generation (30.3%), and nuclear power & import (2%). The fossil fuel use is mostly oil and gas (67.6% of power generated), with a very minor bit of (imported) coal (0.1% of power generated).

Most of the power generation capacity is held by the state owned WAPDA which has 12 thermal and 14 hydro power generation facilities in operation. This is followed by the partial state/private owned KESC which has 4 thermal power generation facilities in operation. In addition there are listed 16 IPP thermal power generation facilities in operation as of June 2009.



The above indicates that the power generation structure in Pakistan is divided into two groups of state owned (WAPDA & KESC) and private owned (IPPs) facilities. The groups are regulated through similar authorities. In this report focus is placed on the regulation of the IPPs and the regulatory authority the National Electric Power Regulatory Authority (NEPRA). Noting that NEPRA as well regulates the state owned power generation as well.

2.1 National Electric Power Regulatory Authority (NEPRA)

Restructuring, Corporatization and privatization of former WAPDA Companies was the cornerstone of the reform policy development of private power with the introduction of IPPs in 1994. Privatization spearheaded by the Privatization Commission and actively supported by NEPRA resulted in divestment of Karachi Electric

Supply Corporation (KESC). A generation company and two distribution companies are being privatized. This privatization has been furthered by the Power Policies of 1994, 1998, and 2002, along with the Hydel Power Policy of 1995.

NEPRA has been created to introduce transparent and judicious economic regulation, based on sound

commercial principals, to the electric power sector of Pakistan. NEPRA reflects the country's resolve to enter the new era as a nation committed to free enterprise and to meet its social objectives with the aim of improving the quality of life for its people and to offer them opportunities for growth and development. (ii)

NEPRA's main responsibilities are to:

Issue Licences for generation, transmission and distribution of electric power;

Establish and enforce Standards to ensure quality and safety of operation and supply of electric power to consumers;

Approve investment and power acquisition programs of the utility companies; and

Determine Tariffs for generation, transmission and distribution of electric power.

NEPRA will regulate the electric power sector to promote a competitive structure for the industry and to ensure the co-ordinated, reliable and adequate supply of electric power in the future. By law, NEPRA is mandated to ensure that the interests of the investor and the customer are protected through judicious

decisions based on transparent commercial principals and that the sector moves towards a competitive environment.

A primary challenge is to quickly create a track record of NEPRA's working such that it demonstrates its objectivity and impartiality. NEPRA has to demonstrate that its decisions are neither arbitrary nor influenced by individual and personal discretion. It is accordingly proposed that to introduce transparency and

accountability in NEPRA, all regulatory decisions regarding licensees and tariffs will be published and made public property.

2.2 Independent Power Producers (IPPs) in Pakistan

Since the introduction of IPPs in 1994, NEPRA has listed to date under it authority the following licenses to IPPs for thermal (fossil fuel) power generation1 (iii)

22 under the IPP Power Policy of 2002;

16 under the IPP Power Policy of 1994;

And the following for renewable power generation

2 under Hydro Power;

1 noting that captive power and small power producers are not included due to smaller capacity limits



6 under Wind Power.

Of these, as indicated in the “2009 Energy Yearbook” (iv), 16 thermal fossil fuel power generation plants were operational and one hydro generation plant.

Under it’s authority NEPRA has issued to date determined Tariffs for the following mix of the power generation IPPs1: (v)

1) 28 Fossil Fuel IPPs

2) 4 Hydro Electric IPPs

3) 6 Wind Power IPPs

4) 2 Biomass Power IPPs

The IPPs tariffs listed by NEPRA as per October 2010 are listed in Annex 1. Here it is noted that not all the licensed IPPs have determined tariffs listed by NEPRA, thought the vast majority of the licensed IPPs under the 2002 policy do have tariffs. This is partly due to the case where a license is need in order to apply for a tariff

3 IPP Tariff Structure in Pakistan

Under NEPRA Pakistan has established a transparent and structured form of IPP tariff determination for produced electrical power. This structure ensures that the IPP producers of the power only receive a fixed return (IRR) on their invested equity, while at the same time being reimbursed for all direct “pass through”

costs/expenses of the generation of the power produced. This system, do to its design and transparency should protect the end consumer of arbitrary and unwarranted price increases from generation in consumed electricity, but also fix the costs of electricity generation to prevailing market conditions (costs of financing, fuels, operation…ect.). In this manner the IPP tariff structure encourages investment in the power sector by providing a transparent system of fixed (IRR) investment returns on equity, as well has slightly higher fixed (IRR) investment returns for higher risk electrical power generation (e.g. wind, hydro…ect).

3.1 IPP Purchase Price Mechanism

The structure of the IPP tariff is set in a manner so that the net-purchase price paid to the IPP for the generated power follows the conditions of the market and thus is an ex-post adjusted tariff (meaning after commissioning). Within this IPP tariff structure there are two charges in the net-price paid to the IPP as in accordance with the Policy for Power Generation Projects 2002 – Section 6; These are the:

Energy Purchase Price [Energy Charge] (PKR/kWh): which is the direct costs per kWh of generation taking into account the actual cost of;

o Fuel

o Variable O&M Local

o Variable O&M Foreign

Capacity Purchase Price [Capacity Charge] (PKR/kW/Hour): are the reimbursement of fixed costs based on the actual level of operation and taking into account the cost of;

o Fixed O&M Local

o Fixed O&M Foreign

o Insurance

o Financing Cost of Working Capital

o Return on Equity (ROE)

o Return on Equity for During Construction Period (ROEDC)



o Withholding Tax

o Loan Payments

o Interest Charges

It is important to note that the actual units and structure of the two charges, as this is what ensures that the IPPs only receive a fixed rate of return (IRR) on equity no matter what the actual generation of the power plant (plant load factor) was for the covered duration of the net-price purchase paid to the IPP. In

this manner NEPRA authorizes a Reference Tariff based on the independently (by Central Power Purchasing Authority) assessed technical conditions and assumption of a proposed power plant. This Reference Tariff is then adjusted as follows during the operation life of the power plant (typically 25 yrs):

1) One Time Adjustments upon Commercial Operation Date (COD)

a. Adjustment due to variation in net capacity at the COD upon the Installed Design Capacity (IDC) test;

b. Adjustment on account of EPC cost changes;

c. Adjustment in insurance as per actual costs on an annual basis;

d. Adjustment due to custom duties, withholding tax;

e. Adjustment on account of actual interest during construction;

f. Adjustment on account Financing fees and charges;

g. Adjustment on account of ROEDC;

h. Adjustment in project cost due to variation in currency incurred during construction;

2) Adjustment in insurance as per actual costs on an annual basis;

3) Pass-Through Items

a. Tax on RoE

b. Withholding tax

4) Indexations

a. Indexation applicable to O&M to account for inflation (local and foreign)

i. Fixed O&M

ii. Variable O&M

b. Adjustments in LIBOR/KIBOR variation (interest of financing)

c. Fuel Price Variation to account for variation in fuel costs and heating values (CV)

The combined setup is depicted in the figure below and an example of the electricity tariff (Engro Energy Ltd. TRF-72) is provided in Annex 2:



Some features of this tariff structure are that the Energy Purchase Prices changes based on the actual fuel

costs (base on price per energy content) to the IPPs and variable O&M based on actual inflation through price indexation. This is then set based on the actual power generation (kWh).

The Capacity Purchase Price changes cover the fixed costs of O&M, insurance, taxes, financing and fixed return on equity. These are then weighted against the actual operation availability per time. This ensures that IPP receives a fixed amount of payment per time (fx. over a quarter), and that this amount is not influenced by the operation of the power plant. This is what ensures that the IPPs receives a fixed ROE (% IRR), and not more or less. It also means that once the financing component is paid off the net-purchase price paid will be lower for the continued future. The adjustments as well ensure that the purchase price paid to the IPP and the ROE are reflective of the current market conditions during the life of the project (typically set to 25 yrs). An simple example of the application is given in Annex 3.

4 IPP Tariff Decision Making of NEPRA

As an authority NEPRA has the responsibility to implement national policies, such as the Policy for Power

Generation Project Year 2002. In doing so NERPA must devise and administer regulations based on its

mandate, where it follows and implements administrative and regulatory law as set by the Government of

Pakistan. In relation to this NEPRA sets the details of the mechanisms of the regulatory structure (such as

the IPP Tariff Structure) and follows the rules as set out by it all following the Policy. In this administrative

capacity it also sets a range of Persuasive Precedents (such as the authorized Return on Equity - %

IRR). These Persuasive Precedents are not necessarily fixed by law or binding regulations (often referred

to as “Decision Presidents”) but are decided on a case-by-case basis. A Persuasive Precedent will then act

as a precedent for future cases in a similar nature, and act as an indication of how NEPRA will decide in a

future case given the same conditions.

Local component

indexed with WPI

Foreign

Includes ROE after COD, ROE

during construction, WHT is pass

through - 15%

Non-Escalable change in

KIBOR/LIBOR to be

indexed to KIBOR

Fixed O&M Insurance

Working

Debt Return on

Indexed to revision in fuel price

Fuel Local

component indexed

with WPI Foreign portion

Variable

Energy Purchase

Capacity Purchase

Electricity Tariff



4.1 Method of Analysis of Decision Making by NEPRA

This analysis focuses on decision making of NEPRA whether these are based on fix law, specified

regulations, or Persuasive Precedents. The analysis focuses on the practical application of the IPP tariff

structure, by reviewing the determinations and decisions as set by NEPRA for IPPs. Under the analysis the

determinations and decisions as issued (listed) by NERPA for 28 thermal power IPPs are fully reviewed (see

Annex 1) as these relate to a more complex tariff structure and decision making than renewable IPPs. As

well the thermal power IPPs make up the bulk of all issued tariffs. Though, some renewable IPPs are

addressed on a case-by-case basis in order to point out important aspects. No small producers are included

in the analysis.

For analysis the decisions are structured based on the following categories:

Original determinations of Reference Tariffs

General Changes effecting the tariff

Changes effecting the Energy Charge

Changes effecting the Capacity Charge

The “requested changes” as raised in these categories by the IPPs are then reviewed as either (1) Accepted

without changes, (2) Rejected as changes were declined, and (3) Revised as changes were made different

from the request. The results are then analyzed to determine the Persuasive Precedents.

4.2 Results of the Analysis and Persuasive Precedents

NEPRA clearly indicates that it follows the Persuasive Precedent as set out in it’s own decisions, taking into account the specific nature of each power generation facility (tariff). A very good example of this it the approval of an adjustment allowing for price changes in the costs of the first fill of HSD to be included in the “Working Capital” costs for the Engro Energy Ltd. project (TRF-140). Here NEPRA states:

“The Authority having examined earlier determinations observed that such adjustment has already been allowed…..On the principle of fairness, equity and justice the Authority considers that the petitioner’s request is justified…” (vi)

Other similar cases of Persuasive Precedent are cited by NEPRA for the acceptance, revision, or rejection

of requests from IPPs. Amongst others, these involved IRRs on ROE (vii) and allowing on shore EPC costs in USD (viii).

4.2.1 Decisions on Original determinations of Reference Tariffs

Based on the publically available notices NEPRA has issued “Reference Tariffs” for 40 IPPs, with 28 Fossil Fuel IPPs, 4 Hydro Electric IPPs, 6 Wind Power IPPs, 2 Biomass Power IPPs. Of these only one was rejected by NEPRA, for the case of Japan Power Generation Ltd. (ix). This rejection was based on a circumstance where a competitive bid was placed on a price basis and Upfront Tariff approved, and the underlying technical applications of the actual power plant and costs could not be rectified within the this Upfront Tariff

by the bidder (e.g. NEPRA could not adjust the tariff). All of the Reference Tariffs issued follow the Policy for Power Generation Projects 2002 and it’s amendments as applicable.

It is noted that in seven2 cases new tariffs were issued by NEPRA, replacing the older tariffs for the same IPPs. All of the new tariffs were issued before COD. The new tariffs were issued on the bequest of the IPPs (e.g. through a whole new application), or as a sole decision by NEPRA. In most cases the new tariffs

2 Engro Energy Ltd. (TRF-140), Gujranwala Energy Ltd. (TRF-94), Halmore Power Generation Ltd. (TRF-85), Kohinoor Energy Ltd. (TRF-77), Orient Power Company Ltd. (TRF-124), Saif Power Ltd. (TRF-99), Sapphire Electric Company Ltd. (TRF-125)



were based on a number of financial adjustments made at one time which significantly affected the total tariffs, the adjustments were for example:

Change in debt/equity ratio

increase in EPC costs

increase in working capital costs

adjustments in debt service

4.2.2 General Decisions Effecting the Tariffs

One important general finding is that in the case of Bestway Power Ltd. (TRF-84) the authority clearly stated that it does not allow for foreign exchange rate variation in PKR/EURO x. This decision has been

echoed in other earlier cases in relation to other currencies such as RMB. This is based on the issue NEPRA will only allow for exchange rate variation in PKR/USD as per the Policy for Power Generation Projects - 2002. Later amendments to the policy allow for the foreign exchange rate adjustments at COD, these

other currencies (Euro, Pound Sterling and Japanese Yen) are converted into USD and then into PKR, as for example in the cases of Grange Power Company (TRF-123) and Gujranwala Energy Ltd. (TRF-94).

4.2.3 Decisions Effecting the Energy Charge

Adjustments to fuel charge

NEPRA sets a clear precedent to allowing for adjustments of the energy charge in relation to actual incurred fuel costs. For example this can be seen in the cases of Atlas Power Ltd. (TRF-68), Attock Generation Ltd. (TRF-55), and Nishat Power Ltd. (TRF-71). Noting that this is after COD.

Before COD, NEPRA has stipulated is cases that:

“The Authority agree with the proposal that the issue of calorific value should be clarified in Fuel Supply Agreement (FSA). In this regard it has to be ensured that the reference calorific value (for the source of which fuel prices are used as a reference for determining prices of HSFO) are clearly indicated in the FSA.” (xi)

This has the implication that changes in the calorific value of fuels shall be dealt with in the Fuel Supply Agreement or Gas Supply Agreement in relation to price paid per unit, and not directly in the tariff. Thus, changes in the calorific value shall be settled in the actual fuel price paid per unit.

Adjustments to variable O&M

NEPRA sets a clear precedent to allowing for adjustment due to indexation for the variable O&M of both the Foreign and Local components. The adjustments for indexation of variable O&M relate to US CPI and WPI (local), and are performed on a quarterly basis. This can be seen through the related continual adjustments for the Atlas Power Ltd. (TRF-68), Attock Generation Ltd. (TRF-55), and Orient Power Company Ltd. (TRF-124). Noting that this is after COD.

4.2.4 Decisions Effecting the Capacity Charge

Adjustment for variation in net capacity at COD

NEPRA sets a clear precedent to allowing for adjustments of the Capacity Charge in relation to the Initial

Dependable Capacity (IDC) test from the Net Capacity as indicated in Reference Tariffs. For example this can be seen in the cases of Atlas Power Ltd. (TRF-68), Attock Generation Ltd. (TRF-55), and Nishat Power Ltd. (TRF-71). In fact in all tariffs, such changes are clearly indicated as “One Time Adjustment at COD” or similar.



There is no case where NEPRA has allowed a change in the Capacity Charge of a tariff base on a change in the Net Capacity after the COD.

Adjustment on account of Total Project Costs at COD

NEPRA sets a clear precedent to allowing for adjustments of the Capacity Charge in relation to the actual costs incurred up through COD as indicated in Reference Tariffs. In this manner these actual costs include Owner’s Cost during construction, EPC cost, Customs Duties & Taxes, Actual Interest During Construction, Financing Fees and Charges, and ROEDC. All of these costs must be clearly justifiable and in cases audited. It should be noted that NEPRA will not automatically accept all claimed costs (increases), and in some cases NEPRA insists on the amount in the Reference Tariff. For example this can be seen in the cases of Atlas Power Ltd. (TRF-68), Attock Generation Ltd. (TRF-55), and Nishat Power Ltd. (TRF-71). In fact in all tariffs,

such changes are clearly indicated as “One Time Adjustment at COD” or similar.

There is no case where NEPRA has allowed a change in the Capacity Charge of a tariff base on a change in the Total Project Costs after the COD.

Adjustment of EPC and Non-EPC cost before COD

NEPRA has a mix of decisions for adjustments of EPC and Non-EPC costs before COD. Nearly all IPPs have applied for some type of adjustments in these categories. These can be anywhere from an actual increase in the EPC costs, to an increase on the Non-EPC costs of perimeter walls and housing. For the most part NEPRA at best allows for a revision of the component and has mostly rejected adjustments.

Adjustments to fixed O&M

NEPRA sets a clear precedent to allowing for adjustment due to indexation for the fixed O&M of both the Foreign and Local components after COD. The adjustments for indexation of fixed O&M relate to US CPI and WPI (local), and are performed on a quarterly basis. This can be seen through the related continual adjustments for the Atlas Power Ltd. (TRF-68) and Attock Generation Ltd. (TRF-55).

Adjustments to insurance

NEPRA sets a clear precedent to allowing for adjustment due to indexation for insurance on an annual basis after COD. This can be seen through the related adjustments for Attock Generation Ltd. (TRF-55).

Adjustments to Cost of Working Capital and Debt Service

NEPRA sets a clear precedent to allowing for adjustment due to indexation for the Cost of Working Capital

and Debt Service after COD. The adjustments for indexation of Cost of Working Capital and Debt Service relate to KIBOR, and are performed on a quarterly basis. This can be seen through the related continual adjustments for the Atlas Power Ltd. (TRF-68) and Attock Generation Ltd. (TRF-55).

Before COD, NEPRA does not make decisions which are favourable to the IPP relating to the Cost of Working Capital, and have rejected the majority of requests. The only accepted cases for a change in Working Capital were in the cases for a change in the costs of the first fill of fuels at COD (Engro Energy Ltd. TRF-140…). Items rejected where for example costs for spare parts (Grange Power Company TRF-123) and O&M for a gas pipeline and gas purchase security deposit (Foundation Power Company Ltd. TRF-48).

NEPRA has allowed for changes in the Debt Service before COD in relation to taxes, loans and interest for

a number of projects (Kohinoor Energy Ltd. TRF-77; Engro Energy Ltd. TRF-140; Nishat Power Ltd. TRF-71).

Authorized Return on Equity (ROE)



The analysis reveals that NERPA, in its decision making, has set a defacto industry wide benchmark for the Internal Rate of Return (IRR) on equity (RoE) in the IPPs tariffs of on less than 15% IRR. This is as well confirmed by an analysis by KPMG (xii) in Mar. 2009 on tariffs of IPPs based on RFO, Natural Gas, Biomass, Wind and Hydro power generation. With the exception of two of hydro IPPs (with 17% IRR) the defacto RoE for IPPs was, 15% IRR up through November 2009.

Furthermore it is stated in a decision by NEPRA (xiii), from May 2010, relating to the tariff authorized for the Attock Gen Ltd. power plant after COD, that NEPRA fixes the IRRs for the RoE component at 15%, and

“The Authority’s decision on the issue of ROE and ROEDC at para-64 is reproduced as follows: The ROE as 15.5% demanded by the petitioner is on the higher side. The Authority

has allowed 15% IRR in the care of other IPPs and find no justification to allow higher return in the instant case. The Authority therefore decides to allow 15% IRR to AGL…”.

Only in case renewable and coal power generation was it identified that a higher IRR for the RoE component was allowed, especially after November 2009. This is the case of AES Pakistan Pvt. Ltd., which is a future planned 1200 MW coal fired power plant. Here the decision of NEPRA is as follows (xiv):

“The Authority decided to allow 16% IRR to the Petitioner. The Authority further decided that the Petitioner will be allowed 17% IRR in case it utilizes indigenous coal…”

There are no licensed IPP large scale coal based power generation plants in Pakistan (xv), and as indicated previously in Chapter 2 only 0.1% of power generation is coal based. Further to this, though Pakistan does have coal reserves, the current exploitation is only 3.7 mill tons (1.6 mill TOE) annually with consumption at 8.4 mill tons (4.7 mill TOE). Of this consumption less than 98% goes to the manufacturing industry and only 1% to power generation.(xvi) It should be noted that further large scale exploitation of coal is planned in Pakistan, but not yet implemented.

Thus the decision to grant a higher IRR in the case of AES Pakistan Pvt. Ltd. is purely based on a first-of-its-kind case, and the desire for the government to introduce coal based power generation in Pakistan, and

encourage domestic coal exploitation in the future. A similar decision on IRR is made in the case of biomass power generation (where coal is used as a dual fuel) (xvii).

In the case of recent renewable energy projects (in 2010) a 17% IRR is authorized by NEPRA. This is

shown in the case of FFC Energy Ltd., a 49.5MW wind power generation project, where NEPRA rejected a request for an 18% IRR, but authorized a 17% IRR as follows (xviii):

“The Authority has already allowed 17% return (IRR based) to promote wind power sector and other power generation technologies based on indigenous resources such as hydel and coal based IPPs, which is 2% more than allowed in the case of thermal power projects. In the view of the aforementioned, the Authority therefore allows 17% return on equity (IRR based) to FFCEL.”

All of the above indicates that the defacto industry wide IRR benchmark for RoE is no less than 15%, and that renewable energy and coal IPPs can have a higher IRR authorized by NEPRA.

Adjustments to Return on Equity (ROE) and Return on Equity During Construction (ROEDC)

Please note that adjustments to the ROE and ROEDC do not mean at change in the IRR on the equity, but an adjustment to the biases equity of the ROE and ROEDC (e.g. this part of the Capacity Charge).

NEPRA sets a clear precedent to allowing for adjustment due to indexation for the ROE and ROEDC after COD. The adjustments for indexation of ROE and ROEDC relate to US$/PRK exchange rate, and are performed on a quarterly basis. This can be seen through the related continual adjustments for the Atlas Power Ltd. (TRF-68) and Attock Generation Ltd. (TRF-55).

NEPRA has in one case removed the US$/PRK exchange rate indexation of ROE and ROEDC in the case of

Nishat Power Ltd. (TRF-71) (xix), this is due to the condition where the IPP did not incur foreign debt as had been applied for and set under the Reference Tariff.

It is important to note that NEPRA has rejected the compounding period for ROEDC before in the case of Bestway Power Ltd. (TRF-84) where



“The Authority has already taken the view in this regard and allowed 24 months construction period for the purpose of calculating of ROEDC as against the normal construction period of 15 months for Reciprocating Engines Technology.” xx

This implies that NEPRA will not allow for actual times of construction which exceed the considered norm (in this case no more than 24 months), thus extensive times of construction can hurt the ROEDC of a project.

In a number of projects NEPRA has allow for changes in the ROE (before COD) as per the actual setup financing after the Reference Tariff based on for example:

Changes in the debt/equity ratio as per actual (Nishat Chunian Power Ltd. TRF-70; Nishat Power Ltd. TRF-71; Saif Power Ltd. TRF-99; Sapphire Electric Company Ltd. TRF-83)

Changes in the foreign/local financing as per actual (Halmore Power Generation Ltd. TRF-85; Tapal Energy Ltd. TRF-78)

Exchange rates (Attock Gen Ltd. TRF-55; Bestway Power Generation Ltd. TRF-84)

In a number of projects NEPRA has allow for revisions in the ROEDC (before COD) after the Reference Tariff (Gujranwala Energy Ltd. TRF-69; Halmore Power Generation Ltd. TRF-85; Tapal Energy Ltd. TRF-78). This typically means that the IPP has requested a change in the equity basis of the ROEDC, but has only received part of what was requested.

4.2.5 Decisions on Unique Tariff Cases

There are two unique (first-of-its-kind) tariff cases identified in the analysis for which NEPRAs decisions on the unique characteristics of tariffs should be noted.

In the case of AES Pakistan Ltd. (TRF-134) NEPRA has set a dual return on equity (based IRR) of 16% for

the use of imported coal and 17% for the use of domestic coal. This said that the “…higher Return on Equity will be calculated on pro-rate basis”.(xxi) The IPP is very large and will likely require the use of dual imported/domestic coal and is taking a risk on the IRR. There is no particular indication of how this will be prorated and set within the actual paid Capacity Charge. It is not known if this pro-rate will be based on the total mass of total energy content ratios between the two coals…ect. This should be clarified better by NEPRA or the IPP, for the case of future coal based power generation in Pakistan.

In the case of Engro Energy Ltd. (TRF-72) the IPP is to operate on permeate (low-BTU) gas, where the gas source is expected to start depleting within the first years of operation. The tariff allows for commingling up to the equal price of HSFO. Put once that point is reached the IPP will need to convert (mid-life) the power plant for the use of another fuel. In this case NEPRA indicates in the tariff:

“(v) At any time during the reservoir depletion phase, if there is a sufficient cause shown

by the power producer supported with concrete evidence to the fact that it commercially no longer viable for EEPL to continue with existing tariff arrangement as given para (iv) [commingling] above and therefore, it considers modification in the existing plant facility, the company in that case will seek approval of the Authority for any additional investment or change of fuel for the proposed modification.” (xxii)

In this case the IPP is undertaking a high risk, as NEPRA dictates that the IPP “will seek approval” for additional investment or change of fuel. NEPRA in this case is not guaranteeing it’s approval for either the investment nor the change in fuel. As well to what extent the additional investment costs for the change can be covered and how, insofar as NEPRA has not indicated that additional investments will be covered

under a revised ROE and ROEDC. Here is it noted that there are no existing IPPs identified in this study where there has been a (mid-life) conversion requiring additional investment. Previously NEPRA’s decisions indicate that investment costs (total project costs) are settled at COD.



5 Conclusions

On the basis of the analysis and discussions within this report regarding NEPRAs decision making and

precedents the following are the main conclusions can be drawn when taking the view of transparency

and limiting the risks which IPPs face under the tariff system.

1) NEPRA clearly indicates (and in practice) follows the Persuasive Precedent as set out in its own decisions, taking into account the specific nature of each power generation facility (tariff).

2) The Power Policy clearly indicated that foreign exchange rates are only taken into account as

USD/PKR and NEPRA strictly enforces this. Only in the case of cost (fx. EPC…) before the COD can currencies of Euro, Pound Sterling and Japanese Yen be utilized, but these again must be converted

into USD. In order for IPPs to limit their risks of financial losses due to changes in currency and devaluation it is recommended that all contracts and costs be settled in PKR or USD, if this is not possible then only before COD in only Euro, Pound Sterling and Japanese Yen, but referenced in a determined tariff again USD or fix against USD in a contracts.

3) NEPRA sets a clear precedent to allowing for adjustments of the energy charge in relation to actual incurred fuel costs, where changes in the calorific value of fuels shall be dealt with in the Fuel Supply Agreement (FSA) or Gas Supply Agreement (GSA).

4) NEPRA sets a clear precedent to allowing for adjustment due to indexation for the variable O&M of both the Foreign and Local components after COD.

5) NEPRA sets a clear precedent to allowing for adjustments of the Capacity Charge in relation to the Net Capacity (defined from the IDC test) as a “One Time Adjustment at COD”. There is no case

where NEPRA has allowed a change in the Capacity Charge of a tariff base on a change in the Net Capacity after the COD.

6) NEPRA sets a clear precedent to allowing for adjustments of the Capacity Charge in relation to the actual Total Project Costs incurred at COD. All of these costs must be clearly justifiable and in cases audited. It should be noted that NEPRA will not automatically accept all claimed costs (increases). There is no case where NEPRA has allowed a change in the Capacity Charge of a tariff base on a change in the Total Project Costs after the COD.

7) NEPRA has a mix of decisions for adjustments of EPC and Non-EPC costs before COD. For the most part NEPRA at best allows for a revision of the component and has mostly rejected adjustments. Therefore, in especially the minor costs relating to Non-EPC issues it would maybe best for IPPs to clarify costs better or reasonably overestimate in applying for a tariff.

8) NEPRA sets a clear precedent to allowing for adjustment due to indexation for the fixed O&M of both the Foreign and Local components as well as insurance after COD.

9) NEPRA sets a clear precedent to allowing for adjustment due to indexation for the Cost of Working Capital and Debt Service after COD. Before COD, NEPRA does not make decisions which are favourable to the IPP relating to the Cost of Working Capital, and have rejected the majority of

requests. NEPRA has allowed for changes in the Debt Service before COD in relation to taxes, loans and interest for a number of projects.

10) The NEPRA as of Oct. 2010 was allowing a return on equity (IRR based), based on the following types of IPP projects:

o Thermal power IPPs (RFO and all types of gas) = 15%

o Thermal power IPPs (biomass and imported coal) = 16%

o Thermal power IPPs (biomass and domestic coal) = 17%

o Wind and Hydro power IPPs = 17%

11) NEPRA sets a clear precedent to allowing for adjustment due to indexation for the ROE and ROEDC after COD. The adjustments for indexation of ROE and ROEDC relate to US$/PRK exchange rate, and are performed on a quarterly basis.



12) Is clear that NEPRA has allowed for changes in the ROE (as per the actual setup financing after the Reference Tariff) for changes in debt/equity ratio, foreign/local financing, and exchange rates. This appears to be part of the flexibility of NEPRA to allow for a general change in financing after the Reference Tariff is issued and before the COD.

13) NEPRA has allowed for revisions in the ROEDC after the Reference Tariff is issued and before the COD. This typically means that the IPP has requested a change in the equity basis of the ROEDC, but has only received part of what was requested.

14) NEPRA will not allow for actual times of construction which exceed the considered norm, but does allow for a small buffer period. Thus extensive times of construction beyond normal can hurt the ROEDC of a project.

15) There are some unique IPP cases for which the tariff structure and NEPRAs decision precedents do

not fit. This particularly relates to (a) the implementation of dual IRRs for an IPP, and (b) the case where an IPP must convert the power plant in mid-life and incur additional investment costs as well as new fuel charge.



ANNEX 1 – Listed IPPs Tariffs (NEPRA)

IPPs Tariffs Listed by NEPRA (Oct 2010)No. Name Tariff No. Type

1 AES Pakistan Pvt. Ltd. TRF-134 Thermal Fossil

2 Atlas Power Ltd. TRF-68 Thermal Fossil

3 Attock Gen Ltd. TRF-55 Thermal Fossil

4 Bestway Power Generation Ltd. TRF-84 Thermal Fossil

5 Blue Star Energy TRF-86 Hydro

6 Cavalier Energy Corporation TRF-118 Thermal Fossil

7 Dawood Power Pvt. Ltd. TRF-111 Wind

8 Eastern Power Company Ltd. TRF-62 Thermal Fossil

9 Engro Energy Ltd. TRF-72 (140) Thermal Fossil

10 FFC Energy Ltd TRF-156 Wind

11 Foundation Power Company Ltd. TRF-48 Thermal Fossil

12 Grange Power Company TRF-123 Thermal Fossil

13 Green Electric Pvt. Ltd. TRF-77 Thermal Fossil

14 Gujranwala Energy Ltd. TRF-69 Thermal Fossil

15 Green Power Pvt. Ltd. TRF-75 Wind

16 Halmore Power Generation Ltd. TRF-85 Thermal Fossil

17 Hub Power Company TRF-92 Thermal Fossil

18 JDW Power Pvt. Ltd. TRF-148 Biomass

19 Japan Power Generation Ltd. TRF-79 Thermal Fossil

20 Kohinoor Energy Ltd. TRF-76 Thermal Fossil

21 Laraib energy Ltd. TRF-100 Hydro

22 Liberty Power Technology Ltd. TRF-89 Thermal Fossil

23 Milergo Pakistan Ltd. TRF-97 Wind

24 Nishat Chunian Power Ltd. TRF-70 Thermal Fossil

25 Nishat Power Ltd. TRF-71 Thermal Fossil

26 Orient Power Company Ltd. TRF-72 (124) Thermal Fossil

27 Pakistan Sugar Mills Association TRF-93 Biomass

28 Progas Power Bin Qasim Ltd. TRF-119 Thermal Fossil

29 Radian Energy Power Generation Pvt. Ltd. TRF-152 Thermal Fossil

30 Ruba Energy TRF-117 Thermal Fossil

31 Saif Power Ltd. TRF-80 (99) Thermal Fossil

32 Sapphire Electric Company Ltd. TRF-83 Thermal Fossil

33 Sarhad Hydel Development Organization TRF-81 Hydro

34 Star Power Generation Ltd. TRF-98 Thermal Fossil

35 SK Hydro TRF-110 Hydro

36 Tapal Energy Ltd. TRF-78 Thermal Fossil

37 Uch II Power Ltd. TRF-122 Thermal Fossil

38 WARDA Power Generation TRF-67 Thermal Fossil

39 Win Power Ltd. TRF-73 Wind

40 Zorlu Enerji Pakistan Ltd. TRF-95 Wind

Thermal Fossil-Fuel 28

Wind 6

Hydro 4

Biomass 2





ANNEX 2 – NEPRA Tariff Engro Energy Ltd.





ANNEX 3 – Simple Example Application of the IPP Tariff

Energy Purchase Price (Energy Charge)

For the energy variable charge the (1) variable O&M local and foreign is basically fixed and only changes based on indexation to the WPI and USCPI. Thus it is changed quarterly as example:

New Variable O&M local (Rs./kWh) = Reference Variable O&M local x (Current WPI / Reference WPI)

For the Fuel charge it is changed monthly as example:

New Fuel Charge (Rs./kWh) = Reference Fuel Charge x (Current fuel cost per BTU or ton / Reference fuel cost per BTU or ton)

The total Energy Purchase Price is then billed at the combined (Rs./kWh) x power delivered (kWh) on a monthly basis

Capacity Purchase Price (Capacity Charge)

For the Fixed O&M local and foreign is basically fixed and only changes based on indexation to the WPI and USCPI. Thus it is changed quarterly as example:

New Fixed O&M local (Rs./kW/Hour) = Reference Fixed O&M local x (Current WPI / Reference WPI)

The “Insurance”, “Cost of Working Capital”, “ROE”, “REODC”, “Debt Servicing” are as well indexed via the WPI, USCPI, Exchange Rate, KIBOR, and LIBOR as appropriate, similar to the New Fixed O&M local above.

The total Capacity Purchase Price then combines all the items (after indexation) into one charge of is (Rs./kW/Hour) then billed based on the total availability of the power plant during the month thus (Rs./kW/Hour) x total available (kW/Hour)

FOR EXAMPLE

Capacity (MW) 100

Availability for a month 30-days (MWh) 72,000 [Used for Capacity Payment]

Generation (90% of the month –MWh) 64,800 [Used for Energy Payment]





i “Pakistan Energy Yearbook 2009”, Part 5 – Electricity; Ministry of Petroleum & Natural resources, Hydrocarbon

Development Institute of Pakistan; December 2009 ii 29 October 2010, Website of NEPRA (nepra.org.pk) under ”About Us”

iii 29 October 2010, Website of NEPRA (nepra.org.pk) under ”Licenses” -> “Generation”

iv “Pakistan Energy Yearbook 2009”, Part 5 – Electricity; Ministry of Petroleum & Natural resources, Hydrocarbon

Development Institute of Pakistan; December 2009

v 29 October 2010. Website of NEPRA (nepra.org.pk) under “Tariff” -> “IPPs”

vi Dec. 23, 2009 – “Decision of the Authority in the matter of petition filed by Engro Energy Ltd...” pg. 4 (TRF-140)

vii Aug 10, 2010 – NEPRA – ”Determination of the Authority in the Matter of Tariff Petition filed by FFC Energy Ltd. pg.

12 (TRF-156)

viii Dec. 30, 2009 - NEPRA – “Decision of the authority in the matter of Motion for Leave for Review filed by Grange Power Co. Ltd….” pg. 3 (TRF-123)

ix Jun 26, 2007 – NEPRA -“Decision of the Authority with respect to a motion for leave for review filed by Japan Power Generation Ltd. (TRF-79)

x May 7, 2008 – NEPRA – “Decision of the authority in the matter of Motion for Leave for Review filed by Bestway

Power ltd. pg. 6 (TRF-84)

xi Apr. 19 2007 – NEPRA – “Decision of the authority in the matter of Motion for Leave for Review filed by Gujranwala

Energy Ltd…. pg. 5 (TRF-69)

xii Letter by KPMG Taseer Hadi & Co. (Karachi), dated 2 March 2009 xiii May 24, 2010 – NEPRA – “Decision of the authority in the matter of Motion for Leave for Review filed under Rule

16(6) of NEPRA…filed by Attock Ben Ltd….” pgg. 1 and 5 (TRF-55)

xiv Nov 16, 2009 – NEPRA –”Tariff Determination in the matter of Tariff Petition field by AES Pakistan (Pvt.) Ltd.” pg. 3

(TRF-134)

xv 29 October 2010, Website of NEPRA (nepra.org.pk) under ”Licenses” -> “Generation”

xvi “Pakistan Energy Yearbook 2009”, Part 4 – Coal; Ministry of Petroleum & Natural resources, Hydrocarbon

Development Institute of Pakistan; December 2009

xvii Apr 2, 2010 – NEPRA – ”Determination of the Authority in the Matter of Tariff Petition filed by JDW Power Pvt. Ltd.

pg. 3 (TRF-148) xviii Aug 10, 2010 – NEPRA – ”Determination of the Authority in the Matter of Tariff Petition filed by FFC Energy Ltd.

pg. 12 (TRF-156)

xix Oct 15, 2010 – NEPRA – ”Modified Decision of the Authority in the Matter of Nishat Power Ltd. Tariff Adjustments a

Commercial Operation Date”. Pg. 1 (TRF-71) xx May 7, 2008 – NEPRA – “Decision of the authority in the matter of Motion for Leave for Review filed by Bestway

Power ltd. pg. 8 (TRF-84)



xxi Nov 16, 2009 – NEPRA –”Tariff Determination in the matter of Tariff Petition field by AES Pakistan (Pvt.) Ltd.” pg. 3

(TRF-134)

xxii Dec. 23, 2009 – “Determination of the Authority in the Matter of Tariff Petition filed by Engro Energy Ltd...” pg. 8

(TRF-72)

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