Inside Financial Markets

Govt plans to move towards market-driven power tariffs

ISLAMABAD: With enough generation capacity contracted for the next five to 10 years, the government plans to gradually move towards international competitive bidding for lowest tariff for future power projects, ending current practice of inviting investments on upfront tariffs.

As a first step towards market-driven tariffs, the National Elec­tric Power Regulatory Authority (Nepra) has cleared a total of seven hydropower projects in Punjab and Khyber Pakhtun­khwa for bidding on the sole criteria of ‘lowest tariff’.

This is “the first significant step towards implementation of long-term vision of market-driven tariffs,” said an announcement by Nepra, adding that it had approved request for proposals (RFPs) of seven projects with a total generation capacity of 653MW. This included one project in Punjab of 135MW and six of 518MW in KP.

It said the projects “shall be implemented in the private sector through open competitive bidding” by the Punjab Power Development Board and Pakh­tunkhwa Energy Development Board by floating approved RFPs and inviting private power companies to quote the lowest levelised tariffs, which “shall be the sole criterion for winning the bids”.

The hydropower projects for which RFPs had been approved included Taunsa hydropower project of 135MW at Taunsa Barrage. The projects in KP include 188MW Naran HPP in Mansehra, 102MW Shigo Kas HPP in Lower Dir, 99MW Arkari Gol in Chichtral, 96MW Bata Kundi in Mansehra, 21MW Ghorband Khwar in Shangla and 12MW Nandihar Khwar in Batagram.

In July, the government had put a ban on new power projects on imported fuel, saying its ongoing projects would be enough to meet electricity demands until 2022, although an extension has recently been allowed for a 1,200MW power project on imported liquefied natural gas as contingency plan due to some slow-moving projects.

The government estimates that 2,632MW of new hydropower plants and 3,960MW of coal-based power plants (both local and imported) and other renewable energy projects already under construction will bring in 13,207MW of new generation capacity by the end of 2018. This is being considered sufficient not only to meet power shortages but also provide comfortable spinning reserves.

As such, power generation capacity already financed and under various stages of execution will also bring further capacity of 20,380MW by 2022, taking the total installed capacity to 53,405MW. Therefore, it was de­­cided that no further financial commitments would be made for purchasing power from the private sector, especially on imported fuel.

It was in this policy direction that Nepra, in the meanwhile, decided to do away with the existing tariff setting practice and move gradually towards international competitive bidding-based projects. Even in the recent past, the government has been holding bidding for some mega power projects that attracted lower tariffs than relatively higher upfront tariffs

Nepra said that all generation tariffs for independent power projects (IPPs) in Pakistan had either been based on upfront tariffs or cost-plus tariffs that often invited criticism of lack of transparency. “Hence, Nepra has decided to transition towards a tariff regime based on competitive bidding, which is universally recognised as the fairest and most transparent method of determining tariffs,” it said.

In the days ahead, the regulator said, it would also encourage competitive bidding for determination of tariffs in other technologies, including wind, solar and thermal projects.

The government and the regulator have already decided not to extend upfront tariff for future coal power projects. The upfront tariff for coal-based projects, ranging 8.5 cents per unit to 9.2 cents, was announced in October 2014 and expired on Oct 15, 2016, in view of upcoming projects of various fuel technologies over the next six years.

The approved RFPs would clearly define the specific parameters like technical details, make model, useful life, gross capacity, net capacity, details of auxiliary load for plant operation, designed heat rate, heat rate at site conditions and reference technical parameters. The bids would also be site-, fuel- and technology-specific, keeping in view the benchmark parameters.

The bid evaluation report, along with the complete record, will be submitted to Nepra for approval and based on the bid evaluation report and the record, the authority will notify the successful bidders.

Pakistan has been facing acute power shortages for almost a decade, with more than 4,000MW shortage in Punjab — the largest province by population and accounting for around 70 per cent of the current power consumption.

Baqar Hussain

A Wannabe CFO, just had stepped in the corporate sector, willing to explore every aspect here and learn as mush as i can, awareness for those who dont, get the info where ever possible and stay up to date always.

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)