ISLAMABAD: On the request of the government, the National Electric Power Regulatory Authority (Nepra) on Tuesday increased upfront tariff for coal based power projects by 12-20 per cent to encourage fresh investment, mostly from China.

“This is the most attractive upfront tariff for coal-fired power projects in the world”, said an official of Nepra when asked to explain a tariff sheet released by the regulator. He said the detailed determination, explaining all reasoning behind increasing tariff would be issued in a couple of days.

The investors would be able to recover full equity investment in less than three and half years, he said.

The decision was immediately hailed by the prime minister’s office which claimed that it “will reduce the cost of electricity significantly. Any investor now – local or international – can simply walk in with a proposal within this tariff,” it said.

An official said that for the first time about 30.65pc rate of return has been offered in the upfront tariff for power projects based on Thar coal. “This is highest ever return on any investment in Pakistan’s history”, an official said.

The rate of return for projects on imported coal or domestic coal had been offered to the extent of 24.5pc return on equity depending on different project capacities.

In original upfront tariff announced by Nepra in May last year after a series of public hearings and consultative process and feasibility studies, the investors were offered a rate of return of a maximum of 20pc as a special case to attract investment in coal based plants.

Plant factor and efficiency benchmarks were earlier based on European and American standards which the government felt were difficult for the Chinese companies to meet and hence a relaxation in standards and improved returns. The tariff would be remain in place for 30 years.

Under the revised decision, the investors would now get a rate of return on equity for imported coal at 24.5pc for 220MW plant, 27.2pc for 660MW plant, and 30.65pc for Thar coal instead of original flat rate of return of 17pc. Likewise, the plants on local coal would get a return of 26.5pc for 220MW, 29.5pc on 660 and 1,100MW plants.

On average, the upfront tariff for coal projects has been increased by about Rs1.5 per unit (kilowatt hour) from original upfront tariff that earlier ranged between Rs7 per unit and Rs9.5 per unit.

In doing so, Nepra has reduced efficiency standards for 200MW power projects to 37pc from 39.5pc. The efficiency standard for 600MW power projects has also been scaled down to 39pc from 42pc while efficiency for 1,000-1,100MW plants has been reduced to 40pc from 42pc. The efficiency standards for Thar coal based projects of 330MW has also been set at 37pc.

The Nepra determination said the project implementation would complete in four years while investor would be able to drawdown entire equity in three years starting with 60pc in first year and 20pc each in subsequent two years. It said the debt involved in the project could also be drawn down in four years, 33pc each in first two years, followed by 20pc in third year and 10pc in the forth year.

The ministry of water and power had asked Nepra a couple of months ago to relax key parameters of plant quality and efficiency, project cost and operation and maintenance expenses and also ignore a legal requirement.

Nepra had offered a lucrative rate of 20pc return for plants based on local coal and 17pc for those based on imported coal through an upfront tariff announced by the regulator in June and notified by the government in September last year.

The higher rate of return was offered in June as a one-time incentive for six years to encourage investment in coal-fired plants with the condition that investors should take benefit of the special tariff by June 30, 2019.

Under the law, a determination announced by the regulator could be returned for reconsideration by the government in 15 days. In this case, the government has accepted the Nepra’s determination on upfront tariff for coal-fired power plants and also notified it.

“It is requested that 15 days time limit for the reconsideration request as stipulated under section 31 (4) of the Nepra Act be condoned,” Acting Secretary of Water and Power Saifullah Chatta has said in a letter to Nepra. The request was accepted by Nepra.

The earlier notification had offered an upfront tariff of 8.2 cents to 9.6 cents per unit for 200MW plants, between 7.7 cents and 9.2 cents per unit for 600MW plants and between 7.4 cents and 8.75 cents per unit for 1000MW plants.

Interestingly, these tariffs were based on feasibility studies conducted by two private sector firms — the AES Corporation and the Engro Corporation. The government wanted to go out of the way to facilitate Chinese firms, officials said, and boost coal based generation.

Published in Dawn, May 21st, 2014