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Home »Articles and Letters » Articles » Power tariffs: role of competition and transparency – II
Solar PV generation tariff: We should have an appetite for solar PV of around 100 MW at the prevailing PV prices, which compares with a corresponding figure of 1000 MW of Solar PV installed capacity by 2013 in India. In the long run, when prices come down to a competitive level, only sky can be the limit. One could expect 50% of the demand come out of solar. Solar has an advantage over Wind power, as Sun is everywhere with comparable intensities, while it is not windy enough at all places. Also many other solar technologies are coming up such as solar thermal and solar space-conditioning.

The proposed tariff should be and can be brought down to around or even under USD 0.20 per kWh, for the following reasons; current solar bids in India are at the rate of USD 0.15 per kWh. In the US in the states which have comparable solar intensity as in Pakistan, ie, California, Florida, Texas and Hawaii, Solar PV FIT rates are around USD 0.15-0.17 per kWh. California is known as paradise for renewable energy in terms of supportive policies. In Germany FIT is at USD 0.2243 per kWh, at a very low solar intensity, almost half than that in Pakistan.

Solar PV module prices are continuously coming down. In Germany, Solar PV Crystalline modules sold (spot market) at a rate of USD 0.78 per Watt (p); for Chinese modules, the corresponding price was USD 0.53 per Watt (p). Both the Chinese and the German prices came to one-third of its level prevailing in January 2010. Upward-tariff policy has to take into account this factor and tie the tariff to these prices. Balance of the System (BoS) costs is generally as much as module prices. BoS to Module prices ratio has gone up (1:2) recently due to reduction in Solar PV prices, as corresponding cost reductions could not have been made in BoS. By this account, the total installed cost should be around or under 2.0 USD per Wp. Similarly Chinese prices should be around or under USD 1.50 per Wp.

If Discos are allowed to invite international bids for the purchase of Solar PV electricity, it is quite possible that bids in the range of USD 0.16-0.18 per kWh may be obtained as opposed to the proposed USD 0.2329 per kWh. It would be possible if foreign companies without the heavy baggage of local parties are involved. Local parties get credit at higher prices and beef up costs to save equity, as it is widely known. A foreign company would easily get a loan at less than 3% over LIBOR than the assumed spread of 4.5%. Also it would be more than happy to earn 12-15% on its equity as opposed to a Tax-free RoE of 17% offered by us, on an equity that does not exist at all. Based on the aforementioned, it should not be impossible for bidders to come up with the prices of around USD 0.18 per kWh, 30% cheaper than the solar PV tariff proposed in the Nepra-GIZ document. Let us not forget GIZ is some kind of a marketing organisation and take their recommendations with a pinch of salt.

Solar PV prices would keep coming down and are expected to compete with conventional sources around 2020. Upfront, therefore, should either be revised down every year or should build-in a digression (yearly reduction in simple language) of (say) around 8-10% based on reliable published forecasts.

Pakistan's solar market and potential has to be advertised in European capitals and may be also in trade locations like Singapore and Dubai through roadshows, participating in Solar and Renewable Energy exhibitions and by other means. It may prove to be an expenditure worth making, as more competitive offerings could be elicited and benefited from.

WIND POWER GENERATION TARIFF A new tariff schedule has been announced by Nepra for eliciting public opinion and that of other stakeholders. Since, wind power tariff was finalised in October 2011, two major changes have occurred; local interest rates have come down and rupee-dollar parity has significantly eroded. Wind power tariff is in two parts; one for projects with 100% local debt finance; and the other with 100% foreign debt finance. A third type is of mixed one with both local and foreign debts, which has to be interpolated from the two earlier tariffs. Does the new tariff reflect some real changes in the basic parameters or simply reflects the changes in interest rates and currency devaluation? A detailed calculation exercise has to be made to know this. It may be in order that Nepra explains the real situation?

In foreign debt-funded projects, the rupee tariff has virtually remained the same around Rs 12.50 per kWh, but in USD terms, the tariff has come down from 14.6627 cents to 12.7111 cents. Probably currency devaluation in local equity has made this difference. In the case of projects with 100% local loans, the interest rate cut made the difference but has been counterbalanced by the erosion of currency rates. Consequently, in Rupee terms, there is a decrease in tariff from Rs 17.27 to Rs 15.6069 per kWh. However, in USD terms, there is an increase from 15 cents to 15.99 cents per kWh. Probably currency devaluation effect has more than nullified the interest rate cut effect.

Pakistan happens to be offering the highest possible wind power generation tariff. In India, with a considerably lower wind resource quality as indicated by the capacity factor (Pakistan over 31% vs India 25%), the wind power tariff is under 8 cents and in most places non-escalationable. The reason is lower capital costs (USD 1300 per kW in India to USD 2600 per kW in Pakistan) and lower interest rates (12% pa). We hope that in this revision Nepra would correct the situation and bring it down to more reasonable and competitive level.

COAL Probably, after getting a little disappointed by slow development in Thar coal, the electrical power community is giving weight to other option in coal. There is some local coal, other than Thar, widely dispersed in the four provinces including Punjab. It is mostly a high sulfur and low CV coal and has been mostly utilised by brick kilns (bhattas). For quality and other reasons, cement industry being the largest user of coal is virtually importing most of its requirements (around 3 million tons per year) out of imports from Indonesia and South Africa. Local coal is attractive for cement industry when coal prices are high abroad. There may be a potential for not more than a few hundred MWs of producing electricity from local coal other than Thar and that probably in smaller units of around 50 MW. Several initiatives are under consideration by various stakeholders to install coal power plants in and around Faisalabad, Islamabad and Haripur and may be elsewhere. Small coal gasification plants have been installed in Lahore region to produce coal gas for industrial heating and melting purposes. It appears that the upfront tariff may be quite useful for conversion cases. As mentioned earlier, a number of oil-fired Gencos are being converted to coal, although a new controversy has emerged when Sindh government demanded utilisation of Thar coal in these to-be-converted facilities. Prime Minister Raja Pervez Ashraf also issued orders in this respect. However, Thar coal is stuck somewhere. A reasonable approach should be 'base the coal boiler designs on a mix of Thar (lignite) and imported coal'. Importing all of the required coal would create logistics issues and as well as would be a drain on foreign exchange. On the other hand, basing on Thar coal altogether would delay the conversion. Converting to coal would save 12 Rs per unit out of Oil based electricity, resulting in a saving of Rs 60 billion per year for every 1000 MW of such conversions. Most of the circular debt issues may be resolved if all oil-fired power plants undergo such conversion.

Large projects 600 MW-plus based on imported coal may be expected on the coastal belt in Sindh, in Karachi or Keti Bandar. KESC and Hub Power may initially go for conversion and later on may install new facilities as well. As mentioned earlier, imported coal may remain competitive in these areas. Large scale coal transport from Thar may be problematic, if and when it comes up. One could, however, think of some mix of local and imported coal.

The Nepra tariff document contains an unnecessary and confusing proliferation of options. In all twelve tariff options have been described, which could have been reduced to 4 or at most 6. It does not mention of conversion cases, where tariff determination is more urgently required. However, the same may be adopted for conversion cases. The idea of upfront tariff is that one tends to ignore peculiarities and provides a tariff base upon which investors may plan their activities and investments. There are three categories of plant sizes (200, 600, 1000 MW)6, and variants of local and imported coal and of local and foreign debt finance. Local coal (other than Thar) cannot possibly be utilised for large plants. Even a 200 MW size may be too high. At smaller capacities and low quality local coal, there would be efficiency losses as well.

All capacities (200 to 1000 MW) and coal types (local or imported) have been rated at a rather ambitious efficiency level of 40%.Adjustments and modification may be required in the tariff proposal, if local coal has to be utilised at all. Also consideration should be given to allow import of used plants. Used plants may offer a unique opportunity, when coal plants are being retired in many parts of the world for environmental reasons.

IN PRAISE OF TRANSPARENCY AND COMPETITION As mentioned earlier that most energy generation/supply prices are competitively set by the market. It is only at retail levels, where some kind of regulation is essential, where distribution is monopolistic. In case of electricity and gas it is, and in case of other fuels, it is not. The issue of regulating electricity generation tariff pertains only to the developing sector. Cost-plus essentially is a matter of past, (although all prices are in one way or the other, "cost-plus", but both cost and the plus items are reduced and set competitively). Upfront tariff may be a step towards competition, if regulators learn to walk a tight rope between incentivizing the system for suppliers and the need to safeguard consumer interest. Let us also remember that all consumers are producers as well in the larger setting. In the present upfront tariff practices, it is essentially a cost-plus, because almost all inputs are escalate-able, even capital costs are allowed to be adjusted at COD, at least in the proposed coal tariff document. However, one could infuse an element of competition if upfront tariff is bid-based, ie, bids are invited around a base figure and asking for discounts. India has benefited from it in solar PV sector, and Brazil and Turkey have benefited through such auctions in case of wind power. Even in cost-plus situations, competition could be promoted by mandatory requirements of transparent tendering at-least for major items of capital equipment and civil works. PPRA rules could be a good guide. In fact, for all practical purposes, all cost-plus projects are a public entity of sorts and there is a strong case for making such projects in the domain of PPRA.

Leaving loopholes for uncompetitive and immoral and illegal behaviour is not an incentive, genuine investors need. They need transparency, fairness and openness. History of development has shown that transparency has promoted investment and economic development, where genuine investors feel safe and secure in a milieu of competition and transparency. Secondly, as we have mentioned earlier that power sector is too big, complicated and capital-intensive for our small private sector, our power/energy policies should aim and focus for international companies which have the technology, expertise and capital. We have seen that even in Pakistan, almost all large projects have been installed by foreign companies. Local IPPs have, in fact, pushed us into a crisis by installing 200 MW oil-based internal combustion engines, which are simple and easy to install and are quick-buck investments. We have seen how RPP has suffered. We are seeing the delays and failure in Thar which are now more due to inadequacies at the end of the project promoters. In this sector the local parties have no real role to play except being intermediary and parasitic. Pakistani law provides for 100% FDI. We do not need Kafeels.


Copyright Business Recorder, 2013

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