The Authority initiated suo motu proceedings for the development of new tariff for Thar coal-based power projects on January 13, 2017 by advertisement along with certain issues in leading national dailies seeking comments of the stakeholders. According to sources, Nepra on January 18, 2017 had written a letter to the Ministry of Water and Power regarding the cessation of Thar coal upfront tariff.
The sources said that notified tariff of January 20, 2015 was expired on January 19, 2017. As per the Authority''''s notified determination, the revision in upfront tariff for next validity period was to be undertaken at least six months prior to the end of the validity period of current tariff. It has not yet been done which might delay important Thar coal-based project.
The Ministry of Water and Power has submitted the following comments to Nepra with a request its comments be kept in mind during determination of new tariff for Thar coal-fired projects: (1) the expired Nepra determined tariff for Thar coal-based power generation projects was made highly incentivised to the follow-up reasons; (i) lack of investors'''' interest in power sector of Pakistan due to security reasons; (ii) uncertainties regarding infrastructure connectivity with Thar coalfield, including roads, transmission lines, water, etc; (iii) and high rate of interest prevailing in Pakistan.
The Ministry of Water and Power, in its reply to Nepra''''s letter has argued that after the success achieved in bringing in investors'''' interest in Thar coal-based generation, especially after the CPEC investment, it is necessary to review the tariff assumptions. It is important to keep investment in Thar coalfield an attractive proposition, as this is the only indigenous source of thermal based load generation which can meet future demands.
At present three blocks of Thar coalfield are included in the CPEC list and it is important that everyone of the three mines achieves a capacity of more than 15-20 million tons per annum to reach the economy of scale necessary to produce the coal at an internationally compatible prices, thus providing the real benefits of Thar coal to the people of Pakistan. This means a generation of around 2,500-3,000MW per mine, or 7,500-9,000MW cumulatively. At present, tariff on Thar/indigenous coal is available to projects of around 3,600MW.
Hence, while it is critical for the power sector to keep investor interest in Thar coalfield, the following improvements in tariff setting have been proposed by the Ministry of Water and Power: (i) EPC cost: The cost of machinery is much lower than those estimated in the previous upfront tariff. It is actually at least 10-15 percent lower than those estimates. This may please be kept in view; (ii) Project Completion Time: It has been observed during the construction being carried out on coal plants in the country these days that an efficient management can complete the project in 30 months after financial close. The time allowed in the previous tariff was 48 months which is too relaxed and allowed higher built-up of costs such as interest during construction, etc, which jacked up upfront tariff. It is proposed that the COD time allowed after FC should be reduced to 30 months to provide for efficient project management;(iii) Cost of water pipeline: the cost of water pipeline from Wajeehar to the project site is estimated to be at least 50 percent higher than the actual(s). This may now be reviewed in the new tariff; (iv) Loan tenure: The period of 10 years for loan repayment also increases load on the initial 10 years tariff. This should be increased from 10 years to 13 or 15 years. This will also have a positive impact on the tariff; (v) IRR: The policy interest rate has now come down to 5.75 percent from 9.50 percent in 2014. This requires a matching rationalisation in the IRR especially when the uncertainties about investment in Thar coal based power plant have reduced considerably; (vi) Price of coal: There has been the practice of giving extension to the high IRR for coal mining sponsors, which due to the reasons cited above, is no longer justified. It would be appropriate that the coal tariff for the purpose of power generation is capped appropriately at the rates commensurate with the economy of scale of 20 million tons per annum;
(vii) Type of tariff: though the best option for any competitive tariff is through reverse bidding, its applicability for Thar coal based power is limited. It is because of the fact that there are only three available sites with three sponsors who are licencees for the mines or their nominees; (viii) Cooling system: The most critical limitation in Thar is the availability of water. The previous tariffs have been on the basis of water cooling system which would limit the mine mouth capacity to 3,000-5,000MW. It would be detrimental to development of this strategically important resource, if water conservation not kept in view, it is therefore suggested that the new tariff incentivised projects with air-cooling system (which save around 80% on the water requirement) and; (ix) Environmental concerns: The Water and Power Ministry has suggested that new tariff should accommodate projects only on super critical or better technology and there should be tariff for plants of lower specifications than super critical.
The ministry has expressed the hope that with improvement on different counts, tariff determination will bring down the levelised tariff by around 15-20 percent from the existing upfront tariff. It will also help in conservation/optimum utilisation of the scarce water resources while containing environmental challenges.
Copyright Business Recorder, 2017