Following projects were approved under the previous upfront tariff: (i) Engro PowerGen Thar (Pvt) Limited- block -II 2x330MW(600MW) ;(ii) ThalNova Power Thar (Pvt) Limited- block II 330 MW;(iii) Thar Energy Limited- block -II, 330 MW;(iv) Thar Coal Block-I Power Generation Co. (Pvt) Limited- Block-I, 2x600 MW( 1,320 MW), totaling to $ 2,640 MW.
According to the determination, the Authority decided to initiate proceedings for determination of new tariff for future Thar coal power projects. Accordingly, following issues were framed to seek input from the stakeholders (i) whether the Authority should determine another upfront tariff with revised benchmarks keeping in view the improvements in latest technology and reduced risks as first movers have already borne the first movers'' risks? (ii) Whether the Authority should determine benchmark tariff for competitive bidding under Competitive Bidding Tariff (Approval Procedure) Regulations, 2014 for new power projects on Thar coal? (iii) If new tariff is determined under either upfront or competitive regime, whether the cost-plus regime shall remain available and (iv) Whether only such coal power plants may be allowed which have low cooling water requirement for future power generation at Thar?
The Issues were made public through an advertisement in the leading newspapers on January 13, 2017 inviting stakeholders to become party to the proceedings by filing intervention request in the matter within 15 days. The stakeholders were also invited to file comments for assistance of the Authority within 15 days. Individual Notices were also sent to all concerned on January 19, 2017.
Ministry of Water & Power, in its comments stated the upfront tariff for Thar coal projects was incentivised due to lack of investors'' interest, uncertainty regarding infrastructure connectivity with Thar coal field and high rate of interest prevailing in Pakistan. The Ministry further stated it is necessary to review the tariff assumptions after the success achieved in bringing in investors'' interest especially after CPEC investment. Since it is the only indigenous thermal source available, it is important to keep investment in Thar coalfield an attractive proposition. Three blocks of Thar coal are included in CPEC and in order to provide economies of scale, each block must achieve a capacity of more than 15 - 20 million tons per annum, which means generation of around 7,500 - 9,000 MW cumulatively. At present, tariff on Thar coal is available to projects of around 3,600 MW.
The ministry proposed following improvements: (i) the cost of machinery is 10-15 percent lower than those estimated in the previous upfront tariff; ( ii) 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. It was proposed that the COD time allowed after FC should be reduced to 30 months to provide for efficient project management; (iii) The cost of water pipeline from Vajihar to the project site is estimated to be at least 50% higher than the actual; (iv) Loan Tenure: The period of 10 years for loan repayment also increases load on the initial 10 years of tariff which may be increased from 10 years to 13 or 15 years. The policy interest rate has now come down to 5.75 percent from 9.50 percent in 2014. This requires a matching rationalization in the IRR especially when the uncertainties in investment on Thar Coal based power plant have reduced considerably.
There has been the practice of giving extension to the high IRR for coal mining sponsors, which due to 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 at 20 million tons per annum. Although the best option for any competitive tariff is through reverse bidding, its applicability for Thar coal based power is limited because there are only three available sites with three sponsors who are licencees for the mines or their nominees. The previous tariffs have been on the basis of water cooling system which would limit the mine mouth capacity to 3000-5000 MW. It is therefore suggested that the new tariff incentivise projects with air-cooling system (which save around 80% on the water requirement).
Ministry suggested that the new tariff should accommodate projects only on super critical or better technology and there should be no tariff for plants of lower specifications than Super Critical. The Ministry maintained that the above improvements in tariff will bring down the levelised tariff by around 15-20% from the existing upfront tariff. It will also help in conservation/optimum utilization of the scarce water resources while containing environmental challenges.
Sindh government in its comments said that to continue and re-notify the lapsed tariff which shall assure investors of an IRR of 20% and to maintain a consistent incentive policy to safeguard and encourage domestic and international investment in Thar mining and power generation. The current tariff was allowed to lapse without notice to investors as required and as stated in the regulators rules. Allowing a ''no existing tariff'' regime to exist has sent a signal of uncertainty and mistrust to investors and markets.
Pakistan is an energy deficient market with 3500 MW of load shedding on daily basis. The cost to economy of an unsupplied kWh translates into more than $ 30 billion/annum. Thar coal is in its nascent stage of development and any reduction in tariff will render irreparable damage to the momentum towards energy achieving autarky. Even if there is a possibility of reducing tariff, it will be unwise at this stage when Thar coal lease holders have spent tens of millions of dollars towards the mine development and are on the threshold of launching an integrated investment plan of billions of dollars for Thar coal development. Sindh Board of Investment (SBoI) endorsed reduction in the cost of producing electricity but firmly believe that such a reduction is only sustainable in the long run by promoting economies of scale in coal mining rather than upsetting investor returns through policy reversals. SBoI estimated that a one percent decrease in return through a tariff reduction of a few cents will result in a cost saving of 3 million dollars. However, this is a one time saving, as with every decrease in RoI, there is a multiplying reduction in investments interests. However, the cost saving accounted for at full utilization of GoS'' Thar mining plan of 20 million tons per year will be $ 11 million per year. Economies of scale will result in the decrease of coal price from $ 60 per ton to $ 28 per ton at full capacity of mine. Cost of fuel contributes more than 50 percent of tariff, therefore, the decrease in coal price will translate into a significant decrease in tariff over the life of mining in Thar. Mine developers cannot firm-up coal supply agreements for downstream power plants if policies and tariff regimes are subject to quick changes. In 2002, a Chinese company Shenhua made a competitive proposal to establish an integrated mining and power project, however, the proposal fell through on account of unreasonable negotiations over 0.5 cents/kWh and the chance at achieving energy security and bringing prosperity to many of our people lost out for over a decade. Fiscal incentives alone may not be the triggering point for investments. The convergences of regional strategic interests are the catalyst that drives such development.
The tariff has been worked out on the basis of following financial assumptions: (i) debt equity ratio is 75:25;(ii) LIBOR of 1.8 percent with a premium of 4 percent;(iii) one time Sinosure/credit insurance fee @7 percent of the debt servicing amount;(iv) in case of project financing without Sinosure/credit insurance fee, the applicable premium over LIBOR shall be 4.5 percent;(v) In case of local financing KIBOR 6.36 percent with a premium of 2.5 percent;(vi) Financing fees and charges have been calculated on the basis of 3 percent of the 75 percent of CAPEX financing;(viii) IDC has been calculated on the basis of approved construction period and average debt drawdown on quarterly basis;(ix) ROEDC has been calculated on the basis of approved construction period and average equity drawdown; and (x) Exchange rate of Rs 105/USD.
Copyright Business Recorder, 2017