HUBCO TARIFF IS COMPETITIVE WITH ITS PEERS
By Dr. Anjum Siddiqui Senior Advisor & Economist The Hub Power Company Ltd
Hagler Bailly, a highly reputable international management consulting company has written in its report "Review of Electricity Tariffs and Private Power Markets for Seven Asian Countries" that Hubco's tariff is "competitive with its peers" in the Asian region. In a comprehensive report, Hagler Bailly have analyzed the tariffs of Independent Power Projects (IPP) Projects in 7 Asian countries: Pakistan, Bangladesh, India, Indonesia, Malaysia, Philippines and Thailand to make a relative tariff comparison in the region. The report is timely and addresses the central question, is the tariff of Pakistani IPPs more expensive in the region.
The Hagler Bailly Report initially examined data from 45 IPPs in 7 Asian countries, but finally selected only those projects which had achieved financial closure. This resulted in a group of 14 projects in 5 countries for which detailed average life cycle and average ten year tariffs were researched by looking at their components, the capacity charge, energy charge (fuel charge) and other charges. The data for the report was gathered from a survey of Asian IPPs who provided information on their Base Tariffs from their respective Power Purchase Agreements (PPAs).
The actual tariffs which are the Base Tariffs plus all allowable cost escalations pertaining to fuel prices, inflation and devaluation have not been compared by Hagler Bailly due to variation in these variables across countries. It is very hard to get data on actual tariffs and companies in general do not reveal such information, consequently, the comparisons were done of average Base Tariffs. Sceptics and critics of IPPs would be quick to point out that it is in the allowable escalations of inflation, rupee devaluation and other pass through costs that IPPs indulge in wrongdoing and corruption to make excessive profits. Such wild accusations are totally incorrect as the allowed cost escalations are common across all IPPs. Hence, no single project can unilaterally choose a higher escalation factor and thereby jockey itself to a position to charge a higher tariff over other IPPs by showing higher pass through costs.
Hagler Bailly's Findings
The Principal Findings of the Hagler Bailly Report are:
Hubco's average tariffs, both life cycle i.e. over the 30 year life of the project and over the first ten years are competitive with its peers in this sample.
Average Life Cycle tariff: The Hubco project has a 30 year life and its average life cycle tariff of 4.79 cents per kilowatt hour (taken from Hubco's PPA) is just below the mean for the 14 projects analyzed (See Table 1). As a result, Hubco ranks 5th cheapest out of a sample of 14. The cheapest tariff is of the gas fired Independent Power Company in Thailand and the most expensive tariff is 9.58 cents/ kWh of the coal fired Essar-Hazira project in India.
If account is made of the fact that gas is a cheaper fuel and the capital cost of the combined cycle technology gas fired plants is cheaper than the oil fired steam turbines, then the Hubco tariff is second cheapest amongst the 14 projects. This finding is contrary to the general notion that Hubco has the most expensive average tariffs in the region.
Amongst the Pakistani power projects in the sample, Uch Power and Rouch Power have higher tariffs than Hubco, while AES is marginally lower. In terms of levelized tariffs, Hubco maintains that it is marginally cheaper than AES. It is worth noting that despite the cheaper combined cycle technology and relatively cheaper fuel, gas, Uch has a more expensive average tariff than Hubco.
In the sample of the 7 Asian countries, the majority of the average life cycle tariffs fall in the 4.35-6.61 cents/kWh range, with a mean of 5.61 cents/kWh. Hubco's tariff of 4.79 cents/kWh is below the mean.
Average 10 year tariff: Hubco's ten year average tariff of 6.33 cents per kWh does not rank as well as it's life cycle tariff (See Table 2). It is common knowledge that Hubco's tariff is front loaded due to the structure of its debt. Consequently, Hubco ranks 7th cheapest in the sample, while data on the Thailand projects is unavailable.
Capacity tariff: IPPs including Hubco have been alleged to have high capacity tariffs. This illusion is once again negated in the Hagler Bailly report. Hubco's average life cycle capacity tariff is 2.88 cents/kWh versus a sample mean of 3.20 cents/kWh. In the sample of the 7 Asian countries the majority of the average life cycle capacity tariffs fall in the 2.10-5.15 cents/kWh range, indicating that Hubco's capacity tariff of 2.88 cents/kWh is clearly on the low end.
No relationship between total project costs and life cycle tariffs: Usually high project costs are presumed to result in high tariffs. This is an oft heard criticism of the Hubco project by WAPDA. The evidence from the 7 Asian countries belies this presumption. There is no clear relationship between the magnitude of the average total life cycle tariff and the total project cost or the project cost per MW. Hubco also does not show any such relationship and conforms to the trend findings for Asian countries, as it's tariff is relatively low for peers of its size.
Weak relationship between cost per MW and life Cycle tariff: There is a mild trend showing that as cost per MW increases, the average life cycle tariff in cents/kWh also increases. Hubco is on the inside of the trend line, inferring that the average life cycle tariff for a project of its cost per MW is relatively lower than average.
The two findings that the tariff is (i) not related to total project costs and (ii) very weakly related to per mega watt project cost, are important because Hubco has been labeled to be the most expensive oil fired thermal power plant, yet there is no or very weak correlation of tariffs with project costs. It follows that Hubco's project costs are not so high as alleged. In fact, they are inside the trend line of project costs for other projects.
Very weak relationship between project costs and 10 year tariffs: The evidence that the 30 year tariff is unrelated to total project costs is reinforced through the weak correlation of project costs with 10 year tariffs. The sample showed that regardless of project cost there was a similar 10 year average tariff and Hubco's tariff corresponded to this trend in the Asian region. Nevertheless, it is entirely conceivable that project costs with high debt to equity ratios can lead to front loaded tariffs and show a statistical relationship, albeit weak, between project costs and the initial 10 year tariffs.
Mild relationship between type of fuel/technology and average life cycle tariff: This stands to reason as project costs of combined gas cycle technology plants are cheaper and variable costs of gas are cheaper than oil fired plants. The tariff of the much publicized Bangladesh project is indeed cheaper than the tariff of the oil fired steam turbines of Pakistani projects, because the project cost as well as the fuel cost of gas fired projects is cheaper than the oil fired steam turbines. On the basis of the 'evidence' from the Bangladesh project, Pakistani IPPs were maligned and labelled as "expensive", but this is a comparison of apples and oranges which does not make sense.
Wide variation of capacity and fuel charges across countries and projects: Due to differences in risk perceptions of investors for projects within a country or across countries, project costs and capacity charges (Fixed Costs) differ. This is reflected in the observed variance of the life cycle, capacity and initial 10 year tariffs. In the case of Pakistan, very high fuel costs due to petroleum surcharges explain why the variable cost of producing electricity is higher than other countries, which do not rely on high fuel surcharges and where oil is available at world prices to power projects.
India and Indonesia have higher tariffs on average: Although India has a better credit rating and lower country risk, its tariffs are still higher. Despite higher sovereign risk, Pakistan has still managed to negotiate a better tariff structure which goes to show that the country did not cut as bad a deal with international investors as is being publicized in the media.
Coal fired projects tend to have a higher tariff: It seems plausible because coal fired projects tend to have much higher project costs than oil fired projects.
(i) The Hagler Bailly Report should serve to straighten the record and remove the misperception that Pakistani IPPs are more expensive than other projects in the region.
(ii) It also establishes that Hubco's tariffs are not excessive, but cheaper than most projects in the region.
(iii) The evidence establishes that WAPDA's allegations that the Hubco tariff is unbearably high are certainly not corroborated by the report of an independent management consultant. Hagler Bailly find that Hubco's average tariffs as per the Power Purchase Agreement are "competitive with its peers in the region".
(iv) On the basis of the Hagler Bailly report, Hubco can substantiate that its tariffs are reasonable and that WAPDA's own management and operational inefficiencies and corruption have resulted in its cashflow problems.
TOTAL AVERAGE LIFE CYCLE TARIFF (CENTS/KWH)
COUNTRY PROJECT FUEL USED TARIFF Thailand Independent Power Gas 4.16 Thailand Tri Energy Gas 4.35 Pakistan AES-Lalpir Furnace Oil 4.67 Pakistan AES-Pak Gen Furnace Oil 4.67 Pakistan Hubco Furnace Oil 4.79 Thailand Union Energy Coal 4.80 Pakistan Rouch Furnace Oil 4.96 Pakistan Uch Gas 5.00 India Kundapalli Naptha 5.42 Philippines Sual Diesel 5.95 Indonesia Pt-Jawa Coal 6.60 Indonesia Pt-Paiton Coal 6.61 Indonesia Tanjung-Jati Coal 7.66 India Essar Hazara Naptha/Gas 9.58
*The Average Tariff is the simple arithmetic average of the Base Tariffs as per the Power Purchase Agreement of the Project. It is not the levellized tariff or the actual tariff.
TEN YEAR AVERAGE TARIFF (CENTS/KWH)
India Kundapalli Naptha 5.90 Pakistan Rouch Furnace Oil 5.99 Pakistan AES-Lalpir Furnace Oil 6.05 Pakistan AES-Pak Gen Furnace Oil 6.05 Pakistan Uch Gas 6.11 Philippines Sual Diesel 6.25 Pakistan Hubco Furnace Oil 6.33 Indonesia Pt-Jawa Coal 6.60 Indonesia Tanjung-Jati Coal 7.66 Indonesia Pt-Paiton Coal 8.37 India Essar Hazara Naptha/Gas 9.58 Thailand Independent Power Gas na Thailand Tri Energy Gas na Thailand Union Energy Coal na
*The Average 10 year Tariff is the simple arithmetic average of the Base Tariffs as per the Power Purchase Agreement of the Project. It is not the levellized tariff or the actual tariff.