NEPRA, TARIFF AND THAR COAL
AROOJ ASGHAR (Arooj.firstname.lastname@example.org)
Feb 11 - 17, 2008
Tariff at which WAPDA purchases electricity from Independent Power Producers (IPP) has been a controversial issue ever since private sector first participated in power sector in Pakistan. Broadly there are three different approaches available for obtaining approval of tariff from NEPRA, namely; i) upfront tariff; ii) determination through investor's petition; and iii) competitive bid. First two approaches are vigorously followed in Pakistan whereas the last one is considered as forbidden fruit which is adopted by almost all the prudent countries.
Upfront tariff is a price which Government of Pakistan through WAPDA is willing to pay to the IPP for the purchase of electricity and is solely determined and declared by NEPRA on certain assumptions. Either simple application is required to get the upfront tariff or it is mandatory to have a public hearing and negotiate the price with NEPRA. In later scenario, a detailed feasibility study is required in support of the proposed tariff which is a bit time consuming in comparison with upfront tariff. Nonetheless potential investor always conducts feasibility studies no matter inclines to accept upfront tariff or opts for petition. Despite all criticism on lengthy process of negotiation, companies prefer to negotiate instead of accepting upfront tariff. So far, NEPRA has issued various upfront tariffs for different technologies e.g. furnace oil, wind and coal. As a matter of fact, NEPRA's upfront tariff for oil and wind based projects has not been accepted by any IPP so far. On one hand certain reservations have been shown on these tariffs while on the other these are used to gauge the pocket of the Government. Besides investor, equipment manufacturer, supplier, construction contractor, services providers, and lenders are vigilant enough to judge the parameters of the offered tariff. They figure out the margins and adjust their price accordingly on account of excuses like booming industry, huge demand, and shortage of equipment due to massive orders etc. It wouldn't be wrong to say that such tariffs are regarded as minimum price by the investor and its EPC contractor, where both start negotiating from above this price. The likelihood of earning from the capital cost in the shape of kickbacks is remote but surely the real money maker is neither the IPP nor the regulator but the equipment manufacturer. On January 11, 2008, NEPRA has declared upfront levelized tariff of US 7.8 cents for power plant based on Thar coal on the forceful insistence of Government of Sindh which was immediately discarded by various stakeholders.
The benefits and need of effective utilization of Thar coal reserves is above board but the real issue is the development of coal fields. From the time these reserves were first identified, nothing has been done in public sector except constant hue and cry on huge capital cost for the development of mines. It's true that development of mines not only requires huge capital investment but also requires heavy operation and maintenance cost. This is the most significant aspect of this project which needs special attention. Therefore it must be comprehended that the development of mines can only be done through public-private partnership.
BENCHMARKS FOR TARIFF-DETERMINATION
Tariff of Thar coal power plant will be lesser than the tariff of power plants based on imported furnace oil and will remain cheaper than imported oil. It is being said that Indonesian coal price be taken as benchmark price for tariff determination. Few have certain reservations on this argument. If Pakistanis can get cheap indigenous commodity in place of expensive imported then why to increase the price of local good deliberately to make it relatively cheaper than imported. Tariff is calculated on certain assumptions both fixed and variable like estimated capital cost, debt pricing, fuel price, calorific value of fuel, rupee dollar parity etc. A slight change in any of these parameters can change the annual/ levelized tariff considerably. Once the project is commissioned, changes in variables are addressed through indexation. Therefore, indexation to be allowed has much more implications than the parameters employed for tariff determination.
While emphasizing the need of reasonable tariff, various analysts quote the case of Shenhua of China. Block one of Thar coal was earlier offered to this group. The project hit snags when the ministry of water and power and WAPDA refused to offer over US 5.39 cents tariff to the company though Sindh government agreed to offer US 5.7 cents tariff. Apparently the company backed out from the project due to non-acceptance of their proposed tariff by WAPDA. It is sad to see the rigidity on WAPDA's part but one should not forget that, according to various news reports, in pursuance of that opportunity President Musharaf talked and assured government's full support to Shenhua in his visit to China. They never came back even after getting assurances from the Pakistan's top man. Is it logical here to conclude that the non-fixation of tariff of few cents was the only issue, perhaps no? Thus, it's misconception that Thar project is not attractive to private sector at US 7.8 cents and billions of dollars of probable investment will perish just because of the lower upfront tariff offered by NEPRA. Every person in this field knows that IPP doesn't proceed on any project without having a reliable feasibility study on which project economics is evaluated. It is important to understand that upfront tariff has nothing to do with the flow of investment. As a matter of fact, upfront tariff is only a small aspect in assessing the viability of any project by the investor. For example, let's suppose Government of Pakistan offers 10 times more return than is being offered by anyone anywhere in the world on the investment in nuclear power plant. Will the global investors rush to Pakistan Obviously no in medium term because of numerous commercial and technical issues. The same logic prevails on Thar coal power plant. Thus it is misleading to say that companies will spend billions of dollars on this project solely on the basis of reasonable upfront tariff.
Determining upfront tariff for Thar coal is not an easy task rather it's a non-productive exercise. The reason for its irrelevance is that there are certain basic unsettled technical issues related to the development of integrated coal power plant like non-availability of water, location of the plant which lacks modern infrastructure, environmental impact etc... Abundant water is required both for mining of coal deposits and for operations of power plant which Thar lacks. In addition, there are various unsettled commercial issues like who will develop coal mines, what will be the pricing mechanism of coal, on what basis coal prices will be indexed, location of the plant, water supply or transportation of coal to any other location etc... In the presence of these unsettled issues, it is premature to determine upfront tariff rather ask the investor to come up with the numbers or more preferably go for international bid. It is suggested that these issues must be addressed before fixing the tariff as every issue has a price tag. 15 years have already been wasted therefore there is no harm in spending few more months in settling these issues which will enhance the viability of the project.
Someone wrote in the newspapers that all this is happening deliberately with the purpose to keep Sindh under-developed. Such non-sense argument must be condemned in strongest possible words regardless of who is saying so. Such immature statements can only be given by the person who knows absolutely nothing about the power tariff structure and related issues. NEPRA, WAPDA and Ministry can be slow in processing but presumably don't give patronage to provincialism. Pakistan can't afford another Kala Bag Dam in the shape of Thar therefore avoid giving such statements which are visibly baseless.
Nevertheless NEPRA has set high benchmarks in the shape of upfront tariff previously which should not be repeated in future. Therefore, it is suggested that instead of creating any further controversies on this prestigious project, both Government of Sindh and Pakistan should first focus on the strategy to develop Thar coal mines and extend full cooperation to power companies who are perusing to conduct feasibility studies and help them in identifying viable options. Last but not the least, it is humbly advised to all the public sector stakeholders to co-operate with each other, trust on each others intentions and abilities Understandably every stakeholder is doing in good faith but coordination and trust lacks which can be responded through logic. It is also recommended that government of Sindh should change its marketing strategy for Thar and highlight its various features instead of relying solely on upfront tariff for huge investment in this area. Rest assured, foreign and local investment will flow in once genuine concerns are addressed.
The writer has over ten years of hands-on experience of development and operations of power plants in private sector in Pakistan and is also a commentator on economy. He can be reached at email@example.com