With the unending circular debt and the structural problems in the energy sector, the government is making strategic changes in its approach to attracting fresh investments in the power generation and transmission systems.

A few days ago, Prime Minister Nawaz Sharif asked the concerned entities that if internationally reputable firms were reluctant to take part in bidding for the 6,600MW coal-based projects at Gadani Power Park, the government should make use of an interim policy finalised by the PPP government for short-term capacity enhancement.

Alongside this, the government is finalising an upfront transmission tariff regime to enable private entities and provincial governments to set up independent power projects for their own energy needs, and to inject surplus electricity into the national grid at wheeling charges to be approved by the National Electric Power Regulatory Authority (Nepra).

The government has realised that even if it is able to add generation capacity, the transmission system does not have the capacity to provide additional supply to the consumers because a major chunk of national grid has outlived its designed life over two decades ago. Attempts to put energy beyond 15,000MW into the national grid essentially leads to it tripping, and a cascading blackout throughout the system.

Ultimately, power producers will be able to produce as much electricity as they can and send it out through the national grid to customers of their choice by paying a certain tolling or wheeling charge to the NTDC

At the same time, the bureaucracy is reported to have informed the prime minister that local and international investors interested in setting up coal-based projects in the country are reluctant about participating in international bidding. Since they are few, it is argued, there is no need for bidding, and hence the government should allow all of them to invest instead of thinning them out by making them compete against each other.

Although the PPP’s policy guidelines for short-term capacity addition were meant for all technologies and fuels, minor changes here and there can be made to meet the requirement for coal-based projects.

In that case, a government-designated entity — most probably Private and Power and Infrastructure Board – would seek proposals for independent power projects on build, own and operate (BOO) basis.

The proposal would encompass all activities necessary to develop, finance, insure and install new plant and equipment, and then test, commission, own, operate and maintain the power generation facility and all incidental activities in accordance with the standard Implementation Agreement and the power purchase agreement, and selling electricity to the power purchaser at a tariff to be determined by Nepra.

The successful applicant would be required to achieve financial close with 80pc debt and 20pc equity in nine months after approval. The plant would have to be commissioned within 25-33 months. The sponsor would be bound to maintain its 20pc equity at least until six years of operation. The tariff approval and generation license would be given by Nepra under an already announced upfront tariff regime.

Simultaneously, fresh investments in the transmission system would be pursued under the upfront transmission regime so that by the time generation capacities come on stream, the national grid is geared up to transmit additional power to the consumers. This is to avoid a repeat of past mistakes like those made in Neelum-Jhelum, Uch and Guddu power projects. In the latter two cases, even after the plants are fully complete, the enabling transmission lines are either absent or unable to take the full load.

The move would also facilitate provincial governments to set up large power plants not only to meet their own requirements, but to also to sell the surplus electricity to the National Transmission and Dispatch Company (NTDC).

A couple of years ago, the Council of Common Interests had empowered provincial governments to set up independent power plants, as allowed under the Constitution. But in the absence of an enabling regulatory framework, private investors were shy of signing power production agreements with the provincial governments.

Now, the federal government has instructed Nepra under policy guidelines permissible under the Nepra Act 1997 to design the transmission tariff, commonly known as tolling charges, to enable any entity to evacuate its electricity generation through the national grid at cost.

Ultimately, the power producers — whether private investors or provincial or local entities — will be able to produce as much electricity as they can and send it out through the national grid to customers of their choice by paying a certain tolling or wheeling charge to the NTDC. This charge would be pre-determined by Nepra.

As a result, transmission charges will become a regulated instrument for the transmission company to recover the required revenue allowed by the regulator, to provide service within the required transmission reliability and performance standard obligation through allocation of permissible transmission losses in the tariff.

In other words, the entities would use the NTDC’s transmission system at a price and deliver electricity to the consumers. The transmission tariff would be announced every year through a multi-year tariff regime ahead of tariff approvals for distribution companies.

Published in Dawn, Economic & Business, July 7th, 2014