ISLAMABAD: State-run companies of Pakistan and China have finalised a 30-year tariff at 7.9 cents per unit for $2.4 billion Kohala Hydropower Project of 1,100MW capacity in Azad Kashmir.

The National Transmission and Dispatch Company (NTDC) and China International Water and Electric Corporation (CWE) — a subsidiary of Three Gorges Dam — have reached the agreement on feasibility stage tariff.

The tariff is subject to approval by National Electric Power Regulatory Authority (Nepra) as a formality.

Know more: Hydropower potential in Azad Kashmir

The NTDC has now officially sought Nepra’s consent for the agreed tariff given the special legal status of Azad Jammu and Kashmir. The project is located on the river Jhelum downstream of Muzaffarabad and Kohala. CWE of China is required to construct the project on build, own, operate and transfer (BOOT) basis.

Under the agreement, the average tariff for first 12 years has been set at 8.9 cents per unit which would come down to 5.1 cents per unit for next 18 years. The average tariff for 30-year life of the project works out at 7.9 cents per unit.

It ensures 17 per cent return on equity on internal rate of return basis.

The tariff has been finalised on the assurance of the Chinese government that the contractor would get lending from foreign financial institutions for a period of 18 years inclusive of 72-month grace period at interest rate of six-month London Interbank Offered Rate (Libor) plus 4.75pc.

The project targeted to achieve commercial operation in 2023 and generate about 5,093 gigawatt energy a year at 53.4pc average annual plant factor. It is expected to earn carbon credit from the United Nations Framework Convention on Climate Change (UNFCCC) for clean energy development under Kyoto protocol.

The two sides had agreed to develop the project during PPP tenure on specific intervention of former President Asif Ali Zardari through a government-to-government deal bypassing public procurement rules.

The PML-N government honoured the deal and continued with full support to the Chinese investor that is also developing Neelum-Jhelum Project.

Earlier, Synergics Corporation of United States had given up the project after completing feasibility study during the tenure of General Musharraf when former Wapda chairman General Zulfiqar Ali Khan offered it a tariff of 3.3 cents per unit even though the then power policy committed 4.7 cents per unit upfront tariff to investors.

As a consequence, about a dozen international investors having letter of interest and letter of support left the country, resulting in no investment in hydropower sector for more than a decade.

A special relaxation in rules was granted by the PPP government when relevant agencies reported that process of inducting new power plants through international competitive bidding had become unviable for Pakistan because of a dent caused to investor confidence for not honouring national investment policies, global financial crunch and security and political situations.

Published in Dawn, September 11th, 2014