Taking a closer look: Chinese solar investments

Published April 30, 2015
The writer is a member of staff.
The writer is a member of staff.

LAST week I wrote about the Karot Hydropower project, the documents for which were signed during President Xi Jinping’s visit to Pakistan recently. This week I took a closer look at the Quaid-i-Azam Solar Park built by the government of Punjab for private solar power generation companies, which is also hosting one of the earliest Chinese investments under the growing partnership. The facility is located in Bahawalpur and has more than 6,500 acres of land with full infrastructure for utility-scale solar power projects.

Two companies have come together to be the first investors in this facility, and, according to their own reports, are already energised and feeding the grid. One is QAS, the local partner and sponsor of the project, wholly owned by the government of Punjab. The other is TBEA Xinjiang Sunoasis Ltd, the Chinese Engineering, Procurement and Construction (EPC) contractor, and also the Operations and Management (O&M) partner. This means that QAS owns the project, but TBEA builds the plant, procures the equipment, and operates and maintains the plant after it has entered commercial operations.

TBEA procured its photovoltaic (PV) panels from another Chinese supplier, JA Solar. Mounting systems, foundation and construction services for the PV panels have been procured from Powerway Renewable Energy and Clenergy, both also Chinese companies. The latter two are private concerns, but TBEA is a massive power equipment manufacturer with a huge presence in transmission systems and transformers. It is not clear whether it’s a government or an entirely private company, but it is publically listed. It was selected, we are told, after an international competitive bidding process.

TBEA originally bid $152 million for the EPC contract, plus $4.7m for onshore taxes, but after getting the bid, announced a discount of $18.7m “on account of perpetual friendship between Pakistan and China”. Nepra ignored the discount for purposes of tariff calculation, since it was unlikely that subsequent solar IPPs would be able to get similar treatment.

An upfront solar tariff was determined by Nepra in January 2015, relying almost entirely on project costs furnished by QAS. Other projects that seek to set up utility-scale PV plants in the solar park in Bahawalpur, or anywhere in the country, will be paid according to the same tariff.

Two companies have come together to be the first investors in the Quaid-i-Azam Solar Park, and, according to their own reports, are already energised and feeding the grid.

For the first 10 years, Nepra determined the tariff at Rs18.8 for the northern region for plants between 50 and 100MW capacity. Plants that are smaller than 50MW will have a tariff of Rs19 per unit — also for the first 10 years. After the tenth year, the tariff drops to Rs8.5 till the end of the project period in year 25. The levelised tariff works out to Rs15.5 for the entire life of the project.

Of this, Rs10 is for debt servicing, Rs5 for return on equity, and the remaining Rs3 for insurance and O&M cost. For the southern zone, the tariff structure is substantially similar.

There is a separate energy purchase agreement between the power producer and the buyer, which is not public. There are no capacity payments in the upfront solar tariff, but it is entirely reasonable to suppose that there is an offtake obligation on the part of the buyer. Plant factor is kept very low for tariff purposes, around 17pc.

The debt to equity ratio was presumed to be 75 to 25, and the QAS project is being financed by a syndicate of local banks with Bank of Punjab as lead financier. Interest cost for the project was therefore pegged on six month Kibor plus 3pc. Foreign financing would be allowed at Libor plus 4.5pc, the authority determined after protests that its upfront tariff did not allow for foreign financing, basing itself entirely on numbers given by QAS.

When the tariff was determined, a number of interveners attended the hearing. Some of the input they provided included concern over absence of interest rate premium on foreign financing, lack of clarity on the project execution period as well as some technical considerations like high ambient temperatures in the Cholistan desert which complicate the operation of PV modules and lack of accounting for degradation of the PV modules with the passage of time.

The intervention by China Power International New Energy Holding Ltd (CPINE), which is also keen to invest in solar energy in Pakistan, contained interesting insights.

The same project (100MW solar generation) in China would cost $140m to build, they said. But in Pakistan, given “much higher project costs for labour force, material and transportation”, the cost would be closer to $187m.

In Pakistan, “the labour cost for hiring Chinese labour is twice as much as that in China” and “wage and benefits for Chinese management personnel are two times as much as they are in China” they said. Raw material costs were substantially higher too, as well as transportation of equipment from China to Karachi would add 5.5pc to the cost. Loans from Chinese banks require loan insurance and investment insurance, coming in at “8pc and 2.89pc of total project costs, respectively”.

“For CPINE, to ensure 17pc Equity IRR is the requirement from company board for investing in overseas projects.” Without this assured return, “[n]o obvious investment advantages and attractions can be shown in doing projects in Pakistan comparing [sic] to doing similar solar power projects in China. Furthermore, there would be no chance of getting this project approved in our company’s board meeting”. Mind you, this is a far lower assured return than what Nepra’s upfront tariff for coal is offering.

And finally, the tariff should be “denominated and settled in USD for our risk estimation”.

A large rush into solar generation is getting under way in Pakistan, and 1000MW worth of projects have been given Letters of Interest. The Punjab government ought to be congratulated for taking the lead in the development of a solar park in Bahawalpur. The Chinese interest in investing ought to be welcomed, but securing Pakistan’s commercial interests is important. That can only be done with a strong commitment to transparency.

The writer is a member of staff.


Twitter: @khurramhusain

Published in Dawn, April 30th, 2015

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