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Parameters of renewable, hydropower generation costs to be revised

Updated August 03, 2017


NEPRA will contune to allow a mix of local and foreign financing for large hydro projects while the exchange rate fluctuation will continue to exist for foreign financing.─File photo
NEPRA will contune to allow a mix of local and foreign financing for large hydro projects while the exchange rate fluctuation will continue to exist for foreign financing.─File photo

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) has decided to change key parameters of renewable and hydropower generation costs for tariff calculations in view of conducive market conditions and fin­a­ncing costs favourable to consumers.

The regulator has sought formal comments from the power sector stakeholders on proposed changes to the existing tariff structure before reaching a final conclusion and its formal notification.

The authority has decided to revise certain benchmarks and ceilings to be allowed for tariff components of generation projects.

Nepra added that it would continue in principle to move towards promoting the competitive mode in generation tariffs.

The regulator already had discussions with the State Bank of Pakistan, various commercial banks, development financial institutions and Islamic banks of different scale and exposure in the power sector on the subject.

The regulator has proposed that to benefit from prevailing low cost of debt and to complement SBP Re-financing Scheme of June 20, 2016 for Renewable Energy (RE) projects till the validity period of financial close till June 2019, it should be mandatory for all RE Projects to avail this credit facility at 6 per cent with the debt duration up to 12 years.

Regulator proposes a ‘competitive’ change in tariff structure for the benefit of consumers

For the balance amount over Rs6 billion, spread will be allowed for RE projects with ceiling of KIBOR plus 1.75pc (except hydro) with saving in the spread to be shared in the ratio of 50:50 between power producer and power purchaser. For small hydro projects a spread ceiling up to 2pc over KIBOR can be allowed on justified grounds.

For projects (other than RE) which are not eligible to avail this SBP’s refinance scheme, the sponsors will have to carry out the competitive process with a maximum ceiling of spread allowed of 2pc over KIBOR. The sponsors will be required to adopt a transparent competitive process.

For large hydro power projects, considering the larger gestation period and peculiar circumstances, a spread range of up to 2.5pc over KIBOR will be considered.

Furthermore, this range will be considered by Nepra as per project specific dynamic for either a competitive process or negotiated spread but without exceeding the 2.5pc limit.

In case of foreign financing, no change has been proposed to existing spread of LIBOR plus 4.5pc being allowed to various technologies at present. However, for large hydro power projects giving due consideration to long gestation specific risks, a spread up to 5pc will be allowed. In the event of saving over spread, the gain will be shared equally (50:50) between power producer and power purchaser.

Likewise, with export credit insurance (eg Sinosure, etc) already allowed, the spread will be rationalised upto LIBOR plus 3.5pc with saving initiative of 50:50 to be shared between power producer and power purchaser.

The regulator would continue to allow mix of local and foreign financing where it deems appropriate while the currency exchange rate fluctuation would continue to exist for foreign financing.

Also, the regulator has proposed that equity more than 20pc of the project cost should be treated as debt for all technologies, except hydro, to ensure optimal debt-equity ratio. For hydro projects, the debt-equity ratio will be decided on case to case basis but equity more than 25pc cost of the project would be treated as debt.

To ensure that the cost of idle funds during construction period is not borne by the consumers and more efficiency was being considered to be brought in to project’s fund management during the construction period allowed, the regulator has also proposed changes to rate of interest and return on equity during construction.

For example, for all cost plus projects, the petitioners will be required to submit the closest approximation between the payments with the debt draw downs and equity injections suitable for the project at the time of tariff petition filing. This will be justified and ensured to be aligned for timely completion of project as per the construction period allowed the project technology.

Also, at least 90pc payments of all major project cost components (including EPC) should be simultaneously paid in counter-financed mode consistent to the debt-equity ratio allowed.

Alternatively, the interest during construction (IDC) will be allowed on justified actual drawdown basis whereas the returns on equity during construction will be fixed by the regulator with a predetermined equity injection timelines in tariff determination with no subsequent adjustment. Payment to the contractors, suppliers, etc, would be made directly through lenders. The date of payment by the lender will be considered as debt drawn for computation of cost of debt.

Published in Dawn, August 3rd, 2017