ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) announced on Thursday a fresh upfront tariff for power projects based on Thar coal that is slightly lower than the last tariff that expired in January.

The decision came after almost four months as the regulator conducted a public hearing on March 28 to examine if it would be appropriate to replace a highly attractive upfront tariff with a benchmark tariff for reverse competitive bidding.

In its decision based on the opinion of all stakeholders, Nepra slightly reduced the rate of return and attempted to attract super-critical technology and said the new tariff would remain effective for two years or a maximum of 5,000 megawatts of generation capacity, whichever came first.

Revises IRR on equity for future projects to 18pc from 20pc

The overall project cost was assumed at an average of $1.2 million per megawatt. Nepra set a 30-year levelised tariff of 7.3356 cents per unit and 7.42 cents per unit for single units of foreign financing and local financing, respectively, to be based on wet cooling technology.

Likewise, it said 7.223 cents per unit and 7.31 cents per unit for single units on air-cooling technology with foreign financing and local funding, respectively.

Nepra set an upfront tariff of 7.23 cents per unit for wet-cooling-based double units on foreign financing and 7.32 cents per unit on local financing.

For double unit air-cooling technology, the 30-year tariff was fixed at 7.132 cents per unit and 7.228 cents per unit through foreign financing and local financing, respectively.

Nepra had announced the previous tariff for Thar power projects in July 2014 for two years. It was notified by the federal government on Jan 20, 2015. That tariff expired on Jan 19.

The existing rates, criticised at the time by independent analysts for being expensive, entailed the upfront rate of 8.33 US cents per unit for foreign-funded plants of 660MW and 9.57 cents for locally funded projects. Likewise, the upfront tariff for foreign-funded projects of 1,100MW was set at 7.99 cents and 9.13 cents per unit for locally funded projects. The projects were based on 20 per cent return, which practically translated into 35pc return on equity over the operational life of the project.

Nepra said all stakeholders, including the power ministry, Sindh government, Sindh Board of Investment and project investors supported the upfront tariff regime as opposed to the competitive bidding regime for the development of power projects in Thar. The power ministry said that although reverse bidding was the best option, its applicability to Thar was limited because there were only three available sites with three sponsors having licences for the mines.

The Sindh government as well as the provincial Board of Investment requested for the re-notification of the lapsed tariff with two-year extension. The project developers also showed reservations on the competitive bidding regime and requested for another upfront tariff for future power project development.

Nepra concluded that the previous upfront tariff paved the way for the development of Thar coal mines and hence another upfront tariff. It said the objective was to achieve the optimal mine size of 20m tonnes in the shortest possible time. This was utmost important as the fuel cost component, accounting for approximately 50pc of the total tariff, would substantially come down as soon as the optimal mine size is achieved and led to overall tariff reduction, it said.

It also concluded that any delay in the expansion of mine will not be in the interest of consumers and will rather be detrimental. Keeping in view the comments of the stakeholders, stage of mine development and stated reasons, the authority decided to announce the upfront tariff for this phase with revised benchmarks for future power projects on Thar coal.

The new upfront tariff will be for a capacity of up to 5,000MW or two years, whichever is earlier.

The authority decided to announce separate tariffs for air cooling and wet cooling technologies to encourage efficiency.

The power ministry also noted that the benchmark interest rate had now come down to 5.75pc from 9.5pc in 2014, which should mean tariff rationalisation as uncertainties surrounding Thar coal-based power plants have reduced considerably.

Accordingly, Nepra decided to revise the internal rate of return (IRR) on equity for the future power projects in Thar to 18pc from 20pc. The offered IRR of 18pc on equity is still higher among all other technologies.

Published in Dawn, July 28th, 2017