ISLAMABAD  -  On one hand the federal government is working on terminating Take or Pay contracts with IPPs, but on the other hand the National Electric Power Regulatory Authority has allowed K-Electric Take or Pay condition for its power plants, 14 percent dollar based ROE and extensions in operation for its four decades old power plants.

The NEPRA has issued divided decision over the generation tariff of K-Electric as the member Tariff has termed the Authority’s decision of allowing 14 percent dollar based ROE as excessive and unfair, while opposing permitting Take or Pay condition for the company’s HSD and RLNG based power plants, arguing that it will further burden the consumers. In its determination in the matter of Tariff Petition filed by K-Electric Limited for power generation plants, NEPRA has approved the tariff on Take or Pay basis for the KE power plants on all fuels including HSD.

NEPRA has also allowed he tariff control period of 7 years or remaining useful life, whichever is lower except for BQPS-III which shall be 11 years. It is worth to note that useful life of unit-I and unit-II of BQPS has already expired, while its unit-III has two years remaining life. The tariff control period shall be 7 year or remaining useful life, whichever is lower except for BQPS-III which shall be 11 years.

On the question whether to allow KE plants as must run for economic merit order undertake or pay justified agreements, the NEPRA has decided not to allow ‘take or pay’ of RLNG under current arrangements. NEPRA has approved fuel cost component from Rs43.3356/unit to Rs50.7461/unit for the HSD in the power plants on combined cycle operations, from Rs20.6731/unit to Rs41.7506/unit for RLNG based power plants, from Rs 33.3197/unit to Rs 34.6414/unit for RFO based power plants, and from Rs 6.8385/unit to Rs  9.6249/unit on gas based power plants. Similarly, from Rs36.7623/unit to Rs45.7659/unit for RLNG open cycle power plants, and Rs 8.4202/unit to 10.5506/unit for gas based open cycle power plants. Against the KE’s proposed debt to equity ratio of 70:30, the Authority has decided to maintain debt equity ratio of 70:30 in case of all plants.

KE proposed a dollar based ROE of 15% subject to variation in PKR/USD exchange rate on a quarterly basis as allowed by the Authority to IPPs. The Authority acknowledges KE’s assertion that there has been no unilateral reduction in the ROE for IPPs. If KE had received a tariff covering the full operational life of its plants in the last multiyear tariff, the allowed ROE would have remained at 15% (USD-based), aligning with the treatment of other IPPs. Nonetheless, the Authority, acknowledging that the plants within KE’s fleet are already established and operational, has decided to approve the ROE at 14% (USD-based). The Authority has decided that any savings in fuel and O&M shall be shared in the ratio of 60:40 between consumers and power producer in case of all plants except BQPS-I. In case of BQPS-I, the Authority approved sharing ratio of 50:50 with respect to O&M savings and further approved.

However, in his dissenting note, member Tariff NEPRA, Mathar Niaz Rana said that dispatch factor of KE power plants BQPS-I (Unitl-6), KCCPP, KTGEPS and SGEPS has been decreasing since 2019. It has substantially reduced in FY2023 after induction of BQPS-III (Unit 1 and 2). KE presently also does not have firm GSA with SSGC, resulting in very nominal dispatch of power plants like KTGTPS & STGTPS. These plants also may not operate due to non-availability of gas. Moreover, KE’s current share from the national grid is approximately 1,000 MW and is expected to increase proportionally up to 2,600MW once interconnectivity is established. KE is also actively working on the option of induction of renewable energy. It is important to highlight that these plants will get payments many times their actual RAB under the proposed tariff structure over the remaining proposed period without supplying much energy to the system for the reasons explained above. Moreover, the per unit O&M cost of these power plants is also on a high side. Considering the above factors, these power plants may be given Take and Pay Tariff for the control period. KE may consider developing a proposal for decommissioning of these old plants in view of less expensive power options becoming available to KE

Considering the dispatch factor & efficiency of BQPS-II and BQPS-III (Unit 1 & 2), these power plants may be given Take or Pay Tariff for the control period, subject to and furtherance of above Para 1, sanctioning a “take or pay” tariff structure for KE plants operating on backup fuel (HSD); would not be a prudent decision as HSD fuel being expensive would be on lower end of the merit order, are unlikely to operate but would nevertheless become eligible for capacity payments, which would otherwise be deducted due to the plant’s non-availability on its primary fuel. The imposition of such capacity payments on consumers may not be justifiable. Therefore, authorizing a “take or pay” tariff for plants on backup fuel (HSD) may not be allowed. The approval of a Take-or-Pay fuel arrangement for RLNG would result in the out-of-merit operation of either BQPS-II or BQPS-III fuel prices disrupt the merit order. This is particularly likely following the introduction of central dispatch, the increase in power imports by KE from CPPAG, and KE’s expansion of self-generation through renewable. Consequently, the associated costs would be passed on to consumers through monthly Fuel Cost Adjustments (FCAs). Therefore, in my opinion, RLNG fuel arrangements of KE now and in future should not be allowed on Take-or-Pay basis.

Mr Rana said that the Authority has allowed 14% dollar based ROE to KE which is excessive and unfair, Most of the generating units of KE are Brownfield based on utilization of old existing assets. The rationale for high returns for new IPPs usually stems from compensating higher risks and uncertainties associated with new projects, which don’t seem applicable in this case. Many of KE’s plants, 0 with the exception of BQPS-II1, have substantially repaid their debts and are exposed to lesser risks compared to any new investments, which warrants consideration for a lesser return. The decision to grant KE a 14% dollar-based ROE in the generation tariff; sets a significant precedent that other Independent Power Producers (IPPs) might seek to follow. IPPs that currently receive their ROE in Pakistani Rupees or at a lower rate may now push for similar dollar-based indexation on their returns, arguing for parity under the regulatory framework. Such a shift could have broader financial implications, ultimately increasing the burden on consumers by exposing them to currency depreciation risks and driving up overall returns for power producers.

Therefore in my opinion the return may not exceed USD based return of 11.5% for foreign equity. Whereas for PKR equity, the return may not exceed 15.5% (11.5% + 4%), as per the independent consultant’s report presented to the Authority on March 01,2022.

In the new MYT, KE’s O&M component has been divided into local and foreign portions. The foreign O&M component is now indexed to both the US -CPI and the dollar exchange rate, while the local portion is indexed to the local CPI. Previously, KE’s O&M costs were indexed solely to the local CPI. Given that KE manages its O&M in-house, it would be fair to continue with the previous practice of O&M indexation i.e. on local CPI basis in the current MYT as well, in order to protect the consumers from exchange rate variation and impact of US-CPI inflation.

Technical section recommended outage allowance @ 8% for BQPS-III, therefore, allowing outages @ 10%, would increase capacity payments for the additional allowance period. The capacity charges of 2% outage hour will be borne by consumers. Therefore, the outage period over and above technically recommended percent is not prudent and may not be allowed.

The Authority has decided to base the financial statements of the company to compute the allowable costs associated with BQPS-III and the Authority has not deducted the cumulative amount of RoRB and Depreciation of Rs. 53.9 billion.