Power tariffs: Role of competition and transparency – I

This appears to be an electricity generation tariff setting season, for at least three major tariff proposals are being reviewed by Nepra, apart from smaller applications. It may be useful to apprise the readers of what is happening in this respect, to have a critical and objective look at the proposals and offer some constructive suggestions.

Under review are upfront tariff proposals for wind, solar and coal power. Fixing generation tariff has almost been done away with in almost all industrialised countries and has been replaced by energy/electricity markets and exchanges, where wholesale electricity prices are settled in the market, as share prices in the normal stock exchanges. Long-term arrangements often confidential are also made around the short and long-term trend of spot prices. Regulatory agencies are involved in fixing transmission and distribution tariffs. In the domain of renewable energy, governments announce FIT (Feed-in-Tariff) and other incentives which are generally above the normal electricity prices, in order to encourage renewable energy. They have multiple objectives such as energy autonomy, security and diversity and several environmental considerations. However, I am not sure that we have to carry this burden and go out of the way in this respect due to the dire economic circumstances that we are facing currently. In any case with an insignificant energy consumption (16-18000 MW for a population approaching 200 million, as opposed to 900,000 MW of the US for 250 million people), neither can we add to or reduce the problems of global context. We have to act in self-interest which may warrant a modest but consistent effort in inducting renewable technologies and its indigenization.

There is a current target of 1500 MW of wind energy and a proposed target of 100 MW for solar. Realistically speaking, a few hundred MW of wind power only may be inducted at an exorbitantly high approved wind tariff (as we shall see later in this review); capacity to buy may be less than the potential supplies. Up to now, only two projects with a total capacity of 100 MW have been added. In case of Solar, some solar water pumps (tube-wells) have been installed under government projects. The comparative economics of solar tube-wells as opposed to diesel has been reported to be attractive. It is being projected that solar water pumping may be adopted by the private and community sector on a large-scale in the short to medium-term; next in line come, the commercial users who have to pay high electricity tariffs and have only day-time electricity requirements. In both the cases, expensive battery storage is not required. Commercial and even industrial users have started installing solar panels on the roofs to meet some extra load requirements replacing diesel generators. In the third order of merit possibly come utility applications for remote villages.

On coal power several initiatives are on the cards; one is the perennial Thar, the other is local coal (other than Thar) and another is imported coal. Conversion of existing oil-fired power plants to imported coal appear to be a robust possibility, in addition to the case for new coal power plants based on imported coal. Thar coal keeps coming but never manages to finally come in despite all kinds of incentives and administrative arrangements such as devolution. Earlier lack of infrastructure used to be cited as the reasons for delay. However, reportedly that problem is no more as most of the infrastructure projects are in pipeline or have been completed. Now the problem is reported to be private investor related. They have prepared such a bulky project that they are neither able to finance even its partial equity requirement, nor are the lenders quite comfortable about it. Circular debt problem has its share in these failures. Finally, will the public and end-users be able to accept the kind of high tariff of 11.5 cents that is reportedly being asked for. People have been hoping that Thar coal would solve their energy problems. At this tariff, it is going to add to the misery of the people. This asking tariff is almost double that of the rate offered by Chinese company Senhua and even twice the upfront tariff Nepra is willing to offer and accept for projects on imported coal. There is a grave need to take stock of the issues faced by Thar coal. The new government after the elections should be able to conduct an objective review and take appropriate actions to facilitate Thar coal at affordable prices. However, this article is not about Thar coal and the Tariff reviews being undertaken by NEPRA also have excluded Thar coal. Financial close has not been done and no tariff application has been filed by the project promoters.

FOLLOWING TARIFF RATES ARE UNDER CONSIDERATIONS:

— Solar PV (utilities) from 1 MW and onwards = 23.2934 cents per kWh

— Reinstitution of existing Wind Power tariff = around 12.5 cents for foreign financed and 16 cents for locally financed projects

— Coal power plants of 200-1000 MW based on local or imported coal=6.6 -8.37 cents per KWh

— (for comparison sake, following unit fuel costs in Rs/kWh may be noted; HSD=20; RFO=20; Gas=4.5; add on the average Rs 2.00 per unit for fixed cost to get total unit cost; imports from Iran are at Rs 9.5 per unit)

Review of the Tariff documents reveals that locally financed projects end up requiring a tariff of 25% or higher than the foreign financed ones. The obvious reason is high local interest rate despite recent reductions. Secondly, ever high returns on equity demanded by local investors and the demands accepted by GoP and condoned by Nepra. In some cases, it has been the other way round. The standard RoE is 15% which has been enhanced to 17% in many cases. Local coal gets 20% RoE and Thar coal private promoters managed to get even higher top-on incentives. What is not understood by the proponents of high RoEs is that Utility sector is much safer and longer term investment assuring returns for 20-30 years. Internationally 10-12% RoE is considered a good and attractive return and 15% for Pakistan should be good enough. And this is tax free. High RoE makes the final product expensive and enhances project risks neutralising the purported incentive of high RoE. Moderation has to be brought about in this run for ever high RoEs.

One willy-nilly reaches a conclusion that both the local investors and the local lending banks are more of a drag and liability in the system. Pakistani bank does not make any difference between ordinary lending and lending to the utility sector in negotiating or fixing interest rates. And the local investor is in the habit of saving on equity and demanding ever high returns on an equity which is not there in the first place. And foreign lenders do not accept their balance sheets. It appears that except for small self-generation projects, utility sector is not their cup of tea. It requires an amount of capital that is not in the pockets of local parties. Besides such high utility investments (either equity or debt) would divert much needed investments away from the vital requirements of the manufacturing sector. Let us attract and prefer FDI in this sector. International companies have the technology, expertise and the capital. They get inputs and finance at cheaper rates. They are able to always offer a better rate than the local who is usually busy in some kind of machination. If we manage to improve governance, streamline operations and organise fair competition, there is no reason not to be able to attract FDI.