Govt mulls market-based IRR for power generation investors

KARACHI: The government is likely to offer a market-based internal rate of return to power generation firms to attract private investments, an official said on Monday.

The existing regimes – both upfront and cost-plus – allow a fixed internal rate of return (IRR), which presently ranges between 15 percent and 20 percent. A hydropower project is offered 20 percent, residual fuel oil/gas-based power project (15 percent), regasified liquefied natural gas (16 percent) and others (17 percent).

The official said the National Electric Power Regulatory Authority (Nepra) would frame recommendations after evaluating the existing practice of determining the rates of return for various power generation technologies.

 “The regimes need to effectively depict specific risk and return matrix and adjustment for a particular technology,” the official said. The National Electric Power Regulatory Authority is designing an IRR formula that should clearly be reflective of a return, which accounts for various parameters, such as prevailing power sector incentive packages, associated country risks and technology variants.

“An  internal rate of return has to correspond to the risks associated with generating electricity and at the same time be engaging enough to attract capital needed for a specific technology or purpose,” the official said.

“Technologies that have not been explored to their fullest potential may be offered higher returns to attract investments.” The official said the rate of return should be tailored towards improving energy mix that is more reflective of the country’s available natural resources and economic conditions.

The National Electric Power Regulatory Authority had already proposed a competitive bidding regime for setting tariffs for generation, distribution and transmission projects to deregulate the entire energy supply chain.

The latest Power Generation Policy, 2015, indexes return on equity component of tariff to US dollar to ensure dollar-based return to the equity holders of power generation projects.

Previously, the Determination of Tariff for Independent Power Producers, 2005 allowed an  internal rate of return equal to long-term interest rate based on 10-year Pakistan investment bonds auction plus a Nepra’s premium.