Investors oppose proposed cut in returns to power projects

KARACHI: Power sector’s investors opposed the government’s proposal to reduce rate of returns for new power projects, saying such reduction would discourage long-term investment in the country with high risk premium.

The National Electric Power Regulatory Authority (Nepra) held a consultative session to obtain opinion of stakeholders on the returns worked out for different technologies.

The new proposed rates were worked out to be in the range of 12.50 to 16 percent in dollar term (equivalent to 15.6 to 19.27 percent in rupee term) for the energy mix: large and small hydro projects, local and imported coal, local and imported gas (re-gasified liquefied natural gas), bagasse and renewable sources (solar and wind).

Nepra said it will provide bases for determining returns for various generation technologies. “The working out of such IRR (internal rate of returns) now needs to be effectively depicted against specific risk and return matrix and its adjustment for a particular technology.”

Currently, Nepra offers 14 to 17 percent rate of return in dollar denomination (equivalent to 17.21-21.33 percent in rupee term).

UK-based Oracle Power proposed that the new rates should apply to project for which letter of intent/letter of support has not been issued.

“For Oracle Coal, this reduction is significant and will discourage the long-term investment necessary to promote the independent power project,” the official said in the proposal. “There remains significant risk associated with Pakistan’s servicing of foreign debts, perception of sovereign guarantees including circular debt.”

Oracle is involved in the exploration and extraction of lignite coal resources in Block VI in the Thar desert in Sindh through a commercial open cast mine supplying projected mine-mouth power stations. The company’s official said so far only one project has reached financial close in Thar.

Korea Hydro and Nuclear Power Co. Ltd (KHNP) proposed that the authority guaranteed 17 percent rate of return.

“KHNP consortium is developing the project based on that rate of return, and any downward change is not acceptable,” it said.

Korean company was awarded the contract to construct the 350 megawatts of hydropower plant on the Neelum River.

Riali Hydro Power Company also urged the government to reconsider proposed rates for small hydro project especially for projects which are taking hydro logical risk. “Hydrological risks on streams, tributaries are much higher than the rivers,” the company said. “Therefore the authority is requested to maintain returns at 17.73 percent.”

China Three Gorges South Asia Investment Limited proposed a minimum acceptable return to the investor. It should not further be revised downward.

Other independent power producer developers said the authority should also consider liquidity, development, regulatory and counterparty risks in addition to the recognition of country risk premium.

A representative of Khyber Pakhtunkhwa government said when upfront tariff for coal was announced, two percent extra return was given to local coal projects.

“Therefore, it is requested to immediately notify extra return on equity of five percent for hydel projects.”