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February 9, 2019

NHP: towards aviable solution?


February 9, 2019

Net hydel profits (NHP) must be paid on hydropower generation from Khyber Pakhtunkhwa under a provision that was hastily added into the 1973 constitution.

Attempts to define and implement NHP have evaded a suitable consensus. Although NHP payments have been made to KP, they haven’t satisfied the relevant stakeholders in the province. A new initiative has been launched by leaders and the bureaucracy in KP to resolve this issue in a favorable manner, especially at a time when there is a PTI government at both the provincial and federal levels. Let’s explore the issue and offers some recommendations on how it can be resolved.

What is NHP and how can it be calculated? While this appears to be simple, nobody has been able to define it adequately and explain how it can be calculated – something that may be acceptable to all the stakeholders involved. For Wapda, NHP is the profit that Wapda makes on the sale of hydroelectricity. In the past, it was calculated to be 54 paisas and was paid accordingly. For the KP government, which is the recipient, NHP is the saving that the government makes in utilising hydro-electricity. Saving is calculated by deducting the costs from the sales price or value. The sales price/revenue is determined by the CCI, which is the cause of the problem. This had to be a political decision as there was no regulator at that time.

AGN Kazi, the then finance secretary (who headed organisations such as the Planning Commission, the State Bank and the Board of Investment, and was an eminent economist) was entrusted the task of calculating NHP and developing a formula. He calculated NHP as the cost difference between the cost of gas-based electricity (the next cheapest at that time and remains so even now) and that of hydropower, which, at that time, was only produced in Tarbela. It is still Tarbela as far as KP is concerned as other hydropower plants have come up Kashmir and Punjab. According to the AGN Kazi formula, NHP was calculated at Rs1.5 per unit of electricity generated.

Wapda and the then federal government did not accept the AGN Kazi formula and appointed a tribunal, which also approved the formula (one of the tribunal members wrote a note of dissent that said this would “kill the goose that lays eggs”). In this period, NHP payments have been made to the KP government. The current payments stand at Rs18.7 billion per year, which amounts to Rs1.1 per unit.

Leaders and the bureaucracy in KP have reportedly presented a new calculation, demanding NHP payments worth Rs100 billion per year, which would amount to Rs5.90 per unit. They believe that this is the solution of the ills of KP’s economy. If this is accepted, KP’s revenue would increase many folds as new projects are coming up that may jack up NHP payments to around Rs300 billion per year. Whether the federal government and the other provinces will agree to this manifold increase remains an open question, especially in light of increasing power-sector losses and the mounting circular debt in the backdrop of heavy power thefts, which KP has a major share in.

Gas-based electricity is still the cheapest after hydro and its comparative status has not changed since AGN Kazi’s time. The current gas-based tariff of, let’s say, the Uch power plant is between Rs3 per unit and Rs4 per unit while hydro costs stand at Rs2 per unit, probably making a case for some enhancement in the prevailing NHP rate of Rs1.1 per unit. Those demanding NHP payments worth Rs5.50 per unit have probably founded their claims on the generation costs of new hydro projects, such as Suki Kinari and other hydro projects in Kashmir.

The hydro generation costs/tariff today amounts to around 7.50 cents and even more. They can possibly demand more if they base their claim on the average electricity price, which is even higher at Rs11-12.It may be noted that the typical total hydropower prices in countries like China, Canada, the US and other countries stand at around four cents while the NHP demands seem to be higher than the total selling price. What’s more, our industrialists demand a competitive tariff while others want an even lower one.

Let’s see how other countries using hydropower can handle this. In most countries, the royalty system has been adopted as it applies to other resources such as oil, gas and other minerals. A percentage of the sales value is given to the resource-owner jurisdiction government as royalty.

Turkey receives no royalty or NHP; Canada, China and other countries obtain four percent; Brazil gets six percent; 10 percent goes to the federal government; 45 percent goes to provincial government; and another 45 percent goes to the local governments of the hydro region.

The problem is that since Tarbela is an old investment, its sales value or generation cost is quite low – it stands at around Rs2 at present and was Rs0.54 during AGN Kazi’s time. Any royalty calculation that is based on such a low sales value would be far too little to be acceptable.

India faced a similar problem in terms of its old investment. Pricing and hydroelectricity can be controversial and India solved this through the 12 percent free-electricity formula combined with a 25 percent allocation for provincial use on a paid basis. The same could be adopted by Pakistan as well. There is now a basis for a reference price of hydroelectricity as new projects have emerged and more are in the pipeline. Their cost data is available and there is now a regulator that can make an unbiased determination.

Times have changed now, much to the disadvantage of KP and the NHP formula. Other renewable energy options have emerged, such as solar and wind energy, which are available in other provinces, are cheaper than hydro and provide electricity at the point of consumption without the requirement of laying down long transmission lines through distant mountainous areas. On new hydro projects, there is now a negative NHP, as per the AGN Kazi approach. Royalty or free electricity amounting to 12 percent seems to be a better option and should be adopted and accepted by protagonists and antagonists alike.

Hydro may become uncompetitive and difficult and the rest of the country may go for other options. Without the active cooperation and involvement of other governments, more hydro projects may not emerge. Those making excessive demands and unrealistic projections should look at the other side of the picture and work towards finding practical solutions that have been adopted in other countries. The government may consider sending a delegation to India to study how this issue has been handled and how the free-electricity formula has managed to work so amicably in the country.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

Email: [email protected]