Nepra asks NJHP to conduct Third-Party Validation for getting levelised tariff

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) ordered Neelum-Jhelum Hydropower Project (NJHP) to conduct third-party validation (TPV) of the project to get the levelised tariff and for the time being allowed NJHP to continue selling its electricity at provisional tariff of Rs9.118 per kWh on take and pay basis with must run condition. This tariff was already effective from October 17, 2019.

It is worth mentioning that the seller had sought levelised tariff of Rs10.3 (cents 6.2440) per unit for a period of 30 years. The tariff is being charged as to pay interest on the debt and repayment of principal amount of Rs317.367 billion taken from outside and local sources for construction of this project that cost Rs428.296 billion.

The regulatory body issued its decision saying that this rate shall be subject to adjustment. The seller (NJHP) either get a waiver of the requirement of third-party validation (TPV) by ECNEC/relevant agency or conduct the TPV. Further, it directed that 969-MW NJHP to file a tariff petition through Central Power Purchasing Agency (CPPA) after complying with either of the two options. Nepra has intimated the decision to the federal government for notification.

Nepra held public hearing on the tariff petition on June 21, 2021 to determine tariff for the project. During the hearing, the Authority observed that, a Third-Party Validation TPV) needs to be carried out for the project, which has not been done even after three years of the decision/approval. NJHP responded that it has written several letters to relevant forums like Ministry of Water Resources (MoWR), Ministry of Planning Development and Reforms (MoPD&R) and Planning Commission to address the issue of TPV; copies of which were also shared with Nepra. The seller informed that according to Planning Commission, the consultant to be hired for the conduct of TPV is at appointment stage.

According to the decision, Nepra has already held that opinion which is reflected in the project’s tariff decisions dated November 19, 2018 that as per the statutory mandate, the assessment of cost and resultant tariff is the exclusive domain of Nepra. In the instant case, the government through ECNEC has raised reservations on the project by issuing conditional approval of PC-I. Being a government-owned project, the Authority can’t ignore such observations.

The Authority was of the opinion that the NJHP has now two options either to get a waiver of the requirement of TPV by ECNEC/relevant agency or conduct the TPV and submit the same along with a tariff petition for the purpose of determination of tariff.

The Authority however is cognizant of the fact that TPV, which has not even started yet is a time consuming matter. Therefore, having considered the submissions of the seller, comments of the buyer and all the relevant documents, the Authority allows the seller to charge the provisional tariff ie Rs9.1184/kWh on take and pay basis (must run) till the conditions are fulfilled.

It is worth mentioning that NJHP has assumed exchange rate of Rs165/ USD whereas Return on Equity (RoE) has been claimed as 10 percent as Internal Rate of Return (IRR). The proposed debt-equity ratio is 74:26 based on Foreign Relent Loans (FRL), Cash Development Loans (CDL) by GoP and local commercial loans. The interest rate on FRL ranges from 12 percent to 15 percent, for CDL it ranges from 10.65 percent to 11.79 percent and for local commercial loans 6-month Kibor + 113 bps is used. Debt repayment period has been assumed as 20 years (semi-annually).

The company which has established the project has requested that the uncovered amount of Rs30.111 billion on account of tariff differential of Rs2.8137 per unit for the period from July 4, 2018 to October 16, 2020 may be allowed to be recovered in monthly equal instalments. The tariff proposal has been based mainly on the following ground: (i) the term of the tariff determined is near to completion; (ii) to allow Water Use Charges (WUC) at Rs1.10/kWh as approved by CCI or as agreed between GoP & GoAJK; (iii) project being substantially completed, all project loans have been closed and since a DSL amortisation schedule has been finalised; therefore the relevant tariff components be modified accordingly; (iv) the insurance component has to be modified because the CAR insurance has expired and Operational phase insurance has been obtained; (v) since Kishan-Ganga impact in the hydrology is now clearly known therefore it has to be accounted for in the generation estimates;(vi) the impact of increased compensation and environmental flow from 9 to 20 cumes as per direction of the GoAJ&K and GoP needs to be considered;(vii) ROE and ROEDC, which was not allowed previously may be considered in terms of Tariff Rule 17(3)(ii) & (iii) as reproduced below; (viii) tariffs should generally be calculated by including depreciation charge and a rate of return on the capital investment of each licensee commensurate to that earned by other investments of comparable risk; (ix) “tariff should allow licensees a rate of return, which promotes continued reasonable investment in equipment and facilities for improved and efficient service;” and (x) indexations, adjustments, and escalations to be accounted for according to the formula provided in Sub Clause 70.3 of COPA Part IIB of NJHPP contract document, agreed at the time of signing being in line with Pakistan Engineering Council (PEC) guidelines, which is also compatible with Nepra 3-stage mechanism for determination of tariff for hydropower projects.