Government has decided to announce the Power Policy 2015 aimed at offering better incentives and simplified processing to bridge demand-supply gap currently hovering around 6000MW.
According to draft Power Policy 2015, exclusively obtained by Business Recorder from Private Power Infrastructure Board (PPIB), a subsidiary of the Ministry of Water and Power, the organisation has promised to provide a one-window facility for implementation of projects under the policy and to issue a Letter of Intent (LoI) and a Letter of Support (LoS), prepare pre-qualification and bid documents, pre-qualify the Sponsors, evaluate the bids/proposals and award the projects, carry out negotiations on the Implementation Agreement ( IA), assist the sponsors/project companies in seeking necessary consent of various government agencies, assist the power purchaser, provincial/AJK/GB authorities in negotiations, execution and administration of various project agreements.
1. HYDROPOWER PROJECTS
1.1 Types of Hydropower Projects
i. The following types of hydropower projects are covered under this policy:
a. Raw site hydropower projects (ie for which no feasibility study and the detailed engineering design has yet carried out) to be developed in private sector;
b. Hydropower projects having already completed feasibility study in either private or public sector, to be further developed in private sector;
c. Hydropower projects having already completed feasibility study and detailed engineering design, in either private or public sector, to be further developed in private sector;
d. Hydropower projects under Public Private Partnership (PPP) arrangement;
e. Private hydropower projects initiated/awarded by governments of the provinces, AJK or Gilgit-Baltistan where power purchaser is a federal entity, transmission and distribution network of a federal entity is used, tariff is determined or approved by Nepra and GoP guarantee is required. On request of the relevant government, such projects will be further handled by PPIB under Tripartite Letter of Support (LoS) regime.
ii. Only the run-of-river hydropower projects, ie, where irrigation, flood control & seasonal storage are not involved, will be offered under this policy unless otherwise specifically permitted by the GoP. The run-of-river projects may have some ponding facility for absorption of daily flow fluctuation and for daily peaking operation of the power plant. The project should be designed and implemented with a view of optimum utilisation of potential of the site.
1.2 HYDROPOWER PROJECTS PROCESSING
Being indigenous, cheap and clean resource, the development of hydropower projects is amongst the top priority of the GOP.
i. Hydropower projects may be processed under the following modes:
a. International Competitive Bidding (ICB) for projects will be conducted where a bankable feasibility study has been conducted and a detailed engineering design is available. The project will be awarded based on the lowest evaluated levelled Tariff along with any other parameter that may be specified in the RFP for the project.
b. Proposals will be sought where feasibility study is available but detailed engineering design has not been carried out. The project will be awarded to the highest ranked applicant and the LoI of short duration will be issued for up-gradation of the feasibility study.
c. For Raw-Site projects, proposals will be solicited and the projects will be awarded to the highest ranked applicant. The LoI will be issued for carrying out the feasibility study.
d. Small hydropower projects may be processed under upfront tariff regime where such tariff is announced by Nepra.
i- For raw site projects the sponsors will conduct a bankable feasibility study through reputable consultants as per terms and conditions given in the LoI. The ToRs for the feasibility study will be issued with the LoI, along with the milestones for carrying out the feasibility study.
ii. The conduct of feasibility study will be monitored by a Panel of Experts (PoE) appointed by PPIB.
iii. The feasibility studies already and/or detailed engineering design carried out in the public sector or private sector or other organisations may be made available to the private entrepreneurs as public document against a fee which will cover at least the audited cost of the studies. These will be paid by the sponsors prior to issuance of a Letter of Intent (LoI).
iv. For the feasibility studies and/or detailed engineering design already carried out, the GoP will not guarantee their content or conclusions. The bidder will have the right, at its own cost, to examine, evaluate and form its own conclusions on any or all aspects of the feasibility study, and to carry out any additional studies and investigations to make its own assessment about the feasibility and viability of the project, as part of its due diligence.
v. Tariff will be determined as per Nepra's mechanism for tariff determination or any such procedure notified by Nepra from time to time.
vi. The hydropower projects shall be implemented on a BOOT (Built-Own-Operate-Transfer) basis and the term of concession period for the private sector will be 30 years after which the project will be transferred to the Provincial Government/AJK and Gilgit-Baltistan (as the case may be) for Pak Rupee 1.
1.3 WATER USE CHARGE (WUC)
i. WUC has been increased from Rs 0.15 kWh to Rs 0.425/kWh by the private sector hydropower projects to the province where the project is located.
ii. The rate of WUC will be reviewed every five years by the GoP in order to determine if an increase in WUC is necessary.
iii. For projects located in more than one provincial jurisdiction, the sharing of WUC will be decided among the stakeholders on a case-to-case basis.
1.4 HYDROLOGICAL RISK The power purchaser will bear the risk of availability of water for hydro power projects, by making payment of fixed monthly CPP component of the tariff to the project company in accordance with the monthly average hydrology. The Security Package will specify arrangements to monitor and record water flows.
2. THERMAL POWER PROJECTS In order to diversify fuel mix and induct both base load and peaking power plants, economical indigenous and imported fuels based projects will be encouraged. Thermal power projects may be processed and awarded under any one of the following modes.
2.1 SOLICITED PROJECTS Generally the projects may be processed and awarded through International Competitive Bidding (ICB) and solicitation for proposals based on upfront tariff. For this purpose, following modes may be adopted:
i. ICB based on lowest evaluated levelled tariff or solicitation of discount on the upfront or benchmark tariff determined by Nepra.
ii. Proposals submitted by the sponsors in response to invitation of Expression of Interest where Nepra has announced an upfront tariff;
2.2 Projects Awarded/Recommended by Provincial/AJK/GB Governments
Where a designated provincial/AJK/GB entity awards the projects in accordance with their applicable laws and recommend to PPIB for their further processing, PPIB may process the project further under this Policy.
2.3 ALTERNATE MODES In alternative, projects may be processed and awarded where GOP's international commitments or fast track implementation of projects or nature of the projects requiring specific fuel, site or financing is involved:
i. Projects approved/recommended to PPIB by concerned provincial/AJK/GB governments for award.
ii. Dedicated Gas Field Projects: All E&P Companies who have made gas discoveries of lower heating value shall have the right of first refusal to set up their own IPPs as per GoP approval.
iii. Power Projects through Public-Private Partnership (PPP) Mode where the private sector partner has already been selected/finalised by a public sector entity.
iv. Designated projects that are covered under bilateral agreements between GOP and foreign governments.
v. Projects to be set up through, tied financing or, use of any indigenous fuel resource and where tariff is determined by Nepra.
vi. Expansion of existing IPPs subject to consent of power purchaser and tariff approval by Nepra.
vii. Mega Power Parks under the specific schemes sanctioned by the Federal Government.
3. PUBLIC PRIVATE PARTNERSHIP (PPP) The GoP encourages establishment of power projects in public-private partnership. In line with the scope of this Policy, the incentives/concessions available to private power projects will also be available to projects implemented under PPP mode.
4. BANK GUARANTEE / BID BOND, LETTER OF INTENT, LETTER OF SUPPORT
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8.1 BANK GUARANTEE PPIB will accept bank guarantee in dollars. However, the bank guarantee may be payable in equivalent Pak Rupees at the prevailing exchange rates at the date of encashment.
8.2 BID BOND For ICB projects and solicited proposals, the bidders will be required to submit bid bond in the form of bank guarantee @ $1000/MW in favour of PPIB along with the bids.
8.3 LETTER OF INTENT (LOI)
i. Upon fulfillment of requirements of the policy and approval of PPIB Board, PPIB will issue an LoI to sponsors against submission of a bank guarantee by the sponsors @ $1000/MW in favour of PPIB.
ii. The validity of LoI will depend on the size and type of the project.
iii. The LoI will require the sponsors to (a) carry out a complete feasibility study to be monitored by the PoE appointed by PPIB, and/or (b) approach Nepra for acceptance/approval of upfront tariff or determination of tariff within the time period specified in the LoI, or (c) fulfill any other condition/milestone stipulated in the LOI.
iv. If the sponsors fail to meet the relevant milestones/standards, PPIB will be entitled to encash the Bank Guarantee and terminate the LoI.
8.4 LETTER OF SUPPORT (LOS)
i. Once the tariff is approved/determined by NEPRA, PPIB will issue an LoS to sponsors against submission of a Bank Guarantee by the Sponsors @ $5000/MW in favour of PPIB
ii. In order to ensure that sponsors of projects move expeditiously with subsequent steps for implementation of the project:
a. The period of validity of the bank guarantee for LoI will be 3 months beyond the expected date for issuance of LoS by PPIB - in this regard, the schedule will be decided and made part of the LoI. However, if such required period of validity of the bank guarantee is more than two years, the sponsors may be allowed to post the bank guarantee initially for a period of eighteen months, with the provision to extend it further for the period remaining till three months beyond the expected date for issuance of an LoS by PPIB;
b. If any extension in the validity of LoI or LoS, as the case may be, is necessitated, sponsors will be required to submit a bank guarantee in double the original amount and valid beyond three months of the extended LoI period or beyond three months of the extended LoS period to qualify for extension in validity of the LoI or LoS;
c. However, if any extension in the validity of LoI or LoS as the case may be is necessitated due to delays on part of GoP entities or for the reasons which are beyond reasonable control of the sponsors, the Board of PPIB may consider such extension without doubling of the Bank Guarantee with appropriate terms and conditions.
9. INTERCONNECTION ARRANGEMENT The power tariff will be based on the point of delivery indicated by the Power Purchaser. The delivery point will either be the outgoing bus bar of the power plant or a specific location on the grid of the power purchaser, depending upon one of the following options:
i. The transmission line upto the power complex will be built, owned, maintained and operated by the power purchaser.
ii. The transmission line from the power complex to the grid will be built by the company and transferred to the power purchaser, who will then own and operate the transmission line.
iii. The transmission line from the power complex to the grid will be built by the power purchaser and the Sponsors jointly and will then be transferred to the power purchaser, who will then own and operate the transmission line.
iv. Any other arrangement envisaged under the GoP's transmission line policy for private sector.
10. TARIFFS
10.1 Tariff Structure
i. The Tariff will be offered in two parts: (1) Energy Purchase Price (EPP) and (2) Capacity Purchase Price (CPP).
ii. The EPP will comprise fuel cost/water use charge, variable O&M or any variable component determined by NEPRA. The EPP will be paid based on the amount of kWh (Rs /kWh) delivered at the point of delivery.
iii. The CPP will comprise Fixed O&M, Return on Equity, Debt Servicing, Insurance, Cost of Working Capital, and/or any fixed component determined by Nepra.
iv. The CPP will be expressed in Rs /kW/hour or Rs /kW/month which is payable provided the plant is made available for dispatch by the company as per the standards defined in the PPA.
v. The tariff will be denominated in Pak Rupee.
vi. In order to mitigate the exchange rate variation risk, specified adjustments for exchange rate variations of dollar, Pound Sterling, Euro and Japanese Yen will be allowed. The adjustment related to debt servicing shall be allowed for the aforesaid currencies.
vii. In order to ensure sustained interest of the sponsor during the entire life of the project, the sum of EPP and non-debt related CPP (computed on a kWh basis at the reference plant factor) will remain constant or increase over time. The debt-related CPP stream may match the loan repayment stream.
10.2 Tariff Design and Indexing Parameters During life of the project operations, quarterly adjustments/indexations for local inflation, foreign inflation, exchange rate variations and interest rate variations will be made on 1st July, 1st October, 1st January and 1st April each year based on latest available date with respect to CPI notified by the Federal Bureau of Statistics (FBS), USCPI issued by US Bureau of Labour Statistics and revised TT&OD selling rate of foreign currencies (US Dollar, British Pound Sterling, Euro and Japanese Yen) issued by the National Bank of Pakistan.
11. CAPITAL STRUCTURE Financing of the projects will be in the form of equity and debt, to be arranged by the sponsors. The minimum equity shall be 20% and the maximum equity shall be 30%. However, if equity is more than 30% of the capital cost, equity in excess of 30% shall be treated as debt.
12. GENERAL PROVISIONS
i. Fees for various stages of the project development shall be prescribed by the Board of PPIB from time to time.
ii. Hydropower projects in the private sector will be implemented on Build-Own-Operate-Transfer (BOOT) basis. Thermal projects in the private sector, however, will be established either on BOOT or Build-Own-Operate (BOO) basis. Decision in the matter would be made on a case-to-case basis.
iii. Private sector projects based on the BOOT model shall be transferred to their respective provincial/AJK/GB governments after completion of a concession period.
iv. Subject to Nepra's Law, Rules and Regulations, for projects located in AJK or GB, Sponsors will first negotiate tariff with the Power Purchaser and the Power Purchaser will subsequently file the petition for determination of tariff with Nepra for purchase of power from IPP at an agreed price. The aforesaid arrangement will remain in place until such time that the Regulator's jurisdiction is extended to include AJK and GB.
v. In case a project is processed pursuant to a Government-to-Government Agreement, the terms and conditions of such Agreement shall be applicable accordingly.
vi. All requirements of the Pakistan Environmental Protection Agency (PEPA) Act 1997, inter-alia, relating to environmental protection, environmental impact and social soundness assessment, shall have to be met.
vii. GoP will not guarantee fuel supplies or obligations of the fuel supplier, except where a specific mechanism is approved by the GoP.
viii. Dispatch of power plant shall be on economic merit order.
ix. The Sponsor identified as the Main Sponsor in the proposal, having a lead role and possessing sufficient financial strength, will be required to hold at least 20% of the equity of the project company during the "lock-in period" which will be from the LoI issuance date until the sixth anniversary of the successful commissioning of the plant. The project sponsors must together hold 51% of the equity for the same period.
x. There shall be deliberate effort by the Sponsors to develop social, health, and educational projects in the project area as part of their Corporate Social Responsibility and Community Welfare Development Programme. Provinces shall also spend a reasonable amount of Water Use Charge (WUC) for projects in local area.
xi. In case any power project earns income through carbon credits of Clean Development Mechanism (CDM), sharing of this income between the IPP and the Power Purchaser shall be in line with the mechanism prescribed in the National CDM Policy.
xii. To promote indigenization, the local engineering industry will be encouraged to form joint ventures with foreign companies in order to develop power projects.
xiii. Skilled and semi-skilled local manpower shall be given preference with regard to employment on a merit basis. Internships shall be provided on a merit basis in order to train and hire local personnel.
13. PROJECTS INITIATED BY PROVINCES/AJK/GB:
i. The provinces/AJK/GB may prepare their own policies however where GOP Guarantee and IA are to be executed by PPIB a clear co-ordination plan shall be developed with the consent of PPIB. GOP IA and Sovereign Guarantee shall only be provided for projects where Power Purchaser is a Federal Entity and the tariff approved by Nepra.
ii. For the projects that have already been issued LOI by the provinces/AJK/GB and intend to sell power to a federal entity, upon request of the respective province/AJK/GB, PPIB will issue Tripartite LOS to the sponsors with respective provinces/AJK/GB.
iii. For such projects, the GOP approved standard documents shall be used ie LOS, Bank Guarantee, IA, GOP Guarantee, PPA etc.
iv. Consent from Power Purchaser (NTDC/CPPA or DISCO) shall be obtained by provincial authority before processing the projects where federal entity is a power purchaser.
14. SECURITY PACKAGE
i. Standardised IA, PPA, WUA (as applicable), shall be prepared for private/public-private partnership power projects to eliminate the need for protracted negotiations.
ii. The GOP will:
a. Guarantee the payment obligations of the Power Purchaser if it is a Federal entity.
b. Guarantee the payment obligations of provincial/AJK/GB governments under the GOP IA.
c. Provide protection against specified force majeure events as contained in the model IA.
d. Provide protection to the power projects against changes in the taxes and duties regime.
e. Ensure convertibility of Pakistan Rupees into US Dollars and the remitability of foreign exchange to cover necessary payments related to the projects.
iii. The Company is entitled for a delayed payment interest at the rate of 3months KIBOR plus 200 basis points to be specified in the PPA.
iv. In case the plant is not available for dispatch due to non-availability of fuel at site solely caused by delayed payments by the Power Purchaser for consecutive one hundred and eighty (180) days from the date payment is due under the PPA, the Company shall be entitled for CPP, with ROE component reduced by 50%, as provided in the PPA.
v. Minimum Take or Pay provision may be included in the PPA as agreed by the Power Purchaser.
vi. For R-LNG based projects, the project company may be required to establish Standby Letter of Credit (SBLC) and/or Revolving L/C in favour of RLNG Supplier as per requirements approved by the GoP.
vii. Laws of England will be allowed for the foreign lenders participating in the projects as the governing law for the Direct Agreements (IA& PPA), which will contain an indemnity to the effect that if the IA, PPA or the GOP Guarantee becomes unenforceable, illegal or invalid due to change in law, the GOP shall indemnify the project company or the Lenders for any cost, loss or liability resulting from such unenforceability, illegality or invalidity.
15. FISCAL INCENTIVES
i. An attractive Return on Equity shall be allowed in the tariff.
ii. The exemption from Income Tax under Clause 132 of Part-1 of the Second Schedule to the Income Tax Ordinance, 2001 shall be available to the new IPPs, and for any expansion of projects by IPPs that are already in operation.
iii. Sponsors of the power project will be allowed to import plant and equipment not manufactured locally at a concessionary rate of 5% customs duty. The EDB will notify in advance list of locally manufactured goods in relation to power generation projects.
iv. Companies will also be completely exempted from the payment of income tax, including turnover rate tax, and withholding tax on imports.
v. Repatriation of equity along with dividends is freely allowed, subject to the prescribed rules and regulations.
vi. Parties may raise local and foreign finance in accordance with regulations applicable to industry in general. GOP approval may be required in accordance with such regulations.
vii. Non- Muslims and Non-residents shall be exempted from payment of Zakat on dividends paid by the company.
16. FINANCIAL REGIME
i. Permission for power generation companies to issue corporate registered bonds.
ii. Permission to issue shares at discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk.
iii. Permission for foreign banks to underwrite the issue of shares and bonds by the private power companies to the extent allowed under the laws of Pakistan.
iv. Non-residents are allowed to purchase securities issued by Pakistani companies without the State Bank of Pakistan's permissions and subject to the prescribed rules and regulations.
v. Abolition of 5% limit on investment of equity in associated undertakings.
vi. Independent rating agencies are operating in Pakistan to facilitate investors in making informed decisions about the risk and profitability of the project company's Bonds/TFCs.
vii. 100% foreign ownership of companies is permissible.
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