Power projects: Chinese, South Korean companies against cut in 17 percent EIRR

South Korean and Chinese companies working on power projects in Pakistan have opposed any reduction in existing 17 per cent Economic Internal Rate of Return (EIRR).
National Electric Power Regulatory Authority (Nepra), which is considering a proposal to review Rate of Return (RoR), will hold a public hearing soon if the federal government extends term of recently retired chairman Nepra. In case of appointment of new chairman, the Nepra will not be able to hold a public hearing due to lack of quorum as Sindh and KP have no representation in the Authority.
In a consultative session with Nepra officials, the representatives of Korean companies were of the view that 17 per cent EIRR was guaranteed by the Pakistani authority at the time of Athmuqam HPPs bidding announcement and KHNP consortium is developing the project based on that IRR, adding that any change downward is not acceptable.
Korean company, Korea Hydro & Nuclear Power Co Ltd (KHNO) argued that original 17 per cent EIRR should be applied to the project under the power policy framework at the time of advertisement by PPIB on January 2016.
"KHNO is deeply concerned that the change in EIRR of the IPP project underway should lead to fall down the credibility of the Pakistan IPP policy," said the representatives.
The representatives of Riali Hydropower Company stated that proposed Return on Equity (RoE) for small hydro project should not be reconsidered, especially for projects which are taking hydrological risk/take & pay option. Hydrological risks on streams/tributaries are much higher than the rivers. The project company has requested Nepra to maintain ROE of 17.73% or small hydro take & pay.
The company has requested that Nepra should also direct the federal government to provide a conducive environment to investors in power sector by facilitating them in provision of integrated power policy and one-window facility for the issuance of Letter of Intent (LoI) and Letter of Support (LoS).
China Three Gorges South Asia Investment Limited has stated the current IRR of 17% offered to the investor (for hydropower projects) proposed a minimum acceptable return to the investor and should not be further revised downwards in lieu of the following risks;(i) geo-political risks (jurisdiction of AJK); (ii) developmental risks (land acquisition risk and long gestation period risk); (iii) construction risks (geological risk and construction period) and; (iv) operation risks (circular debt and delay payment risk).
The KPK government in its comments has stated hydro is best suited for power generation as 70-80% plant consists of local component, no imported fuel is required, plant operates for over 50 years and is transferable to provincial government at the end of its 30 years life.
The provincial government was of the view when upfront tariff coal was announced, 2% extra ROE was given over local coal, requesting Nepra to immediately notify extra ROE of 5% to hydel project.
Access Electric/ Access Solar was of the view that in addition to the recognition of country risk premium in Capital Asset Pricing Model (CAPM) formula, the following also needs to be considered: (i) liquidity risk; (ii) development risk; (iii) regulatory risk and; (iv) counterparty risk.
It stated that average return over the most recent 30 years period should be used instead of S&P 500 index from 1928 to 2013. Beta being used as for US S&P 500 utility for adjusting the equity risk premium for power projects also includes gas, water and other related public utilities which may not have the same risk profile as power companies. Other issues included incentive-based return rather than risk-based return and take or pay vs take and pay.
Oracle Power PLC, in its comments stated that the proposed changes in the allowed return should apply to project for which LoI/ LoS has not been issued. For Oracle coal, this reduction is significant and will discourage the long-term investments necessary to promote the IPP project.
According to the company, there remains significant risk associated with Pakistan's servicing of foreign debt, perception of sovereign guarantees including circular debt.
The Nepra's State of Industry Report 2017 foresees a rise of 62 GW by 2026 which would require a capacity of 4 GW per annum requiring about $ 4 billion per year totaling $ 36 billion. This is ambitious target when compared to equivalent countries like Thailand 0.65 MW per MW capita and Iran 0.96 per MW per capita. In Thar, only one project has reached financial close and it is premature to assume Thar is de-risked.
KRAFRAC Consulting stated if Nepra wishes to allow different returns to projects with different power generation technologies, the additional return should be specifically labeled as "incentives" and mentioned separately. This would allow review of incentives in future without interfering with the actual return.