The Private Power Infrastructure Board (PPIB) has termed Power Policy - 2002 as flawed and the sponsors of unsolicited projects could exploit it through legal actions, official sources told Business Recorder here on Wednesday.
"There are several contradictions in the policy which will be addressed after seeking approval of the Economic Co-ordination Committee (ECC) of the Cabinet as some of the parameters applied to unsolicited projects can create legal complications in future," the sources said.
Sources said the board has discussed pros and cons of the policy at different forums to improve it in the best interest of investors and consumers. Most of the issues are related to hydel power projects, GoP's tariff guidelines and Nepra's authority to set tariff under the Nepra Act, which require more deliberations among the stakeholders before final decision, the sources maintained.
Sources said the discount rate for analysis of levelised tariff of hydel projects is one of the issues as 12 percent discount rate is too high for hydel projects.
"The 12 percent discount rate generally provides higher levelised tariff for hydel projects, as compared to 10 percent discount rate, which is being used for thermal projects. The PPIB has proposed standard discount rate of 10 pe4rcent for both hydel and thermal projects," they noted.
Sources also said the policy stipulates that escalation to cover 'dollar' inflation will not be provided. However, almost all investors have raised concerns on the issue, and realistically speaking the prices of parts and services in foreign currency would not stay constant over a period of 25-30 years, hence the indexation of foreign currency costs such as O&M expenses, insurance, etc, based on some benchmark of foreign inflation, appears necessary.
The PPIB adviser for ICB projects (Citi group) has also recommended that both the exchange rate adjustments and inflation indexation should be provided on foreign O&M costs. As the policy allows exchange rate adjustments only for the dollar, it would be appropriate to escalate/index the foreign currency operating costs with the US Consumer Price Index (US CPI).
Sources said the Ministry of Water and Power has already moved a summary for comments of other public sector stakeholders. Regarding uniform fee structure for processing proposals, the sources said the legal fee is mentioned in the policy which is based on actual expenses plus 20 percent as ancillary charges, with a suitable cap to this expense.
This would result in very high legal expense for the initial few projects and very little expenses for subsequent projects. Similarly, there is a distinction between unsolicited and ICB projects, where no evaluation fee is applicable to unsolicited project.
In order to charge all IPPs on an equal basis and generate source of income for the PPIB at the same time it has been suggested that uniform processing fee of $100,000 be fixed for all proposals (ie raw-site unsolicited/solicited and ICB.
On the issue of reimbursement of ICB-adviser fee, the sources said the PPIB has already approved in its 52nd meeting that the fee of the advises/investment bankers should be charged from the successful bidder after award of the project. However, the proposal is being submitted to the ECC for formal approval.
According to the sources, the Power Policy - 2002 allows the sponsors to terminate letter of support (L/S) for any of the executed project agreements at any time before the required date for financial closing by foregoing a portion of the performance guarantee equal to its face value multiplied by the number of months since the issuance of the L/S (rounded up to the next whole number) divided by the total number of months allowed in the L/S to achieve financial closing.
The PPIB has suggested that this option be eliminated from the policy as commissioning of the direly needed new power generation capacity would be uncertain and delayed if the sponsors exercise this option.
Moreover, all the stakeholders' efforts and resources which have been consumed in preparing and executing any of the mutually-acceptable project documents would go down the drain. In another vital decision, the PPIB has decided to extend performance guarantee meant for issuance of L/I till the issuance L/S to the sponsors.
Giving the reason, the sources said that for raw-site (unsolicited and solicited) projects, the performance guarantee (or bank guarantee) securing the performance obligations of the sponsor, couldn't be encashed after approval of the feasibility study by the panel of experts (PoE). The sponsor, at this stage, is required to negotiate with the power purchaser to get Nepra's approval for tariff.
The PPIB believes that there is a gap in the policy that if the sponsor, due to one reason or another, backs out from the project implementation process at the tariff approval stage, it can neither penalise them for abandoning the project at this rather advanced stage of implementation, nor is there any guarantee which can compel the sponsor to hand over the feasibility study to the PPIB for carrying out bidding. In order to avoid complications, the board has suggested to revise the Policy.
Sources also said that para 38 of the Policy talks about a one-time extension of up to six (6) months in achieving financial closing (against extending the validity period of the performance guarantee and increasing the guarantee amount by 100 percent), while para 52 talks about accommodating any delays in achieving financial closing through a day-to-day extension allowed under the Implementation Agreement (IA)and this anomaly needs to be addressed.
"The PPIB has suggested that inconsistency be removed by allowing a day-to-day extension in achieving financial closing of up to a maximum of six months," the sources added.
Regarding revision in initial validity period of L/I, the sources said the initial validity of L/I will be between 12-24 months, depending on the size of the project. This implies an initial validity of at least 12 months - which may not be required for many thermal projects. The PPIB has suggested that the validation period would be changed to: "the initial validity of the L/I will be up to 24 months, and will depend on the size of the project."
For revision in initial validity period of L/S, the PPIB is of the view that L/S will normally be issued to the successful bidder for a period of 15-18 months to be specified in the RFP. This implies a validity period of at least 15 months, which could be counter-productive for many projects, as a 15-month validity period would not be required for financial closing. After discussing the issue in detail, the board has proposed that the clause to be changed to: a validity period of up to 18 months to be specified in the RFP.
The board is also of the view since the wind, solar and other renewable fuel-based projects of below 50 MW are currently being handled by Alternative Energy Development Board (AEDB) above 50 MW projects in the aforesaid category, be also handled by the same institution.
This will enable maximum utilisation of AEDB's already developed expertise in the area, and at the same time prevent duplication of resources (which would be inevitable if the PP1B were to handle these projects).
On ratio of Capacity Purchase Price(CPP) in the overall tariff of hydel projects, the sources said that hydel projects are characterised as having high capital cost and low operating cost. Thus, variable operating costs (energy purchase price (EPP): ie (a) water use charge and (b) variable O&M charge) are very low, compared to fixed capital costs ie (a) return on equity (b) debt-servicing, (c) insurance and (d) fixed O&M.
While the Policy, through para 19, restricts that the CPP in case of hydel projects will be approximately 60 percent to 66 percent of the levelised tariff. This restriction is not in line with the cost structure of a hydel project, and thus needs to be reviewed, the sources added.
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