Coal-based power plants: Sindh and Nepra at loggerheads over upfront tariff fixation

The government of Sindh and National Electric Power Regulatory Authority (Nepra) are at loggerheads over the fixation of the much-debated 'upfront tariff' for coal-based power plants.
The Sindh government has rejected outright the tariff of 7.8 cents/KWH recommended by Nepra, and would plead its case before the Economic Coordination Committee (ECC). In a letter on January 14, addressed to the Federal Ministry of Water and Power Secretary Muhammad Ismail Qureshi, , the Provincial Mines and Mineral Development Secretary, Abdul Hamid Akhund, said that "the tariff determination of 7.8 cents is not acceptable to Sindh, and we would like to plead our case before the Economic Co-ordination Committee (ECC)".
Sindh government is disturbed at the attitude of Nepra and its accusation that "excessive tariff is being demanded on political grounds, setting aside normal laws".
Referring to the January 11 meeting called by the Minister for Water and Power in this connection, the representative of Sindh government said a meeting was required with the tariff formulators of Nepra to discuss threadbare the assumptions of the Sindh government and Nepra.
In the meeting, Nepra informed the Sindh government's representative that they had already submitted their determination of 7.8 cents, which they had based on the study conducted by Rheinbraun Engineering (RWE) in 2004. RWE is the largest German coal mining and power generating company. The documents which Nepra's chairman had referred to in the meeting, claiming to substantiate their working, were neither shown nor were Sindh's assumptions discussed.
Akhund contested Nepra's statement that they had placed their determination on a 40 percent efficiency, which, in a coal-fired power plant, is not possible. Even a super-critical boiler, which has a phenomenal cost, does not give average efficiency of more than 36 percent. Moreover, the capital cost inflation calculation has been done at the United States consumer price index, which cannot be linked with the engineering procurements and construction, as the market conditions have changed. The Engineering Procurement and Components (EPC) market is volatile and the way China and other countries are placing orders, it is difficult to find manufacturers to meet the demand.
The Mines and Mineral Development Secretary regretted that this erroneous approach was adopted in the case of Wind Energy whilst announcing up-front tariff, and had not been successful as the ground realities in connection with the pricing of equipment were not worked out as per the market. Thus the revision in the tariff and the delay in the setting up still persists.
Nepra has reportedly based its calculations on lignite coal cost at $40 per ton and claimed efficiency level for dry coal, whereas an additional cost of $40 per ton is required for securing one ton dry coal as Thar coal has 48 percent water content. Therefore, two tons will be required to get one ton of dry coal ie $80 per ton, which has conveniently been ignored. The residual fuel oil has been worked out at 1.2 million dollars per megawatt, which is not practical.
Representatives of Nepra were informed that comparisons needed to be made on rational basis and different projects warrant different assessments. India's case cannot be quoted as they have the capacity to do their EPC and manufacture their own equipment. Further, they also have shallow mining, and not deep as in Pakistan. Pakistan will, therefore, rely on imported equipment, whose cost is exorbitant compared to its neighbour.
It is the considered view of Sindh government that no investor would step in for coal-fired power plant if the basis of determination is $40 the price of coal, and 1.2 million dollars per MW, and the tariff reflected at 7.8 cents.
The tariff quoted by RWE in 2004 was 7.1 cents, which has undergone bigger change than any economic indicator and the capital cost, plus inflation allowed by Nepra is no more valid. Nepra had allowed a revision of EPC construction to the independent power producers (IPPs) within six months of over 20 million dollars.
"We have failed to take into consideration the energy security and the independence that our indigenous resources will give to Pakistan," the Secretary said.
According to economists, Water and Power Development Authority (Wapda), which is in the best position to determine how much they need to pay and what the tariff should be, had worked out a tariff of 10.8 cents/KWH. The government of Sindh had asked for an upfront tariff of 11.1 cents/KWH. Offering a rate as low as 7.8 cent/KWH amounts to offering a price to a seller that is impossible for him to consider. "It is absolutely absurd to think that any investor will be willing to invest in Thar at a tariff of 7.8 cents/KWH, as nobody is willing to subsidise the state.
"The case of Chinese company, Shenhua, is before us. After spending three years and approximately seven million dollars in 2004, they were denied a tariff of 5.79 cents because Wapda had found it too expensive. Rather than being used as an attractive incentive, the tariff rate is being misused as a tool to ensure that all those who are interested in the development of indigenous coal are blown off the scene. Another Chinese group, CMC, working in the Sonda coalfield for a 250 MW coal-based power plant, after having already prepared a feasibility study and spending millions of dollars, will also be forced to pull out, like Shenhua.
"An attractive upfront tariff is an absolute must if Thar is to be exploited. An indicative for Thar, which has been proposed by Nepra is a trap. This tariff is not binding but still requires the sponsors to file a tariff determination petition, leaving them at the mercy of Nepra. It holds no concrete value whatsoever," economists say.
As far as imported coal is concerned, two Letters of Intent (LOIs) have been issued--one to AES and the other to Mitsui. The price of imported coal, five months ago, was $76/ton and today it has reached $132 per ton, which comes to 42 percent increase in less than six months. Those in the business seriously wonder whether AES or Mitsui will subsidise their costs and supply electricity to Wapda at the suggested rate. This again goes to show Nepra's myopic vision and lack of common sense and its determination to keep the country reliant on imported energy forever. Furthermore, imported coal power plants will have the same drain on foreign exchange reserves as oil because coal has shown the same steep upward price trend in recent years.
Meanwhile, Sindh Mines and Mineral Department, in a press release issued here on Tuesday, vehemently denied the claim that the Sindh government had argued that a political decision was required in the matter and that normal laws should be set aside.
This has never been the stand of Sindh government. "The Sindh government has always claimed an up-front tariff on the basis of ground realities. However, Nepra has never accepted it on a flimsy premise that it is not in a position to give an up-front tariff as the details of the capital costs, etc are not known. Previously, Nepra had allowed up-front tariff for Wind Energy, which it had to revise twice because it lacked foresight.
"It is also a matter of record that government had to waive all its conditions for fast track projects based on oil, and offered a tariff with built-in incentives. These incentives had to be revised and tariff related indexation, demanded by the investors, were accepted. The efforts of the government to create fast track capacity expansion also did not pay dividends, we agree to too little too late."