ISLAMABAD: The National Electric Power Regulatory Authority (NEPRA) has allowed fuel cost component (FCC) to baggasse-fired Independent Power Producers (IPPs) from October 2018 till September 2022.
This was approved in pursuant to the FCC adjustment mechanism as provided in section 19 (III) (a) of the determination of the Authority dated May 29, 2013 in the matter of Suo-Moto proceedings for development of upfront tariff for new baggasse cased co-generation power projects.
For the said adjustment in FCC for the applicable year, the Baggasse IPPs shall be required to submit their requests in line with the said mechanism under upfront tariff 2013 along with the relevant indices including International Coal Price and Bunker Index for the relevant year from September till October.
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However, with effect from October 2022 onward, the Authority has decided to allow 5% annual indexation on the applicable baggasse price for the previous year.
The reference price for the year 2022-23 indexation shall be the base baggasse price of 2021-22 as obtained from coal linked mechanism under Upfront Tariff 2013.
According to the determination, the Authority carefully considered the submissions presented by Baggasse IPPs, the comments from CPPAGL, and the responses from Baggasse IPPs. Regarding the 1st option (linking baggasse price with CPI), the Authority noted that CPI values are derived from a basket of different commodities, and may not accurately reflect the determinants of the baggasse price.
Concerning the 2nd option (linked with a percentage increase in Sugarcane price), the Authority holds the view that since baggasse is a by-product of sugarcane, the sugarcane price may not genuinely represent the true market price of baggasse.
In reference to the third option (minimum coal price of $ 100.67/ton with only PKR/USD exchange rate variations), the Authority deems it unjustified to persist in allowing the pricing of local indigenous fuel in dollar terms, a concern also raised by CPPAGL.
Notably, in a single year, from 2022 to 2023, the PKR depreciated against USD by around 35%. Accordingly, the Authority considers this proposal imprudent.
With regard to the 4th option, i.e., the use of sales tax data from FBR, the Baggasse LPPs argued that FBR under Sales Tax Act 1990 read with Section 216 of the Income Tax Ordinance, 2001, is not permitted to disclose the data to any person. The other argument set forth by Baggasse IPPs is the non-availability of pure baggasse data.
The Authority observed that the FBR baggasse data relates to “residues of starch manufacture, similar residues beet-pulp, baggasse and other waste of sugar manufacture, brewing or distilling dregs and waste.”
The Authority considers that the apprehension in using FBR information at this point of time is the non-availability of pure baggasse data as the shared information also include other residuals of sugar processing with this information.
Another limitation is the continued and assured availability of baggasse specific price data each year for assessing the annual adjustment. Consequently, determining the baggasse price based on FBR data may introduce an element of perpetual uncertainty.
In addition to the limitations of the FBR data discussed above, it was also considered that reliance on data of any sugar mill might lead to a probability that certain sugar mills, engaged in selling power to the grid, could artificially inflate the baggasse value, resulting in an abnormal increase in the overall average baggasse price and aim at gains from sale of electricity at higher prices.
Therefore, the Authority opines that utilizing FBR data or data from any sugar mill for the adjustment of FCC may not be a prudent approach.
The Authority also examined the baggasse pricing and adjustment mechanism allowed in comparable regional Regulator.
Out of all the other options discussed above, indexation following regional Regulator is considered the most cost-effective and consumer-friendly option. It is also a straightforward and predictable mechanism, aligning with section 31(3)(i) of the NEPRA Act, which emphasizes providing stability and predictability of tariffs for custom.
In view of the above considerations and the fact that at the moment no regulated price is available, the Authority decided to approve a 5% annual indexation from 2022-23 and onward, on the basis of baggasse price of 2021-22 obtained from the coal-linked mechanism under the Upfront Tariff 2013, as from amongst all the options for further indexations of baggasse price from year 2022-23 onwards this indexation leads to minimum increase and will provide predictability and certainty in baggasse prices to attract future investment in baggasse based power generation which is stalled at the moment.
Without prejudice to the foregoing the baggasse IPPs during the consultative session as required under xvi of the modified order of the Authority dated August 28, 2013 also tendered their consent to the annual indexation of 5% from October 1, 2022.
Furthermore, ensuring investor confidence in the renewable energy sector is paramount, particularly regarding the predictability of tariff structures. Stability in tariffs facilitates informed decision-making and long-term investment planning.
Conversely, any alterations in tariff mechanisms can discourage investment and hamper sector growth. Therefore, maintaining a consistent and transparent tariff, along with a stable baggasse price mechanism, is imperative for attracting and retaining investors in renewable energy ventures.
The decision is to be notified in the official Gazette in accordance with the provision of Section 31(7) of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997.
Copyright Business Recorder, 2024
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