National Electric Power Regulatory Authority (Nepra) has upheld its earlier decision, making mandatory for 19 power generation projects under China Pakistan Economic Corridor (CEPC) to pay one per cent of their capital cost as security cost as built-in consumers' end tariff.
The decision has been taken in a review motion filed against the decision of the Authority in the matter of induction of security cost for CPEC projects in power tariff to ensure sustainability. One per cent security has been calculated at $ 155.6 million. The details of power projects and 1 per cent of capital cost as security cost till operational period is as follows: (i) 1320 MW Huaneng Shandong Ruyi (Pakistan) Energy (Pvt) Limited- security cost $ 15.97 million;(ii)1320 MW Port Qasim Electric Power Company (Pvt) Limited- security cost $15.97 million ;(iii) 1320 MW China Power Hub Generation Company Limited- security cost $ 15.97 million;(iv) 1320 Thar-coal block-1 Power Generation Company- security cost $ 15.97 million;(v) 660 MW Engro Powergen Thar( Pvt.) Limited- security cost $ 8.49 million;(vi) 330 MW ThalNova (Pvt) Limited-security cost $ 4.24 million;(vii)330 MW Thar Energy Limited security cost $ 4.24 million;(viii) 720 MW Karot Power Company (Pvt) Limited - security cost $ 14.39 million;(ix) 870 MW S. K. Hydro (Pvt) Limited- security cost $ 14.55 million;(x) 1100 MW Kohala Hydro Power Project- security cost $ 19.73 million;(xi) 4000 MW Mitiari-Lahore Transmission Line Project- security cost $ 15.13 million;(xii) 100 MW Appolo Solar Development Pakistan Limited- security cost $ 1.45 million;( xiii) 100 MW Best Green Energy (solar) Pakistan Limited - security cost $ 1.45 million;(xiv) 100 MW Crest Energy Pakistan Limited (solar ) -security cost $ 1.45 million;(xv) 99 MW UEP Wind Power (Pvt) Limited (wind)- security cost $ 2.28 million ;(xvi) 49.5 MW Sachal Energy Development (Pvt) Limited(solar)- security cost $ 1.18 million;(xvii) 49.5 MW Hydrochina Dawood Power (Pvt) Limited- security cost $ 1.14 million;(xviii) 49.5 MW Three Gorges Second Wind Farm(Pvt.) Limited - security cost $ 1 million and ;(xix) 49.5 MW Three Gorges Second Wind Farm(Pvt.) Limited - security cost $ 1.00 million.
On September 23, 2016, the ECC approved the following: "CPEC projects which have achieved financial close and for the CPEC early harvest projects where financial close is still pending as well as new addition to the CPEC projects under Implementation Agreement, (IA) and allowed issuance of a policy directive to Nepra to allow 1% of the capital cost net of $ 150,000/- amount on account of security to be distributed annually starting from the construction period till the term of the Power Purchase Agreement (PPA)."
The Authority decided to initiate suo motu proceedings in the matter. Notice of proceedings was published in the newspaper on March 18, 2017 inviting comments from the stakeholders. Individual notices were also sent to various stakeholders on 22nd March 2017. Hearing in the matter was held on April 4, 2017.
On August 3, 2017, the Authority, in its decision, approved security cost in respect of each CPEC project on the basis of 1% of capital cost of the project reduced by $ 150,000/annum (subject to 3% indexation for each year after the 1st year from COD) which will be treated as pass-through item.
Being aggrieved of the impugned decision, the following CPEC projects filed Motion for Leave for Review against the Authority's subject decision: (i) Zonergy Company Limited on behalf of its subsidiaries (Appolo Solar Development Pakistan Limited - Best Green Energy Pakistan Limited - Crest Energy Pakistan Limited); (ii) Hydrochina Dawood Power (Pvt) Limited; and (iii) UEP wind.
The Authority admitted the Review Motions filed by Zonergy, Hydro china and UEP Wind on September 13, 2017, October 3, 2017 and October 12, 2017 respectively and decided to provide an opportunity of hearing to the petitioners who opposed the decision of the Authority.
After carefully going through the grounds raised in the Review Motions and having heard the aggrieved parties, it became evident that all of the grounds raised by the petitioners primarily pertain to the payment of $ 150,000/ annually by IPPs. The decision provides that "IPPs of CPEC projects shall pay $ 150,000/annum, subject to 3% indexation for each year after the 1st year from COD, as required under security protection clause of the IA directly to the relevant Ministry/Agency designated for the purpose during the construction period as well as during the operation period." It was made obligatory for the IPPs to pay $ 150,000/ annum. Security protection clause of the IA stipulates reasonable out of pocket expenses against additional security to be provided by the GOP on Seller's request from time to time. These out of pocket expenses are limited up to USD 150,000 per year (increased by 3% every year after 1st year from COD).
The petitioners while offering comments in the proceedings of the decision objected to the inclusion of $ 150,000/annum on part of IPPs. M/s Zonergy submitted that it never requested for additional security and was not liable to pay $ 150,000/annum. M/s UEP Wind submitted that additional security under Article 5.4 of IA is a separate matter and it should not be factored in while calculating the security cost. UEP Wind submitted that Nepra has no jurisdiction to require the company to incur any additional cost based on its interpretation of the IA. According to UEP, NEPRA is not party to the IA, therefore, may not enforce the provision of the IA based on its interpretation. HDPPL submitted that the burden of the security cost should not be on the shoulders of the projects.
The Ministry of Energy (Power Division), PPIB and CPPA (G) vide letter dated March 16, 2018 were requested to submit comments in the matter of above motions for leave for review. However, no comments were received in the matter.
After hearing the aggrieved parties the regulator decided to allow 1% capital cost of the project reduced by $ 150,000/annum (subject to 3% indexation for each year after the 1st year from COD) as security cost in respect of each CPEC power project in accordance with the approved payment mechanism and the same to be treated as pass-through item.
The payment mechanism approved by the regulator, during the operation period, IPPs of CPEC projects was to include in the monthly capacity invoice a separate charge on account of security cost. The capacity charge for security cost would be calculated on the basis of determined annual security cost of the respective project, reduced by $ 150,000/annum for the 1st year from COD and thereafter @3% indexation for each succeeding year, divided by net annual output in kilowatt hours assuming reference exchange rate of Rs 105/$. The subject security cost component of capacity charge would be indexed on the basis of exchange rate of the last available day of the preceding quarter. The IPPs would seek its approval from Nepra quarterly in accordance with other tariff components of the capacity charge. IPPs would pay the invoiced amount immediately to the relevant Ministry/Agency designated for the purpose.
CPPA would pay the invoiced amount in accordance with the other components of capacity charge. In case the annual security cost of a project is less than $ 150,000/ subject to applicable indexation, IPPs shall not include security cost in the capacity charge invoice and CPPA shall not pay any amount on account of security cost for the respective project.
The determined security cost for each year of the construction period in lump sum with arrears, if any, would be paid by the IPPs to the relevant Ministry/Agency designated for the purpose which would be included in the capital cost of the project at the time of COD adjustment. In case the agreed construction period under the PPA is less than the allowed construction period under the tariff determination, IPPs would ensure that the total amount paid to relevant Ministry/Agency on account of security cost during the construction period is equal to the total amount for the construction period assessed under the tariff determination. In future, if the overall security situation improves and GoP considers that special security arrangement is no longer needed and the special security force/division is released from this responsibility, no payment would be made by the power purchaser on account of special security arrangement. CPPA (G) would submit a report every five years regarding the status and implementation of the decision in the matter.