Govt to downward revise rate of return on electricity projects

Currently, Nepra offers rate of 14-17%, new rates are worked out to be in range of 12.50-16%

KARACHI: The government has kicked start the process of revising down the rate of return on new power projects as the cost of projects went down with the availability of latest equipment and technology at comparatively lower prices.

Initial working done by the National Electric Power Regulatory Authority (Nepra) in this regard suggests the new rate of return - after the revision - would remain high for the projects to be run on indigenous fuels compared to those to be run on imported fuels.

The rebalancing of the rate of return on the basis of cost and fuel-type would help the government attract new investment in priority projects. Setting up large hydro projects remains top priority of the government and the regulator.



The new rates are worked out to be in the range of 12.50-16% in dollar term (equivalent to 15.6-19.27% in rupee term) in the energy mix; large and small hydro projects, local and imported coal, local and imported gas (Re-gasified Liquefied Natural Gas), bagasse and renewable sources: solar and wind.

At present, Nepra offers 14-17% rate of return in dollar denomination (equivalent to 17.21-21.33% in rupee term).

“The cost of new power projects has gone down notably over a period of time with the latest equipment and technology for the power projects now available at comparatively cheaper prices,” an official at the regulatory authority told The Express Tribune.

Nepra’s concept paper on ‘Determination of Rate of Return for Power Sector’ drafted in November 2016 said, “The IRR (internal rate of return) offered by regulator must be more tailored towards improving the energy mix that is more reflective of a country’s available natural resources and macro-economic conditions. An IRR offered that is segregated, will be able to clearly reflect the incentive for investors for a particular technology or resource for improving energy mix that is best optimised for the country.”



Large hydropower projects would be offered highest rate of return - after the revision - at 16% in dollar denomination compared to maximum 18% offered on Thar coal at present. However, Thar coal-fired projects would be offered higher return than the one on imported coal in new working. Surprisingly, the return on renewable sources of energy; solar and wind would remain unchanged at 14% in dollar denomination (equivalent to 17.21% in rupee term), according to Nepra’s notification.

Topline Securities added, “Nepra has worked out power sector returns (to be revised down by 1-4.5 percentage points for thermal and 1-2.75 percentage points for renewable power projects) for which the regulator will now hold a consultative session with stakeholders on November 21, 2018, likely to be followed by further discussions.

“This (new rate of return) will not affect returns/tariffs awarded to the existing power projects and projects which are awarded tariffs but yet to commence operations,” the brokerage house added.

If approved, the new rates will be positive for power consumers as it will lower per unit cost of electricity going forward. Further, it will also lower the burden on national coffer in terms of lower capacity payments on new projects as capacity payments are in-built component of power tariffs, it said.

Published in The Express Tribune, October 31^st, 2018.

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