HYDEL POWER POLICY

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1 1.0 INTRODUCTION HYDEL POWER POLICY In Pakistan, nearly all the hydropower potential results from discharges into the Indus River Basin. These discharges result primarily from precipitation and snowmelt in the northern mountainous ranges of the country. They occur in small rivulets that flow down to the larger tributaries of the river Indus and finally converge into the mighty Indus itself. Hydropower is characterized by two major constraints: the remote location of the power plants and the seasonal variations in river discharges, which are of a relatively greater proportion compared to most other countries, due to extreme climatic and precipitation conditions in Pakistan. 2.0 PRIVATE POWER POLICIES The following policies have been announced in Pakistan since 1994: Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan, March Policy Framework and Package of Incentives for Private Sector Hydel Power Generation Projects in Pakistan, May Policy for New Private Independent Power Projects, July THE NEED FOR A HYDRO POWER POLICY Hydropower development is the need of the time for the following reasons: 1. to meet future power shortages which will start affecting the national economy from the year to improve the thermal-hydro mix from 75:25 ratio in order to produce cheaper energy which is essential for a developing country like Pakistan 3. to utilize a renewable resource indigenous to the country rather than importing expensive fuels There has been a period of dormancy in hydropower development since the construction of Tarbela Dam project in A Hydropower Policy is necessary to evoke response from the private sector and to bridge the gap in hydropower development. In view of the urgency and multitudinous constraints i.e. remote location and seasonal variations associated with the development of hydropower plants, the Government has devised an attractive policy package to promote interest towards their development. 4.0 POWER INDUSTRY IN PAKISTAN The power industry in Pakistan primarily consists of two Government-controlled utilities, the Water and Power Development Authority (WAPDA) and the Karachi Electric Supply Corporation (KESC) with an increasing role of the private sector. These two utilities operate independently except for one 220 KV double circuit and two 132 KV links between them which each utility operates as a separate island. Together the two utilities are responsible for power generation,

2 transmission and distribution to approximately 13.3 million consumers in the country. The Ministry of Water and Power controls both WAPDA and KESC. Approximately 95% of the grid system is operated by WAPDA and the balance by KESC. In addition to the national grid, several Independent Power Producers (IPPs) are also operating to meet national power needs. 5.0 GROWTH PATTERN OF INSTALLED CAPACITY The total installed capacity in the country at the time of independence was 50 MW. In 1958, when WAPDA was constituted, the installed capacity was 174 MW, of which 119 MW was in the area where WAPDA operates and 55 MW in the areas where KESC operates now. The decade-wise increase in the installed national capacity since 1947 excluding the nuclear power plants is as under: GROWTH PATTERN OF INSTALLED CAPACITY Mega Watts 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Years WAPDA KESC PRIVATE TOTAL NOTE: A. With the addition of CHASNUPP`s 325 MW to the KANNUP s earlier 137 MW, Pakistan s total installed nuclear power capacity is 462 MW. B. The installed capacity of the WAPDA system decreased during the year because the following plants were removed from the system due to poor efficiencies: 1. Mesco 20 MW 2. Shahadra 85 MW

3 The following plants were derated: 1. Multan derated to 195 MW from 260 MW 2- Quetta 3-6 derated to 42 MW from 85 MW C. The 50 MW Sukker power plant was been taken out of the system during the year and the following plants have been derated: 1. Jamshoro derated to 850 MW from 880 MW 2. Muzaffargarh derated to 1350 MW from 1370 MW 6.0 HYDEL POWER POLICY After the success of 1994 Power Policy, the Government announced the Hydel Power Policy in May 1995 called Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan. The salient features of this policy are: Choice of Site and Equipment Investors are free to propose hydel power plants on tributaries and canal systems at any location and opt for any type of equipment. However, seasonal storage plants are only allowed on streams and tributaries. The policy covers all feasible hydropower plants up to 300 MW. Rivers are excluded but plants with capacities more than 300 MW which do not disturb the downstream user s water rights and do not undermine the optimum development potential of a site would be considered on case to case basis. Feasibility Studies The private sector should carry out feasibility studies at their own expense to discern technical and economic feasibility and evaluate if the plant factor is > 50%, 40% energy is produced during low-water months (January - June), etc. Financing Arrangements The Government will raise funds without any direct sovereign guarantee of repayment; therefore, investors/ lenders should look forward to revenues by the sale of electricity. The minimum requirement for equity investment is 20% of the total capital cost of the project. Up to 30% of the capital cost of the project may be provided through a Private Sector Energy Development Fund (PSEDF) with a variable interest rate and maturity period up to 23 years including a grace period of 8 years. Power generation companies may issue corporate bonds or shares at discounted price. Moreover, foreign banks may underwrite the issuance of shares. A tax facility similar to non-banking financing institutions, 80:20 debt equity ratio, abolition of 5% limit on investment of equity are also extended. Net Profits Article 16(2) of the Constitution of Pakistan regarding profits from hydropower generation is not applicable to the private sector. However, a nominal price for the use of water as Bulk Power Tariff at a

4 rate of US cents/ Kwh should be paid to the provincial governments. Fiscal Incentives The private power generation companies are exempt from corporate income tax, sales tax/ Iqra/ flood relief and other surcharges on the import of all types equipment for generation/ transmission/ distribution with the exception of 2% custom duty on imported machinery. Repatriation of equity along with dividends is allowed freely. Exemption from income tax in Pakistan to foreign lenders to such companies. Private power companies may get insurance from any source and will also be eligible for other concessions given to industrial projects. Security Package Model Implementation and Power Purchase Agreements have been prepared to eliminate the need for protracted negotiations between the Government and Sponsors. The ownership of the project will be transferred to the Government free of charge after 25 years of its operation. The Government will provide protection against specific force, major risk, and protection against changes in certain taxes and duties and ensure convertibility of rupee and remitability of foreign exchange. Application and Processing Letter of Interest and Letter of Support will be dealt by provincial Governments. Registration of applicant and application form is given by provincial Private Power Cells for Rs. 5,000/-. Whereas, applications will be accepted against a non-refundable fee ranging between Rs. 30, ,000 for power plants between MW and larger. The Government will charge the price of the feasibility study if it has been completed in the public sector. Tariff for Bulk Purchase of Power A Bulk Power Tariff applies according to the following: Capacity Rate US Cents/ Kwh Timeframe Upto 20 MW 6.1 For first 10 years Upto 20 MW 5.57 Levelized for the first 25 years MW 6.0 For first 10 years MW 4.7 Levelized for the first 25 years 300 MW and above Case to case basis The Bulk Power Tariff has been calculated on an annual plant factor of 50%. The payment will be made on the basis of actual energy sold to

5 WAPDA on a monthly basis. WAPDA will deduct US cents 0.233/ Kwh as price of water. Indexation / Adjustment The base price for use of water will be paid in equivalent rupees. The variable O&M cost is directly escable from financial close against exchange variations of Pak Rupee to US Dollar and US inflation rate as determined by State Bank of Pakistan and Consumer Price Index. Environmental Study Every proposal for private power company will be liable to conduct an Environmental Impact Assessment as applicable by statutory requirements by the Pakistan Environmental Protection Laws and should be in accordance with the EIA Guidelines issued by the Ministry of Environment, Local Government and Rural Development. 7.0 SALIENT FEATURES OF 1998 POLICY FOR NEW PRIVATE IPPs The total power demand in Pakistan was estimated to range between 19,000 MW and 25,500 MW by July The existing generating units and committed additions to capacity in both the public and private sector were expected to meet the demand until the year The shortfall in generating capacity was expected to range between 5,000 MW and 8,500 MW until July 2008, based on population trends and hydrologic variations. The basis for selection of an IPP was a minimum levelized tariff through International Competitive Bidding (ICB). The process of selection involved pre-qualification, issuance of a Request For Proposals (RFP), bidding and evaluation of bids against bid criteria clearly laid out in the RFP. Detailed feasibility studies were required before the bids were to be invited. Hydropower projects were to be implemented on Build-Own-Operate- Transfer (BOOT) basis. Initially projects based on hydro and indigenous coal were to be entertained. No blanket exemptions from duties and taxes were provided to the IPPs. Unsolicited proposals for hydro and indigenous coal based projects were permitted from sponsors in absence of a feasibility study. The sponsor was required to complete a detailed project feasibility study at his own cost and hand over the study to GOP, in order for GOP to invite bidding. On the conclusion of the bidding process, the sponsor of the unsolicited proposal were to be offered the opportunity to undertake the project at the lowest tariff offered by the bidders. If he rejects this offer, the successful bidder was required to repay the reasonable cost of the feasibility study.

6 Adequate compensation in tariff was provided for projects requiring substantial investment in dedicated production and / or transportation facilities for fuel. 8.0 DIFFERENCES FROM 1994 POLICY After the announcement of the 1994 Policy Framework and Package of Incentives for Private Sector Power Generation Projects, thirty-four projects totaling a net capacity of 9,062 MW were issued a Letter of Support (LOS). Of these, nineteen projects totaling a net capacity of 3,454 MW achieved financial close. Some major features more lenient in the 1994 policy are as follows: Bulk Tariff of US Cents 6.1/kwh was guaranteed for purchase of all power produced by the IPPs. Freedom to select technology and fuel was provided to the entrepreneurs. The IPPs proposed their selected location without any pre-agreed criteria. Guarantee of the performance of public sector utilities and fuel supplier was provided. "One Window" operation through the PPIB was arranged. Subsidy on fuel and in the form of other taxes and blanket exemptions was offered. 9.0 WAPDA s PLAN A three-phase Hydropower Development Programme has been prepared by WAPDA as part of their Vision 2025 philosophy. This development plan was presented to and approved by the Chief Executive of Pakistan on January 17, In the Vision 2025, WAPDA suggested a plan to meet the upcoming deficits through additional power generation in three phases i.e short-, medium- and long-term. Salient features of the plan are: SHORT TERM ( ) MEDIUM TERM (2010) LONG TERM (2015) Proposed Capacity Addition (MW) 715 6,497 15,887 No. of Projects 8 Capacity Addition Hydro-power Coal Gas Total (MW) Cost Design/ Documents Execution Rs. 154 M US$ 0.77 B Proposed = 15 Identified = 9 2,897 3, ,497 Rs. 600 M US$ 7.7 B Proposed = 20 Identified = 15 12,377 2,250 1,260 15,887 Rs. 1,210 M US$ B

7 10.0 PROJECTS IDENTIFIED FOR ADDITION IN CAPACITY In accordance with the promotion of the hydropower policy and acknowledging the necessity for hydropower, WAPDA has identified the following priority hydropower projects for the short-term, medium-term and long-term which correspond to , 2010 and 2015 respectively. SHORT TERM Sr. No PROJECT CAPACITY (MW) YEAR 1 Jinnah (Indus) STATUS Feasibility Study (F.S) by WAPDA 2 Malakand-III F.S by Private Sector 3 Allai Khwar F.S by Shydo 4 Golan Gol F.S by WAPDA 5 New Bong UGC F.S by P.S 6 Khan Khwar F.S by Shydo 7 Duber Khwar do-- 8 Pehur High Level P.F.S by WAPDA Sr. No. Total 715 PROJECT MEDIUM TERM CAPACITY (MW) 1 Raised Mangla Thal Reservoir (CJ Link) 52 3 Doyian (NA) Neelam-Jhelum Kohala (Jhelum) Matiltan (Ushu) 84 7 Gulpur (Punch) Abbasian (Jhelum) Rajdhani (Punch) Combined Cycle on Gas/Coal 3,600 Total 6,497

8 LONG TERM Sr. No. PROJECT CAPACITY (MW) 1 Basha 3,360 2 Dasu (Indus) 2,712 3 Patan (Indus) 1,172 4 Thakot (Indus) 1,043 5 Bunji (Indus) 1,500 6 Munda (Swat) Chokothi (Jhelum) Naran (Kunhar) Suki Kinari (Kunhar) Patrind (Kunhar) Azad Patan (Jhelum) Karot (Jhelum) Mahl (Jhelum) Combined Cycle on Gas 1, Thar Coal Lakhra Coal 450 Total 15,887 REMARKS: All the above mentioned projects are to be undertaken by WAPDA or as joint venture with the private sector. REFERENCES 1. Pakistan Water & Power Development Authority, Power System Statistics Twenty Third Issue, March Government of Pakistan, Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan, March Government of Pakistan, Policy Framework and Package of Incentives for Private Sector Hydel Power Generation Projects in Pakistan, May Government of Pakistan, Policy for New Private Independent Power Projects, July TA Study of Asian Development Bank, A Review of the Independent Power Policy of the Government of Pakistan, Completion Report, February Global Water Partnership, Draft South Asia - Water Vision 2025 Country Report Pakistan, 2000.

9 7. Asian Development Bank TA, Water Resources Sector Strategy, National Water Sector Profile, April The Private Power Infrastructure Board Website