Nepra refuses to approve tariff of 3 IPPs selected in Intl Competitive Bidding

[Naveed Yaseen]

MUSHTAQ GHUMMAN
ISLAMABAD (September 12 2009): The National Electric Power Regulatory Authority (Nepra) has reportedly refused to approve tariff of three independent power producers (IPPs), selected on the basis of International Competitive Bidding (ICB) being promoted by the Private Power Infrastructure Board (PPIB), well-informed sources told Business Recorder on Friday.

The IPPs granted questionable tariff by the PPIB are Engro PowerGen (Pvt) Limited (Engro), Reshma Power Generation Limited (Reshma) and Saba Generation Company (Pvt) Limited (Saba). "The Nepra is of the view that the tariffs given to these projects are not in accordance with the bidding rules, which is a concern for us," the sources added.

Water and Power Secretary Shahid Rafi, who is pursuing the regulator for the review of its earlier decision, has asked for re-assessment of the country's power situation and approval of the tariff accordingly, the sources added. On July 9, the Nepra wrote a letter to the government asking the review of the government decision regarding three IPP projects approved as a result of the ICB conducted by the PPIB. To clarify the points raised by the Nepra, the Water and Power Ministry stated that the government for fast track IPP projects conducted the ICB process.

According to the Ministry, Economic Co-ordination Committee (ECC) of the Cabinet (ECC) considered a summary on fast track power generation projects through the ICB in its meeting on September 10, 2008 and approved the following IPP projects, processed under ICB: (i) Progas Energy for 305 MW IPP Project at Port Qasim; (ii) Cavalier Energy for 470 MW IPP Project at Port Qasim; and (iii) Ruba Energy Pakistan for 154.07 MW IPP Project at Lahore Gujranwala Road.

Accordingly these IPPs were advised to approach the Nepra for tariff approval, which was approved by the Nepra on October 9, 2008 for Cavalier & Ruba and on October 28, 2008 for Progas Energy respectively. Thus, the Nepra has already accepted the principle of award of multiple projects as a result of ICB in case of approval of Cavalier, Ruba and Progas IPP Projects.

Through the same decision, the ECC directed to lock-in the competitive tariffs offered by M/s Attock Wartsila Consortium (AWC), for their proposed 195.9 MW power project at Mandi Bahauddin and M/s Creative Energy Resources (CER), for their proposed 163.59 MW power project at Chakwal for commercial operation date (COD) during 2010.

The PPIB was directed to solicit by October 31, 2008, competing bids other than those offered; and finalise issuance of letter of support (LoS) at an early date. Accordingly, the PPIB initiated the ICB for IPP projects to be commissioned in 2009-10. However, no bids were received and thus the AWC was notified as "qualified bidder" on November 10, 2008 and was advised to apply to Nepra for tariff approval.

Nevertheless, the AWC did not agree to the assumed Calorific Value (CV) of Residual Fuel Oil (RFO), which was based on Nepra's recent tariff determinations. The PPIB aggressively pursued the resolution of the issue of CV of RFO, which was pending for over a year. This was finally resolved through deliberations of Nepra with the concerned stakeholders and Nepra notified the decision on March 4, 2009.

However, due to the delays in settlement of the CV issue, the AWC disagreed to proceed further. The sponsors of the Creative Power Project could not adhere to the COD of December 2010 and declined to proceed further. While approving the three IPP projects, the ECC decided that in case any of the approved projects' failure to achieve crucial milestones as per agreements towards timely project implementation, the project will be immediately cancelled with penalties.

The deficit power generation capacity would then be expeditiously arranged through addition of IPP/ rental power projects (RPPs), both solicited and unsolicited, on fast track basis. As a preventive measure to meet the slippage of any of the approved projects, the government also invited bids on September 26, 2008, for fast track IPP projects to be commissioned in open cycle by December 2010 and in combined cycle by December 2011.

Considering the difficulties faced by the sponsors in arrangement of financing for their proposed projects due to financial and economic crises the world over, the competent authority extended the commissioning deadline by three months. According to the Ministry, RFP clearly mentioned that the bids will be accepted in order of their ranking, subject to the reasonability/ acceptability of tariffs; and all of the responsive bidders will be declared "qualified bidder(s)".

The Ministry further stated that as a result of the earlier bidding process, only 437 MW rental projects could enter advanced stages. However, no IPP project materialised. As such the earlier allowed 1000 MW capacity was still to be inducted. Moreover, there was also a need to add more IPP projects to meet future demand and replace rental projects, which would be retiring in 3-5 years, said the Secretary of Water and Power, in a letter, sent to the Nepra Chairman.

"It is quite clear that the ICB for 1PP projects under discussion is the extension of an earlier round of the ICB for which Nepra has already approved tariffs. The same procedures were also adopted for the current ICB as were adopted for the earlier ICB," the sources quoted, Secretary of Water and Power as saying. This argument is reportedly not being given any weight by the Nepra.

The Water and Power Ministry is also of the view that IPPs are processed and procured through ICB process as per international norms and practices and in a transparent manner. The projects were widely advertised in the media (national dailies, PPIB website, etc) and letters were sent to potential bidders and to reputed national and international power sector companies inviting them to participate in the bidding.

Registration of interested parties was open for 108 days, following which request for proposals were issued. Pre-bid conference and clarification meetings were held to explain the bidding process, evaluation and ranking criteria/methodology and prospective bidder's queries. The bidders were given 122 days to prepare and submit proposals.

According to the Secretary of Water and Power, it also merits to mention that the bids received under the ICB initiative were evaluated by the bid evaluation committee comprising members from PPIB, WAPDA/ NTDC, Nepra and Ministry of Finance and subsequently further negotiated by a negotiation committee constituted by the competent authority.

After acceptance of the negotiated tariffs by the competent authority, PPIB issued "notification of qualified bidder" to the following three bidders, on May 11, 2009: (i) Engro PowerGen (Pvt) Limited (Engro); (ii) Reshma Power Generation Limited (Reshma); and (iii) Saba Generation Company (Pvt) Limited (Saba).

"The bids received, obviously reflect the investor's perceptions and expectations according to the market dynamics prevailing at the time of the bidding, including but not limited to, liquidity available in the financial market to finance the projects, investor's perception of the return on investment commensurate with the risks, equipment manufacturers/ contractors appetite for new business etc," the sources quoted Shahid as saying.

He further stated the government accepted all the bids keeping in view the projected demand for additional capacity. As per the government's assessment, the project offering lowest tariff was not offering the required capacity addition. Hence the decision was made to accept all the bids totalling 970 MW. To address the concerns/ queries of the prospective bidders, a pre-bid meeting was held on November 17, 2008 under the chairmanship of the Federal Minister for Water and Power.

Various bidders demonstrated their reservations on the performance parameters (annual availability and efficiency) for dual fuel gas turbines (GT) based Combined Cycle Power Plants (CCPP).

It was brought to the notice of the Minister that the performance parameters for annual availability and efficiency set out in the Request for Proposal (RFP) issued to the prospective bidders are primarily for a power plant to be operated on single fuel (either RFO or gas) for its entire life, whereas the requirement is of a dual fuel capable of running on both RFO and gas, whenever required.

In the eyes of the Ministry of Water and Power, at present there is not even a single combined cycle power plant in Pakistan operating on RFO. International experience with RFO based combined cycle plants is also very limited. Therefore, at the time of preparation of RFP, technical/performance parameters were based on discussions among power purchaser, equipment manufacturer and the PPIB.

The Nepra, the Ministry argued, had also no precedent of tariff determination for a dual fuel (RFO and gas) based project. Besides, the references used by the Nepra like JPGL, Grange Holding etc are not valid since these projects have yet to materialise. The comparison of efficiency approved by the Nepra has only relevance when relevant project has submitted the Performance Guarantee (PG) and received LoS and, more particularly, achieved financial closing on the approved tariff.

Besides comparison with low Btu gas based project is irrelevant due to use of RFO as primary fuel. Shahid Rafi further argued that threadbare discussions, with the stakeholders, including PPIB, WPPO/ Pepco, sponsors of new projects and equipment suppliers, resulted in the consensus that most of the parameters indicated in the RFP are valid.

However, certain performance parameters need to be rationalised. Accordingly, a comprehensive report on review of performance parameters (efficiency and annual availability) for dual fuel gas turbines based combined cycle power plants was prepared, which was approved by the competent authority.

Another argument given by the Ministry is that no heat rate degradation over the project life has been permitted for ICB projects. Decision to adjust some of the technical performance parameters was made in order to make these parameters acceptable to the market considering fuel (RFO) and technology (CCGT), as has also been conducted by Pepco in the under construction public sector Nandipur project which has similar equipment configuration.

The Ministry appreciated the Nepra's concerns as a regulator vis-à-vis efficiency, cost of generation etc, yet argued that in the present circumstances when power shortages have become a serious threat for the local industry and eventually for the overall economy of the country, the topmost priority needs to be given to induct additional generation capacity through all possible means, which would only be possible through mutual efforts by all concerned quarters. Despite the PPIB rigorous efforts to attract private investment in power sector through competitive bidding process, there has been limited response owing to on-going financial crises around the globe.

"You would agree that under competitive bidding process, it is the market that determines the price of the commodity. The tariffs termed as 'higher' by Nepra have been determined after a well organised process of bidding, and several rounds of negotiations were held with the responsive bidders to reduce their offered tariffs to the maximum possible extent," Rafi added. He requested the Nepra to re-assess the situation and approve the tariffs, which is unlikely to be accepted by the regulator.

http://www.brecorder.com/index.php?id=960279