Talk26 on Private sector Hydropower Development in Pakistan

Thursday, 11 October 2018

Background

Pakistan offered its first policy specifically for private sector hydropower development in 1995 for investors to fully participate in the development of hydropower projects. In 2002, the government introduced another policy that was able to generate significant private sector interest, but unfortunately most of the projects picked up by the private developers did not see significant developments.

LEAD Pakistan under its Managing Shared Basins series hosted an interactive session with Waqar Ahmad Khan, Chief Executive Officer of Star Hydro Power Limited. Star Hydro Power Limited invests in the hydropower sector, and has recently commissioned a medium size project in Pakistan with an investment of USD 420 Million.

The session focused on the current policy framework, institutions and structures for private sector hydropower investments in Pakistan, and attempted to shed light on the challenges facing private sector developers.

Power Sector Structure of Pakistan

Power sector in Pakistan is highly regulated not only in terms of licensing for projects but also in terms of tariffs. The Ministry of Energy (MoE) acts as the governing body, under which the NTDC (National Transmission and Distribution Company) is in control of the grid system, and the CPPAG is the federal purchaser of electricity. National Electric Power Regulatory Authority (NEPRA) as an independent body decides tariffs for the purchase of electricity and it regulates the NTDC, CPPAG and WAPDA. The Water Power Privatization Organization in (WAPDA), on the other hand acts as the federal body for public sector hydropower development. The provincial government departments consist of provincial energy departments that commission their own projects and have, post 18th amendment, started offering projects to the private sector for development. The private sector players in the power sector include K-electric, a vertically integrated utility company working for Karachi, and Independent Power Producers (IPPs).

Financial and Risk Characteristics of Hydropower

Hydropower projects have high capital costs spread over long periods of development and construction. While their operational costs are low, the financial cost are high due to larger spread over base interest rate (reflecting the risks of development), longer construction period and long equity return period.

During the development phase, hydropower projects are exposed to high risk due to policy uncertainty. During the construction phase the project faces geological, flooding and seismic risks. Since hydropower projects involve large workforce during construction, with their attendant risks of cultural and social issues, it is imperative to gain support of the local community. In its operational stage, the plant is exposed to risks from climate change, change in hydrology, and latent vulnerabilities in its design.

Federal Policies

The first policy for setting up private sector BOO (Build-Own-Operate) power plants was issued in1986. The second such initiative, known as “The Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan” came in 1994, aimed towards providing internationally competitive tariffs and with a target of raising PKR 86 billion foreign and 16 billion local investment. While this policy was targeted towards thermal and hydro power projects, there were no specific provisions to incentivize hydropower. In terms of operationalizing the policy, several departments were set up to facilitate private investors, such as the Private Power Cell in the ministry (later called Private Power and Infrastructure Board), and in WAPDA. Financial incentives were offered by the federal government inclusive of tax breaks, lower custom duties and tariff indexation. Levelized tariff was offered at 5.91 cents/kW for up to 20 MW projects, with case based tariff determination for larger projects. The Private Sector Energy Development Fund was also set up with the help of banks such as World Bank and J-Exim, to provide financing at reasonable rates. However, this policy framework, unfortunately, was unable to draw in any investment, while in thermal sector around 3,100 MW was contracted.

In 1995, the policy framework was revised to provide incentives specifically for hydropower through tariff relief for consumers and cheap hydropower generation while setting a target of adding 2000 MW hydropower capacity by 2003. In terms of institutional incentives, the power to issue Letter of Intent (LOIs) and Letter of Support (LOS) was delegated to the provincial governments; Private Power and Infrastructure Board (PPIB) was to facilitate concession agreements; WAPDA was the power purchaser; and the Federal government issued standardized concession agreements. This policy also adopted the BOOT structure (Build-own-operate-transfer). In terms of finance, levelized tariffs were introduced at 5.57 cents/kWh for projects up to 20 MW, and 4.7 cents/kWh for larger projects. As a result of this framework, only one project was commissioned in 2013, the New Bong Escape Hydropower Project of 84MW. Overall, this framework was also unable to stimulate private investment into the hydro power development sector.

In 2002, ‘Policy for Power Generation Projects’ was introduced, to provide sufficient power generation capacity at the least cost and to encourage the use of indigenous resources. This policy had the specific objective of promoting environmentally friendly practices and was applicable to all power projects; public, private and public-private partnerships as well. With this policy, all hydropower project under 50 MW were to be processed by the provincial authorities. The Policy did undergo amendments in relation to tariff determination, selection process of projects, certain incentives etc. However, institutional changes included the delegation of authority to PPIB for issuing LOI and LOS, NTDC to act as the power purchaser, and NEPRA to approve tariffs on a capacity based structure (no levelized tariffs offered). There was also no longer any fund available to aid financing, and investors were required to raise funds on their own.

The 2015 power policy is similar to the 2002 policy in all aspects, other than delegating authority to the provincial governments to issue LOI for projects greater than 50 MW, following the 18th amendment.

Conclusion

Since 1994, two private sector hydropower projects have been commissioned. One in 2013, 84 MW New Bong Escape Hydropower, and second in 2017 147MW Patrind Hydropower Project. Currently, 3 projects of 1,692 MW are currently under construction, and 5 projects of 2,720 MW are in different stages of development.

Several factors have contributed to the slow growth of this sector, including the initial resistance from WAPDA towards private sector investment in hydropower development. Moreover, local investors have little appetite to commit resources for long period of time (7-13 years) before revenue generation hence it has mostly come from international investors only.

The volatility of policy implementation in Pakistan, due to it being at the mercy of political considerations, has discouraged significant investment in hydropower. Implementation of projects has also been significantly hindered by the lack of coordination and goal alignment amongst government stakeholders at different levels.

Another core issue has been the limited financing opportunities available for the large capital investments required by hydropower projects. Local banks, while interested, have limited capacity, while international commercial banks have shown little interest in providing project financing. Only multi-lateral financial institutions, some foreign development banks and a few Exim banks have been involved in providing finance.

Overall, the implementation record for the hydropower projects under federal government is mixed. It has very recent that significant progress is being made in private hydropower installation.