Ministry of Water and Power has reportedly challenged National Electric Power Regulatory Authority (Nepra) for extending higher tariff for solar projects which has adversely affected the basket price.
Well informed sources told Business Recorder that the Ministry has written a strongly worded letter to Nepra on fixation of high tariff on solar projects and recommended that tariff for solar power should be slashed as per international trends.
Nepra recently held a public hearing to fix new tariff for solar power after consideration of arguments of all the stakeholders.
The regulator had framed the following issues for the public hearing: (i) whether to determine a new upfront tariff for wind power projects or to determine a benchmark levelized tariff for competitive bidding by the relevant agencies? (ii) whether the proposed costs are reasonable? and (iii) whether assumptions listed above are reasonable?
The sources said Water and Power Ministry highlighted on number of occasions in the past that the tariff and costs associated with solar PV projects are on the higher side.
According to the Ministry, the higher costs and tariff are not only adversely affecting the basket price but also not creating a competitive market with serious investors for the renewable energy resources.
Anomalies like higher EPC, higher insurance rates, lower plant factors and absence of benefits of technological innovations etc resulted in a tariff which was abnormally high.
The Ministry strongly proposed a reduction in tariff as internationally the tariffs are much lower now.
The Ministry submitted the following comments/suggestions:
(i) given declining trend in solar PV costs and time taken for project development, it may be assumed that project companies shall be able to install advanced technology with higher capex (eg premium modules or tracking) within the same project cost parameters;
(ii) while energy yield based on high-end technology shall vary significantly based on site location, land availability, selected technology. etc, at least 10% increase in plant factor is generally expected. As such, assumed benchmark plant factor of 18% for South Region may be increased to 20% and tariff should be reduced accordingly;
(iii) with the onus on higher efficiency and increased plant factor and given nascent state of tracking / advanced solar technology in Pakistan, the project company may retain full benefit in case the project achieves higher plant factor. Sharing dis-incentivizes adoption of sophisticated technology and it is also in consumer interest to assume a higher plant factor upfront, thereby reducing the tariff, rather than assuming a low plant factor and higher tariff upfront with sharing;
(iv) Nepra assumes annua1 insurance component at maximum of 1 % of EPC cost to be adjusted subsequently as per actual each year. Rather than retaining this cost-plus adjustment which keeps the tariff higher, Nepra should assume a lower insurance premium from the onset. Given declining trend in solar PV costs and as insurance premiums depend on replacement value of the plant assumed insurance cost may be reduced to 0.75% of EPC cost without any further adjustments or indexations;
(v) Nepra has increased debt tenor from 10 years repayment + 1 year grace to 13 years repayment + 1 year grace period and reduced spread over Libor from 4.5% to 4.0%. The Ministry supported the change as it reduces the tariff in initial years;
and (vi) there should no longer be any sharing in case project-specific debt tenor or spread is different from Nepra’s assumption. Project companies should be free to opt for shorter tenor loans (eg 7 or 10 years) and service higher debt repayments at the cost of their equity returns.
Removing sharing would also provide flexibility to project companies to subsequently refinance their debt. This will ultimately benefit the end-consumer as Nepra can assume progressively longer debt tenor and / or lower spread over Kibor / Libor in future tariffs on the basis that project companies can refinance debt after COD even if they are unable to initially match the debt terms assumed by Nepra.
The Ministry, however, suggested that in case the project company arranges debt through any subsidised public sector scheme (eg State Bank of Pakistan revised financing scheme for renewable energy), the previous concept of 60:40 sharing may be retained by Nepra. -Business Recorder