New Thar coal tariff

The verdict on the new Thar coal tariffs is out with the regulator announcing a new upfront tariff that is on the lower side than the previous one. Recall that in March NEPRA had scheduled a hearing for input on determining the new tariffs for Thar coal power projects which had expired on 19 January, 2017.

There were two major questions raised: Should the new tariff be lower than the previous one given the reduction in costs due to improvement in technology? Secondly, should the tariff mechanism be shifted from upfront to competitive bidding?

For the first question, the regulator chose to revise the IRR on equity for future power projects from 20 to 18 percent. It noted that mine development along with construction of a coal plant has progressed significantly which has eliminated several risks and uncertainties.

Another factor is the low interest-rate environment which will entail cheaper borrowing. The MoWP submitted that the interest rate has now come down to 5.75% from 9.50% in 2014 which requires a matching rationalization in the IRR especially when the uncertainties in investment on Thar Coal based power plants have reduced considerably. Both of these make sense and the 18 percent IRR is still on the higher side which will encourage investor confidence.

Secondly, as far as the tariff mechanism goes, NEPRA chose to maintain the upfront method rather than shifting to competitive bidding. This was in line with stakeholder consensus on the need to first achieve the necessary scale along with attracting more players. The MoWP noted in its input that although the best option is competitive bidding yet currently its applicability for Thar is limited due to only three available sites and the same number of sponsors.

NEPRA also noted the need to achieve the optimal size of 20 million tons mine capacity in the quickest timeframe possible. This is necessary as the fuel cost component comprises for roughly 50 percent of the total tariff which will come down substantially once economies of scale are achieved. Therefore the regulator has made the upfront tariff applicable for 5000MW or two years from the date of notification whichever shall fall earlier.

Another pertinent point has been the water problem in Thar which raises the issue of whether only coal power plants with low cooling water requirement should be used. While the use of air cooling technology is better in this regard, NEPRA’s view is to encourage use of such technology that enables induction of maximum capacity from the power plants.

Therefore it has announced separate tariffs for air cooling and wet cooling technologies. The new levelised tariffs are in the range of Rs7.58 to Rs7.79 per kilowatt-hour (kWh) depending on the type of technology and financing used.

Lastly in a welcome move NEPRA has decided to allow only those projects which use supercritical technology. The earlier used sub critical technology results in subpar efficiency and more adverse environmental impact. Overall, the new tariff seems balanced as it keeps investor interest engaged while also accounting for the reduction in cost and the use of improved technology.