Competitive bidding yields dividends

The move to competitive bidding for determination of tariffs for power projects by the government has started paying off dividends. In the recently issued determination by the National Electric and Power Regulatory Authority (Nepra), the tariff awarded to the fourth 1263MW RLNG power plant at Jhang, Punjab is the lowest amongst all three RLNG power plants previously commissioned.

The tariff for the project on RLNG is 8 percent lower at Rs5.90/kWh as compared to Rs6.36-6.42/kWh for the previous projects. Being set up by the Punjab Thermal Power (Private) Limited (PTPL) which in turn is owned by the Government of Punjab, it will be a combined-cycle power plant using RLNG as the primary fuel and high-speed diesel as back-up fuel.

Indeed, the engineering, procurement and construction (EPC) cost for the power plant at $0.412 million/MW is one of the lowest in the world and certainly lower than the previous three plants which ranged from $0.47-0.50/MW. This has been possible in part due to the discount provided by Siemens which is the original equipment manufacturer (OEM) for the power plant.

It is good that another player apart from General Electric (GE) has also got an opportunity as GEs gas turbines have faced problems in Pakistan which in turn has affected the entire power supply chain. Even though the issues have been resolved, selection of Siemens will also ensure that the risk is diversified as all of the three previously commissioned RLNG power plants have GE as their OEM.

At the same time competition has led to discounts being given by international firms to secure contracts in Pakistan which has resulted in lower project costs and in turn lower tariffs. From a tariff view point, it is a job well done indeed.

However, there are some issues that beg attention. The biggest one is the structuring of the entire power supply chain to cater to the government’s new found lover for RLNG. Channel checks suggest that there are still a lot of lacunas when it comes to the energy supply chain.

Starting from import of R-LNG and ending with the supply of R-LNG to power plants, the process needs to be carefully managed as the efficiency of the RLNG power plants will suffer while the tariff will go up if they do not get a reliable supply of RLNG. For paucity of space, this column will analyse the lacunas in the energy supply chain in the weeks to come.

The second issue is the preferential treatment of government and CPEC power projects where they are being awarded “take or pay contracts” whereas the policy has shifted to “take and pay contracts” for private sector power plants. Nepra Member (KP) Hamayat Ullah Khan highlighted in the order the “discriminatory attitude “by the Central Power Purchasing Agency against other technology power plants.
If private sector participation is to be encouraged, the government should focus on incentivisation rather than discrimination. In the long term the power sector will only be financially and operationally sustainable if the government limits its own role and moves towards a market based electricity system. However, till now each step forward has been accompanied by two steps backwards.