Hydel power generation projects in IGCEP: KOEN seeks fair treatment

30 Mar, 2022

ISLAMABAD: Korea South-East Power Company (KOEN) has urged National Electric Power Regulatory Authority (Nepra) to give fair treatment to hydel power generation projects in the Indicative Generation Capacity Expansion Plan (IGCEP) 2021-30.

M/s KOEN is a state-owned company and subsidiary of Korea Electric Power Corporation (Kepco), which owns and maintains about 82,855MW generation capacity worldwide with an asset base of around $174 billion. KOEN started investment in Pakistan in year 2012 and successfully delivered 102MW Gulpur Hydropower Project, which began its commercial operations in March 2020.

KOEN signed an MoU with Government of Khyber Pakhtunkhwa (GoKPK) in May 2017 for the development of 229MW Asrit-Kedam Hydropower project and 238MW Kalam-Asrit Hydropower project in district Swat with cumulative investment of $1.0 billion and were issued Lols under KPK Hydropower Policy 2016. KOEN started the fast-track development of the projects and has already invested $20 million. The company’s CODs for the projects are scheduled in 2029 and 2030.

Under the terms of LoI, the sponsors are required to approach NEPRA for determination of feasibility stage tariff and issuance of generation licence followed by issuance of Tripartite Letter of Support (TLOS) by PPIB under Power Generation Policy 2015.

According to the company, in contradiction to the terms of LoI and applicable power policies, it understands that NEPRA is not entertaining the projects processing until these are included as “committed projects” in the IGCEP.

In a letter to Chairman NEPRA, KOEN’s Branch Manager, Yoon An Sang, stated that IGCEP was never a precondition for the issuance of LoS under the power policies. This change in policy/regime has been introduced by the GoP after sponsor has taken the investment decision and therefore, it has seriously shaken the confidence of international sponsors. An added threat to viability of investment is the implication of corporate tax to projects which are unable to get LoS by June 30, 2023. Based on the company’s skills and experience, it can achieve LoS as per applicable policy, however, IGCEP and LoS have become circular references.

The Korean company maintained that determination of the NEPRA Authority in the matter of IGCEP approval recognizes the fact that those projects which are at advanced stage of implementation should be treated as “committed projects” without putting their CPAEX in the optimization software as optimization of these project based on least cost principle is not pragmatic. Owing to this principle various exceptions were provided to existing projects, however, unfortunately most of the private hydropower projects (excluding CPEC) were ignored (without giving them a chance to be evaluated on least cost principle) primarily due to the reason thatmajor chunk of hydropower slot (about 73 percent) was allocated to public sector hydropower projects, 26 percent was allocated to CPEC and less than one percent was allocated to other private hydropower projects. However, Category-II wind projects were given special exception in the IGCEP despite the fact LoS for those projects were not issued. Moreover, blocks for solar (7,000MW) and wind (3,062MW) projects were included for competition, where solar will compete with solar and wind will compete with wind.

The company further stated that IGCEP does not provide any clear criterion as to how the private hydropower will qualify as committed project in future once the existing committed projects are implemented. IGCEP under section 1.1 (Planning Cycle) stipulates that projects will get LoI after getting qualification under the IGCEP. Fundamental question here is how the cost of private hydropower can be ascertained (for consideration under IGCEP) without the feasibility study which is carried out after the issuance of LoI.

A typical run of river hydropower project requires three years to reach the LoS stage and 5-6 years are required for construction. Therefore, no sponsor will invest huge amount in the feasibility study and will wait for 8-9 years without getting the assurance that either the project will qualify in the IGCEP as committed project or at least be given a fair chance to compete with other hydropower projects.

The company maintained that it is not however clear in IGCEP, whether hydropower projects will compete against others or based on least cost principle, hydropower will also be competed against wind, solar and coal projects.

According to the company, unfortunately, IGCEP is not clear about the “least cost criteria”. If the “least cost” principle is applied theoretically without considering the matters of grid stability, appropriate energy mix, base load, peaking power, and economic benefits then only solar projects should qualify in the IGCEP being least cost option. Definitely, this is not the intent of the Government or IGCEP. Every technology has its pros and cons, and it would be grossly unfair to compete capital intensive hydropower with wind and solar projects.

IGCEP compares the capital & operating costs of the projects only to calculate the Annualized Cost metric. However, this approach is flawed because it ignores the capital structure, construction period, interest rates, required return on equity and residual benefits of the project after completion of concession period. Moreover, it also ignores the availability of project with respect to MDI of the Discos.

“We believe that government is under international obligation to safeguard the interests of international investors who took investment decisions relying on investment and power policies of the Government; therefore, ignoring the projects based on arbitrary assumptions is discriminatory and will seriously damage the FDI climate of Pakistan,” said Sang.

Koran company has requested the government that following the precedent of wind category 2 projects, its projects should also be considered as “committed” in IGCEP, as this is foreign direct investment. The company further stated that it has already invested considerable amount and taken an investment decision long before the promulgation of IGCEP.

“We propose a fair and transparent assumption in the IGCEP which we hope shall be acceptable to all stakeholders including provinces and shall ensure that only serious investors shall move forward to reach the stage of LoS within the given timeframe,” he further wrote.

Currently envisaged “least cost criteria” results in ignoring the much-needed FDI in private hydropower development, a separate block of private sector hydropower projects should be allocated and added in IGCEP permanently to meet the target of 60 percent renewable energy as announced by the Federal Government.

Under this hydro block a pool of hydropower projects having LoI should be competed against other private hydro for inclusion as “committed” projects in IGCEP.

Sang said, like Finance (Supplementary) Act, 2022, Power Generation Policy 2015 should remain applicable to those projects which already have valid Lols and will receive LoS before June 30, 2023.

Copyright Business Recorder, 2022

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