Due to wrong implementation of finance concepts by NEPRA, consumers are paying minimum 17 paisa more on every unit of electricity they consume.
“We shall strive to develop and pursue a Regulatory Framework, which ensures the provision of safe, reliable, efficient and affordable electric power to the electricity consumers of Pakistan”
The above mission statement of National Electric Power regulatory Authority have four keywords (safe, reliable, efficient and affordable) for the consumers of electricity in Pakistan. We already know, as much has been written about the performance of NEPRA regarding safety, reliability and efficiency of electric power provision to consumers. The consumers, most important stakeholders of NEPRA, have turned their silence into violence due to long hours of outages and price escalations of this reliable electricity.
The question this little piece of research asks, how much we can rely is the team of NEPRA to fulfill its mission and what is the price we are paying for their negligence and incapability to regulate the sector. As we conclude later on, we will find that a consumer is paying and will keep paying for next 30 years, at least 20 paisa extra on every electricity units he consumes or had consumed in past due to wrong calculations of NEPRA. Let’s Illustrate and compute it now!
We are working here with the set of assumption avoiding targeting any specific project. The technology of plant is irrelevant because the mistake is consistent in all tariff determinations where projects are on BOOT (Build, Own, Operate and Transfer) basis. My set of assumptions is as follows;
|Total Project Cost||250||US$ Million|
|Total Equity||62.5||US$ Million|
|Net Electrical Output||460||GWh/annum|
|IRR on Equity||17.00%|
The latest publicly available data was taken for Energy Yearbook of Pakistan to find the installed capacity and net generation of the IPPs to calculate the effective plant factor.
Methodology of NEPRA:
Nepra allows simple return on equity for the total equity invested in the project for the period when project loan is still outstanding. In case of assumptive project above, total return payable to project owners for the first ten years of project life (when loan is outstanding) will be calculated as follows;
Annual Return = Total Equity x Return on Equity
Annual Return = 62.5 x 17% =US$ 10.63 Million
After the repayment of loan is complete, NEPRA allows the sponsors of project to redeem back the equity invested in the Project, in addition to regular return on equity. NEPRA use the following excel function to calculate the annual payment including both components.
PMT (Rate, Nper, PV, FV)
Rate- is the rate of return on equity (17%).
Nper- is the number of payments remaining (15 years of Remaining Project life in Years).
PV- is the present value of Equity (62.5 million US$)
FV- is the future value of equity at the end of Project life, which is assumed zero by NEPRA.
NEPRA’s methodology would result into in annual payment of US$ 11.74 for the last 15 years of Project. Below is the summary of payments which will be made by NEPRA under current policy and calculation methodology;
Year 1-10 US$ 10.63 Million
Year 11-25 US$ 11.74 Million
Total Payment US$ 282.33 Million
Above methodology is satisfactory where the payment for the entire year is made at the end of year in the form of a single disbursement, however in case of IPPs working in Pakistan, under the terms and conditions of power purchase agreements, payment is made at the end of every month against the plant readiness & electricity generated in the preceding month. Here comes the concept of “time value of money” which is prime consideration in the calculation of Internal Rate of Rate (IRR).
This concept is artless even for a finance student, but mavens occupying the Nepra, either do not understand it or they are more motivated towards the prosperity of project sponsors as a substitute to consumers.
If we keep the assumptions above intact and recalculate the IRR of the Project with the correct formula which should be used by Nepra according to international standards, the effective IRR would become 18.45% instead of allowed 17%. The formula used to calculate correct IRR is as follows;
XIRR (values, dates)
Values: is a series of cash flows that corresponds to a schedule of payments in dates.
Dates: is a schedule of payment dates that corresponds to the cash flow payments.
If NEPRA revises the methodology, it would result into in annual payment of US$ 9.88 million for the first 10 years of Project and US$ 10.91 million for the last 15 years of Project. Below is the summary of payments & savings which will be made by NEPRA under revised policy and calculation methodology;
|Period||Current Methodology||Revised Methodology||Savings|
|Year- 1 to 10||US$ 106.25 Million||US$ 98.77 Million||US$ 7.48 Million|
|Year- 11 to 25||US$ 176.08 Million||US$ 163.69 Million||US$ 12.39 Million|
|Total||US$ 282.33 Million||US$ 262.46 Million||US$ 19.87 Million|
You can ask for the source worksheet demonstrating the calculations, formulas and differences, through an email by filling the form at this link.
What’s the Impact?
When we correct the formula to bring back the effective IRR from 18.45% to permissible 17.00%, we conclude that over the 25 years of Project life, IPP will be getting an excess undue payment of US$ 19.87 million, which is approximately 10% more than what they actually merit. This amount too is based on the assumption that there shall be no devaluation in PKR against US$.
On average, IPP will get PKR 77 million excess and undue amount due to negligence of NEPRA, which will cost the consumer an extra and undue payment of 17 paisa for every unit consumed at home or office.
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