Government of Pakistan has developed and implemented four Power Policies, through Private Power & Infrastructure Board (“PPIB”), since its resolution to invite private investment in electricity generation sector of the country. The first Policy for Private Power Generation Projects was announced in year 1994, followed by Policy for Hydropower Generation Projects in year 1995. Another Policy was announced in year 1998 and finally the prevalent Policy was announced in year 2002.
The Hub Power Project having gross capacity of 1,292 MW and net/dependable capacity of 1,200 MW was awarded to private sector before the announcement of 1994 Power Policy and therefore it’s governed by the Implementation Agreement signed between the Company and GOP.
Around 3,000 MW of capacity was added to national grid by private power producers who opted for the 1994 Power Policy. Circa 74% of the newly added capacity during this period was based on expensive oil fuels, which later distressed the energy mix of the country and stemmed the monster of circular debt.
Moreover the experts who calculated the forecast of electricity demand proved themselves entirely flawed as the additional capacity coming through 1994 power policy was well beyond the requirements of the country and for the next decade nation was always available with excess and unutilized power generation capability. The agreements with IPPs were based on “Take or Pay” arrangements, therefore the consumers had to pay for additional unutilized capacity as well (the cost of engagement of incompetent experts).
The Government could have avoided the unaffordable energy mix by encouraging the development of low cost hydropower projects in the country, however the already tested experts advised the government to lower down the upfront tariff of US Cents 4.7/ KWh (Policy Tariff) to US Cents 3.01/ KWh (Revised Tariff) for the hydropower projects. At that time four hydropower projects had already conducted their feasibility studies based on Policy Tariff but were reluctant to proceed the projects based on Revised Tariff due to unviable financial projections based on new offered tariff. The government offered two impracticable choices to the project developers i.e. either proceed the projects on Revised Tariff or leave the projects for other international investors. The project developers however decided to accept the first choice and gone slow on development of projects while trying to get the Policy Tariff reinstated by the government.
In the beginning of new century, the government and its experts realized the fact that excess power epoch is ending rapidly and country is again going to face long hours of shutdowns due to increase in demand and no available additional supply. Courageously in year 2004, the government finally decided to offer a good news to hydropower project developers by accepting their demand of restoration of Policy Tariff. However it proved too late and the cost for development of hydropower projects had gone up during this time due to increase in construction and equipment costs. Out of four projects awarded in 1996, only one (84 MW New Bong Escape) could survive, which was later allowed a tariff of US Cents 8.53/ KWh based on cost-plus tariff mechanism. Effectively it took 17 years for development of first private hydropower project in the country, the Letter of Support of which was issued in May 1996 and it started its commercial operations on March 23, 2013.
The 1998 Power Policy was a complete failure and could not attract any investment in the sector, however the Power Policy 2002 became a comprehensive document for all technology projects and around 2,800 MW of dependable capacity was added to national grid successfully during the last decade.
This time the government realized the disparity in the energy mix of the country and formulated the power policy in a way that offered more incentives to hydropower projects. Time to time adjustments were made from year 2002 till now to attract more and more investment in hydropower sector but the results are not encouraging at all till this date. The successful commissioning of the New Bong Escape hydropower project has provided a way forward for the independent power producers interested in the hydropower project development and some international investors from Kora and China are now at advance stages of project development.
Government also constituted National Electric Power regulatory Authority (“NEPRA”) in year 1997, as an autonomous body for ensuring the safe, reliable and affordable energy to all consumers in the country. NEPRA approves the tariffs of the projects on cost-plus basis after due diligence of costs estimates by the project developers. However, most of the hydropower potential exists in AJ&K and northern areas of Pakistan, which are not yet under the jurisdiction of NEPRA and there are various legal snags faced by project developers whom projects are located in these two areas.
1638 MW Kot Addu Power Project was a public sector power project; however, through its strategic sale by the Privatization Commission, it was converted into IPP as KAPCO. The project which were able to make successful commercial operations under the 2002 Power Policy still consist of 42% based on expensive oils and other 58% on Gas fuel. The gas reserves in the country are depleting rapidly and availability of gas to power projects is compromised to facilitate the domestic users. However the lower utilization of these projects is costing extra to consumers due to “Take or Pay” arrangements made with these projects.