Hydel Policy Of 1995: Amendments Likely For Hydel Projects Upfront Tariff
Sunday, September 7, 2008 at 11:47 am Under Business News 10 views
ISLAMABAD:The federal government is likely to allow amendments to those private sector projects which were initiated under the hydel policy of 1995 by allowing them upfront tariff in accordance with tariff provisions of 2002, sources in the PPIB told Business Recorder.
The issue is expected to be placed before the Economic Co-ordination Committee (ECC) of the Cabinet shortly as the Ministry of Water and Power is in the process of receiving comments from other ministries, the sources added. The sources said various options for the development of projects under 2002 Power Policy were deliberated in depth between the PPIB, National Transmission and Distribution Company (NTDC), Azad Jammu and Kashmir Council and the project companies.
They said that it was a considered opinion of the stakeholders that wholesale extension of 2002 policy concessions with minimal changes to the project agreements was not possible as fundamental changes in the securitisation, financing and contractual framework would then be required.
Therefore, it was agreed that for the expeditious fast track development, the projects should continue to be governed by 1995 Hydel Policy and only the tariff provisions of 2002 policy including the amendments made thereto shall be made applicable to the projects.
In May 1995, the government announced policy framework and package of incentives for development of hydro electric power projects in the private sector. The policy encouraged proposals for setting up of power generation plants utilising indigenous resources on the least cost basis and providing benefits of economic growth in the under developed parts of AJK and NWFP. Hydel Policy 1995 was subsequently adopted by the AJK Council for its implementation in the territory.
Consequently, Letters of Support (LoS) were issued to M/s Laraib Energy Ltd, M/s Iqbal Power Limited and M/ Matiltan Power Company Ltd for projects led in AJK and NWFP respectively on Build, Operate, Own, and Transfer (BOOT) basis for a term of 25 years (the “Projects”). The 1995 Hydel Policy offered an upfront tariff of 4.7 US cents per kWh.
However, due to substantial increase in prices of construction material and equipment required in the hydropower projects, tariff under the 1995 hydel policy was raised to 5.89 cent per kWh as approved by the ECC on October 31, 2007. Meanwhile, the GoP approved a framework of implementation of hydropower projects under Power Policy 2002 whereby National Electric Power Regulatory Authority (Nepra) will notify mechanism for determination of tariff for hydropower projects including cost variations for re-openers in certain defined areas.
Nepra however developed a mechanism for determination of tariff for hydropower projects in consultation with various stakeholders. The mechanism appreciates that the hydropower plants due to their unique nature present a number of unforeseen risks that deter investment by the private sector including upfront tariff determination. Tariffs are inadequate to remove costs uncertainties of civil works in such projects.
In order to mitigate the risk of the investors, the mechanism provides determination and multiple adjustments of tariff at different stages of hydropower project development. Projects under 1995 policy are at the advanced stage of negotiations in project agreements {including the Implementation Agreements (IAs), Power Purchase Agreement (PPA), Direct Lenders Agreement (DLA), Water Use Agreement (WUA), engineering, procurement and construction contracts} and are required to achieve financial closing by December 31, 2008.
However, the project companies are unable to achieve financial close based on revised upfront tariff of 5.89 cents for unit due to unforeseeable risks encountered in civil works, escalating prices of construction materials, and eroding returns on investment. The sources said that investors/sponsors of the projects are of the view that for bankability of the projects they should be given upfront tariff.
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