Nepra approves KE’s generation tariff with key adjustments

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) has conditionally approved K-Electric’s (KE) generation tariff for its power plants, introducing important modifications that could reshape the utility’s financial and operational future.

This approval, effective post-June 2023, includes adjustments in the return on equity (ROE), operational frameworks and debt-equity ratios for KE’s power fleet.

A significant change is the reduction of KE’s US dollar-based ROE from 15 percent to 14 percent, in line with other independent power producers (IPPs). Nepra maintained a debt-to-equity ratio of 70:30, with allowances made for KE’s Bin Qasim Power Station III (BQPS-III), due to the unhedged nature of its debt. However, KE’s overall financial leverage in fiscal year 2023 (46:54) exceeded this limit, leading Nepra to treat excess equity as debt.

The K-Electric had sought approval for a tariff control period covering the remaining useful life of its power plants. However, Nepra approved a control period of up to seven years or the remaining useful life of each plant, whichever is shorter.

The sole exception is BQPS-III, which was granted an 11-year control period to align with its debt repayment schedule. This is significantly lower than the 30 years requested by the KE. In addition, Nepra introduced a fuel and operational savings-sharing mechanism, giving 60 percent of savings to consumers and 40 percent to producers, with a 50:50 ratio for BQPS-I.

Despite approving a “take-or-pay” tariff model for all KE plants, Nepra denied KE’s request for “must-run” status for its re-gasified liquefied natural gas (RLNG) plants. The regulator also rejected the company’s bid for separate allowances for major overhauls and simple cycle operations using high-speed diesel (HSD).

While the government is actively working to transition Independent Power Producers (IPPs) to a “take and pay” model, K-Electric has been granted a “take or pay” tariff structure. This allows KE to receive capacity payments regardless of whether its plants generate electricity, a decision that could burden consumers. A cap on costs related to Standby Letters of Credit (SBLC) was set at one percent of the actual amount, and provisions were made for proceeds from asset disposals to benefit consumers.

Nepra’s decision enables KE to move toward an unbundled generation tariff structure, with plant-specific rates designed to improve transparency and efficiency. However, KE’s transmission and distribution tariffs remain under Nepra’s review.

The approved levelised tariffs for KE’s power plants vary significantly. For BQPS-I at a 60 percent plant factor, the levelised tariff is Rs3.65/kWh. For BQPS-II, it stands at Rs12.8043/kWh. KCCP, when operating on gas at a 60 percent plant factor, has a levelised tariff of Rs38.03/kWh, rising to Rs59.06/kWh if running on HSD. SGEPS’s tariff reaches Rs39.68/kWh at a 60 percent plant factor. Meanwhile, BQPS-III, running on RLNG or gas at a 92 percent plant factor, has a levelised tariff of Rs8.48/kWh, increasing to Rs16.75/kWh on HSD.

Nepra has approved fuel cost component from Rs43.3356/unit to Rs50.7461/unit for the HSD in the power plants on combined cycle operations, Rs20.6731/unit to Rs41.7506/unit for RLNG based power plants, from Rs33.3197/unit to Rs34.6414/unit for RFO based power plants, and from Rs6.8385/unit to Rs9.6249/unit on gas-based power plants. Similarly, from Rs36.7623/unit to Rs45.7659/unit for RLNG open cycle power plants, and Rs8.4202/unit to 10.5506/unit for gas-based open cycle power plants.

In his dissenting note, Nepra member Mathar Niaz Rana raised concerns about the declining dispatch factor of KE power plants, particularly BQPS-I, KCCPP, KTGEPS, and SGEPS, since 2019. He noted a significant drop in FY2023 with the induction of BQPS-III units, and highlighted KE’s lack of a firm gas supply agreement with the SSGC, affecting plant operations. Rana suggested a “take-and-pay” tariff for older plants due to reduced efficiency and high operation costs, and recommended decommissioning them as cheaper power options become available. The Nepra member opposed approving a “take-or-pay” tariff for KE plants operating on backup fuel, citing that such plants would be unlikely to run but would still be eligible for capacity payments, burdening the consumers. He also warned that a similar arrangement for RLNG would disrupt the merit order and pass on extra costs to consumers through Fuel Cost Adjustments (FCAs).

He further criticised the 14 percent dollar-based ROE granted to KE as excessive, pointing out that most of KE’s plants have repaid their debts and face lower risks. Allowing this high ROE could set a precedent for other IPPs seeking similar returns, which would increase costs for consumers. Instead, Rana recommended capping foreign equity returns at 11.5 percent and rupee equity at 15.5 percent.

The Nepra member also questioned the new method of indexing KE’s O&M costs to both US-CPI and the dollar exchange rate, suggesting it should remain indexed to local CPI to protect consumers from exchange rate fluctuations. Lastly, he opposed the additional two percent outage allowance for BQPS-III, which would raise capacity payments, and disagreed with the decision to avoid deducting Rs53.9 billion in Return on Regulatory Asset Base (RoRB) and depreciation from KE’s BQPS-III costs.