How our power sector can tackle the tariff issue?
By Muhammad Farhan and Muhammad Rehan
The present government like its predecessor is doing a lot of lip service to tackle the the energy crisis but when we look at the ground reality, consumers have seen little relief.
The government policies are not consistent, one day; one department announces a project and the next day the other denies to support.
The same happened with the five (200 MW each) LNG based power projects that were announced by the Private Power Infrastructure Board (PPIB) in March 2016.
The projects were on the way to finalize the contract, the ministry ordered to stop all new projects on the imported fuels in June 2016.
The same is happening with the tariff of the new plants.
The Ministry of Water and Water Power had issued a Co-generation policy in 2008 for the installation of new projects by the Sugar industry.
The Co-generation policy commits the 28% efficiency along with 88% availability. The NEPRA refused to accept the guideline of the Cogeneration Policy 2008 while making a decision.
Before going into detail of the decision and explaining the deviation from the policy, first we shall discuss the different types of the tariff.
Take or Pay Tariff
A “Take or Pay” tariff is a rule, the Power Purchaser either takes the electricity from the Power Producer or pays for the availability of the plant (known as Capacity Payment)
Take and Pay Tariff
A “Take and Pay” tariff is a rule, the Power Purchaser pays the both energy and capacity payment only for the power it takes based on the energy meter readings. The Power purchaser is bound to run the plant strictly on Economic Dispatch Merit order (Cheap plants first). If Power purchaser asked to run an expensive plant ahead of the cheap plant, then it will pay the capacity payment (fixed payment) to the cheap plant.
Must Run Option
This option is specifically created for the cogeneration power plants. As the cogeneration power plants have to supply both the steam and power to their sugar mills as well. They cannot shut down the unit even power purchaser has no need of power to keep the sugar mill in operation.
As per this tariff the power purchaser will pay for the full energy and capacity charges during the season either the plant is fully or partially in operation. This type of tariff is an extra burden on the public of the Pakistan but the some businesses are fully enjoying the perks of Must Run Option.
This type of tariff is an extra burden on the public of the Pakistan but the some businesses are fully enjoying the perks of Must Run Option.
Now we will discuss the dual policies of the regulator and how it will impact on the investors. During the third week of October, The National Electric Power Regulatory Authority (NEPRA) had refused to accept the guidelines of the cogeneration policy 2008 while announcing the decision on the Tariff of a cogeneration power plant.
During the third week of October, The National Electric Power Regulatory Authority (NEPRA) had refused to accept the guidelines of the cogeneration policy 2008 while announcing the decision on the Tariff of a cogeneration power plant.
NEPRA itself announced that they have decided not to give the “Take or Pay” Tariff for the plants that have an efficiency of 29% even though cogeneration policy allows 28% efficiency. As per the decision NEPRA’s feels it is not prudent to make a long term commitment with the low efficiency plants.
On the other side in the bagasse upfront Tariff, NEPRA is offering the “Take or Pay” Tariff with the “Must Run option” (A more benefitted option of Take or Pay Tariff available for sugar Mills). The Bagasse upfront Tariff is based on the 24.5% efficiency with the 45% availability.
This is the clear difference of the policies, in once case the NEPRA is offering the “Must Run” Tariff for the 24.5% efficient plants and on the other side, it refused to give the “Take or Pay” Tariff for the 29% efficient cogeneration plant that has the multi fuel option (Coal and Bagasse) with much higher availability of 88%.
The scenario is same for the both businesses {(a) cogeneration with coal & bagasse mix and (b) cogeneration with bagasse only} as the both have to supply the steam and power to the sugar mill during the crushing season and they have to keep the units in operation round the clock during the crushing season. The Must Run option should be available for all cogeneration plants for the smooth operation of their fuel supplier (sugar mill).
The scenario is same for the both businesses (a) cogeneration with coal & bagasse mix and (b) cogeneration with bagasse only} as the both have to supply the steam and power to the sugar mill during the crushing season and they have to keep the units in operation round the clock during the crushing season. The Must Run option should be available for all cogeneration plants for the smooth operation of their fuel supplier (sugar mill).
The Must Run option should be available for all cogeneration plants for the smooth operation of their fuel supplier (sugar mill).
As per the NEPRA’s notification the Bagasse upfront Tariff will remain effective till May 2017 and Sugar Mills can accept it till that time.
This is not fair that the 24.5% tariff is available for new plants and the plant that is 29% efficient and ready to provide the power, the authority refused to allow tariff with the reason that they will have enough power in the next three years.
The principle of consistency should prevail, if NEPRA is so much worried about the customers and feels that 29% efficient plants are extra burden on the customers; then they should immediately cease the Bagasse Upfront Tariff.
The decision of Take and Pay arrangement is not practicable and nearly impossible to follow in true letter and spirit. The NEPRA should be transparent while making the decisions and follow the same principle in all cases.
The current fall in the electricity prices and better recovery has just been due the decrease in oil prices. If the international oil prices increases, we will be again in the same situation of high electricity prices. The government should encourage the Coal based plants as the future of the country lies in the indigenous and cheap imported fuels.
Instead of discouraging the cogeneration plants with the coal and bagasse mix option, there is a need to clarify the 2008 cogeneration policy to have more plants with this option.
It would be better for the energy sector of the country that all regulatory agencies should be on the same page to give the investor confidence to invest in the country. The inconsistent Tariff policy and lengthy approval procedure is not a good option for the country.
Muhammad Farhan is a Chemical Engineer, MBA and MSBA working in Power sector since 2007. Muhammad Rehan is a LLB and MBA working as an Advocate High Court in Multan.