The National Electric Power Regulatory Authority (Nepra) has shown ‘special kindness’ to Turkish company M/s Zorlu Solar Pakistan Limited (ZSPL) by approving 13 percent Return on Equity (RoE), after intervention of the Prime Minister who apologized publicly to the Turkish companies for mistreatment in the past.
The company intends to establish 100MWp solar power project at Quaid-e-Azam Solar Power Park (Extension), Lal Sohanra, District Bahawalpur, Punjab. Turkish company had complained of ill-treatment during the PTI government.
During the hearing, the petitioner submitted that while considering Pakistan’s 10-year government bonds as risk-free rate, 14% RoE is already on the lower side. Additionally, the petitioner during the hearing emphasized that the indexation of RoE due to change in exchange rates, be allowed on quarterly basis as against on annual basis, as approved by the Authority in the tariff case of Siachen Energy.
ZSPL said that with annual indexation, the company shall be exposed to the risk of PKR devaluation for one year, which actually decreases the RoE to the level below 10 (considering 20% devaluation).
Additionally, if the factor of delayed payments by CPPA-G is considered, then the RoE reduced to 7-8%. ZSPL stated that this arrangement shall not be acceptable to the lenders and resultantly the project shall not remain bankable.
According to determination, the Authority noted that in two most recent comparable cases of renewable technologies, the RoE of 12% has been approved by the Nepra.
The regulator said that approved RoE component was allowed adjustment, due to change in exchange rate on annual basis. The Authority argued that the RoE of 12% along with yearly indexation thereon, as approved in the recent tariff cases, be also allowed in the tariff case of Zorlu also.
However, the Authority considered the submissions of the petitioner and argued that given the significant PKR devaluation, especially in the last couple of years, the yearly indexation would have a negative impact on the approved RoE.
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To neutralize the impact thereof, the Authority has decided to approve RoE for ZSPL at 13%, while maintaining the annual indexation on this tariff component due to change in exchange rates The mechanism of the said adjustment is given in the Order part of this determination.
The petitioner has claimed $ 0.6861 million/MW {USD 68.610 million) on account of Engineering Procurement and Construction (EPC) cost. The Authority noted that an additional cost of $ 19.260 million has been claimed by the petitioner. In the earlier tariff determination of ZSPL the EPC cost of $ 49.350 million was allowed to ZSPL.
The petitioner has submitted that higher EPC cost is being claimed due to (i) change in technology and resultant change in design of the project and (ii) change in equipment prices and transportation cost globally.
The assessed EPC cost for Zorlu as $ 0.6500 million per MW ($ 65.000 million) has been approved. The allowed EPC cost shall be adjusted at commercial operations Date (COD)in accordance with the mechanism given in the Order part of this determination.
The Authority in the earlier tariff determination of ZSPL allowed ROE of 14% with quarterly indexation due to change an exchange rate. The petitioner requested to allow the same level of return with the same indexation thereon. ZSPL in the petition and during hearing has proposed 10-month construction period for the project.
The Authority has considered the submissions of the petitioner and has decided to approve 10 months’ construction period as allowed in the projects of similar scale by the Authority.
The additional issue was framed in light of the amendments made through Finance Bill, 2021 whereby, the income tax exemptions given to power generation projects were discontinued.
The Authority noted that exemption from Income Tax is allowed in the relevant policies under which power generation projects are developed. Likewise, the provision of income tax exemption has also been stated in the RE Policy, 2006 under which ZSPL is being developed.
Nevertheless, given the amendments in the Finance Bill, the Authority has decided that the relevant Government Entities shall deal with this matter while signing concession agreements with ZSPL.
Nepra has also allowed 80% of the approved EPC cost in terms of dollars to be adjusted at COD at lower or equal to the corresponding approved USD amount. At the time of COD, the PKR amount for this portion of the EPC cost shall be re-computed, on the exchange rates prevailing on the respective payment dates during the approved construction period OR on the exchange rates as decided in the relevant contracts, whichever is lower.
In addition, 20% of the approved EPC cost is being allowed in terms of PKR (@ Rs. 200/USD), and shall be adjusted at lower or equal to the corresponding approved PKR amount.
At the time of COD, the USD amount for this portion of the EPC cost shall be re-computed, on the exchange rates prevailing on the respective payment dates during the approved construction period. The adjusted amount, in terms of USD, shall not exceed beyond the USD amount computed at Rs. 200/USD.
