Pakistans hydro potential is estimated at more than 40,000 MW out of which only 6,827 megawatts are tapped. Thanks to 33 per cent portion of inexpensive hydro power in Wapdas total mix of installed generation capacity, consumers are still able to foot their bills.
All major hydro projects except Ghazi Barotha and Chashma are generating electricity at less than a rupee per unit.
Since the early 1990s the succeeding governments are relying on private sector for induction of new power generating capacity.
The first power policy document was issued in 1994 and that attracted a lot of interest from international investors. But that interest remained confined to thermal technology, although the policy provided relatively better incentives to hydro Independent Power Producers. Whereas it provided 18 per cent returns to thermal based IPPs, it promised a 25 per cent return on equity to investors interested in hydro projects. Some investors interested in hydro projects did indicate their interest and obtained letters of intent (LoIs). However, the projects for which LoIs were issued did not materialise. Structure of bulk power tariff promised under the policy was predominantly a thermal based tariff. Furthermore, the other incentives related to protection against force majeure, pass through concept of fuel, availability of premium (equal to 0.25 US cents per unit sold to Wapda) for projects commissioned before end 1997, were all pro
Keeping in view the longer gestation period for a hydro based power project, it was nearly impossible for them to be commissioned before 1997 and qualify for the premium. Additionally, the incentives such as protection against hydrological risk i.e. water unavailability was also missing. On the top of it, a typical hydro IPP embodies a project full of uncertainties which neither an investor likes nor the lenders feel comfortable in approving loans for it.
The government was quick to note the deficiencies and in May 1995 it brought out a hydro specific power policy that recognised the importance of feasibility studies, concept of water use charges at cents 0.233 per unit and provincial role. Besides, the policy provided for three different tiers of indicative Bulk Power Tariff i.e. 5.57 cents per unit for 25 years for projects up to 20 MW, 4.7 cents per unit for 21 to 300 MW and a case-to-case basis tariff for projects above 300 MW.
As regards feasibility study, a definite criteria was given which required that (i) installed capacity of the power house based upon hydrology would be established at 50 per cent minimum annual plant factor, (ii) a minimum of 40 per cent of the annual energy be produced during the low water months (January to June), and (iii) transmission line up to the nearest grid be considered part of power complex.
Earlier, issuance of LoI and letter of support (LoS) was the prerogative of the federal government, whereas in hydro policy the provinces were given the right to issue these letters. Nonetheless, further processing of hydro proposals remained with federal agencies, and it was specifically clarified that LoI or LoS would not bind federal government to enter into agreements until it is satisfied that the feasibility study met the criteria provided in the policy.
The Bulk Power Tariff was indicatively based on minimum 50 per cent plant factor and was to be adjusted as per the hydrological parameters based on historical data. Initially, it was believed that the hydro policy had succeeded in attracting private investors, but no hydro project got commissioned mainly owing to surplus power availability from IPPs pursuant to the 1994 policy.
In 2006, the Economic Coordination Committee (ECC) of the Cabinet revived the original Bulk Power Tariff of 4.7 cents per unit for the four surviving projects pursuant to hydro policy, and then enhanced it to 5.89 cents per unit in 2007. In the meanwhile a new Power Generation Policy had already been in place.
In contrast to the concept of Bulk Power Tariff, the 2002 policy provides for tariff determination by power regulator Nepra on the basis of cost justification plus reasonable returns. Furthermore, the policy provides for a protection against the hydrological risk which was missing in earlier policies. Additionally, in tariff determinations Nepra is currently allowing floating interest rates (based on Kibor fluctuations) to IPPs. The policy has already received a very good response from investors and Private Power and Infrastructure Board is already processing over dozen hydro projects with total capacity of 4,262 MW.
But as a matter of fact, one must understand that mere response from investors is not the only ingredient for the success recipe. Yet no application from hydro IPPs has been filed with Nepra for tariff determination.
In fact, hydro projects are a bit difficult from their inception to end. They are quite different from their thermal projects, which can be started with only superficial due diligence. Whereas, hydro projects cannot be conceptualised without first completing a pre-feasibility study and subsequently a proper feasibility study acceptable to lending institutions.
Furthermore, owing to Pakistans topography, hydro projects can be developed mainly in mountainous region which not only made them costly but also physically difficult to complete. Besides, their engineering designs, work scope and estimates may be subject to major changes during construction phase. We must hope that the stakeholders will develop legal instruments and financial models for development of hydro IPPs, and within two three years these projects may move ahead from paper to ground.
