PPA Upfront Tariff for Solar PV Projects

The first Renewable Energy Policy was announced by the GoP in 2006, though a serious thought process is observed in drafting the policy however it was still not free from usual autocratic hiccups, the policy is now known as the cost plus regime – the determination of tariff was on case to case basis where the sponsors of the power project had to provide a full disclosure of CAPEX and OPEX to be approved by the authorities and then the tariff be determined with a guaranteed rate of return of 15% on investment. The failure was thus “inbuilt” on above premise that is why we don’t see any operational solar project on ground under that policy.

Go as the world goes – define an upfront tariff that suits the purchaser and let the IPPs manage and offer if that sounds good to them, take realistic approach, that was actually pushed by business-wise logical minds and keenly interested vendors. Consequently, we see a pragmatic policy framework came in to existence with “upfront solar tariff”. National Electric Power Regulatory Authority (NEPRA) of Pakistan in collaboration with Alternate Energy Development Board (AEDB) announced the upfront tariff for solar (UTS) for MW scale utility power plants for purchasing power agreements (PPA), vide NEPRA reference No. NEPRA/UTS-01/777-779 dated January 21, 2014 referred to as “Determination of the Authority in the matter of Upfront Tariff for Solar Power Plants“.

This determination is being given in accordance with the Regulation 3 of the Upfront Tariff (Approval & Procedure) Regulations, 2011 (vide S.R.O. 757(1)2011). An applicant can opt for the Upfront Generation Tariff for Solar PV Power Plant once notified in the Official gazette pursuant to section 31(4) of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (XL of 1997).

Salient features of the scheme are as under:

Pakistan being in the Sunny Belt is ideally located to take advantage of solar energy technologies. The annual average solar irradiation of Pakistan is around 5.5 kWh/m². Pakistan lies within latitude 23.45° to 36.75°N and longitude 61° to 75.5°E.

In view of variance in irradiance profile of the country, a tiered tariff structure is adapted in order to balance competing interest of independent power producers (IPPs), accordingly the country is divided in two regions i.e., south and north comprising following areas/provinces:

• Capacity Factor : Based on the verified energy estimates, NEPRA has decided to adopt plant capacity factors of 16.78% for north region and 17.5% for south region of the rated out of the installed solar panels.
• EPC Cost : As per NEPRA deliberation, consultation and current price trend, the Authority considers that US$ 1.693 million per MWp (offshore & onshore) for PV solar power plant is reasonable estimate and accordingly EPC cost of US$ 16.927083 million is approved for the 10 MWp solar PV power plant.
• Non-EPC Cost : The Authority considers that US 1.32 million for non-EPC and project development cost for a 10 MWp solar PV power plant is reasonable and the same is being approved.
• Insurance Cost : Accordingly, the Authority assessed an amount of US$ 126,953 (0.75% of EPC cost) as insurance during construction for the 10 WMp solar power plant.
• Financing Cost : The Authority approved 3.5% of the debt amount (US$ 480,985) as financing fees and charges which will be subject to adjustment at the time of COD on actual basis with maximum of 3.5% of the debt amount.
• Financial Cost During Construction : On the basis of 8 months construction period and debt equity ratio of 75:25, the Authority assessed the financial cost during construction period as US$ 150,105 for 10MWp poject.
• O&M Cost : The Authority considers that 1.5% of the EPC cost is a reasonable estimate of the O&M cost for solar PV power plants and accordingly annual US$ 253,906 per annum has been assessed as O&M cost for the 10 MWp solar PV power plant.
• Insurance UTS : The Authority assessed US$ 169,271 (1% of the EPC cost) as insurance cost for the upfront solar tariff.
• On the basis of discussion in the preceding paragraphs, the summary of approved project cost for upfront solar tariff based on a 10MWp solar power plant on the rated capacity of the solar PV panels installed is provided hereunder:

  Description	Approved (US$)
  EPC Cost	16,927,083
  Non EPC & Project Development Cost	1,320,000
  Insurance during construction	126,953
  CAPEX	18,328,255
  Financing Fees & Charges	482,318
  Financial Cost During Construction	150,521
  Total Project Cost	19,006,875

• Equity Ratio : Minimum equity for the project will be 20%. There will not be any maximum limit for financing of the project through equity. However, the equity exceeding 30% of the total project cost will be considered as debt.
• Order : The Authority hereby determines and approves the following upfront tariff and adjustments/indexations for solar power generation for delivery of electricity to the power purchaser based on a 10MWp solar power plant on the rated capacity of the solar PV panels installed:

  Specified Reference Tariff
  Description	North Region		South Region		Indexations
  	Year 1-10	Year 11-25	Year 1-10	Year 11-25
  	Rs./kWh	Rs./kWh	Rs./kWh	Rs./kWh
  Fixed O&M	1.8137	1.8137	1.7391	1.7391	CPI, US CPI, US$/PKR
  Insurance	1.2091	1.2091	1.1594	1.1594	Actual on annual basis
  Debt Service — Foreign	12.8872	–	12.3570	–	US$/PKR & LIBOR
  Return on Equity	6.1097	6.1097	5.8583	5.8583	US$ /PKR
  Total	22.0197	9.1325	21.1138	8.7568

   

  The above tariff will be applicable for 25 years commencing from the date of the commercial operations (COD).
  

Steps & fees involved in setting up a Solar PV Power Project in Pakistan.

1. Submission of proposal for the project.
2. Review of proposal by AEDB and approval.
3. Payment of registration, project facilitation fee and bank guarantee by project company / IPP.
4. Issuance of Letter of Intent (LOI) by AEDB.
5. Feasibility study submission (in-case of projects based on cost-plus regime).
6. Generation License.
7. Tariff determination.
8. Submission of Performance Guarantee by Project Company/IPP.
9. Issuance of Letter of Support (LOS) by AEDB.
10. Signing of the project documents (EPA, IA, land lease if applicable).
11. Financial Closing (pre-requisites of financial closing are signing of loan agreements by the project company, submission of Letter of Credit (LC) to power purchaser, confirmation of the LC receipt by power purchaser and confirmation by the Lenders of fulfillment of all conditions precedent for financial closing).
12. Issuance of GoP Guarantee.
13. Construction start by project company.
14. Commissioning test
15. Commercial Operations Date (COD).

The choice to opt for this tariff will only be available up to 6 months from the date of its determination by the Authority.

The applicant will have to achieve financial close by March 31, 2015. The upfront tariff granted to the applicant will no longer remain applicable/valid, if financial close is not achieved by the applicant by March 31, 2015 or generation license is declined to the applicant.