National Electric and Power Regulatory Authority (NEPRA) has issued an order to the power producers to charge the security cost of the power projects under the China Pakistan Economic Corridor (CPEC).
The power regulator has authorized producers to charge 1% cost of the 19 CPEC-related power projects worth $15.56 billion as part of their tariff.
The amount will be charged from the consumers over the course of next 20-30 years by labeling it as a security cost.
This is not good news for Pakistanis. However, the federal cabinet had already approved the idea through the Economic Coordination Committee on September 22, 2016, and now NEPRA has issued the notice to the power producers. The overall security cost for CPEC rounds off to Rs. 17 billion which equates to $2.92 million (Rs. 315 million) annually.
The federal cabinet approved that all the CPEC power projects, whether they’ve achieved financial close or are yet to achieve the financial close and the new additions to the CPEC projects, will be allowed to pass on 1% of the capital cost net of $150,000 to the consumers as part of security costs. This charge will be valid from construction till the end of the power projects.
NEPRA said in its order,
“The authority has decided to allow 1% capital cost of the project reduced by $150,000/annum (subject to 3pc indexation for each year after the first year from COD (commercial operation date)) as security cost in respect of each CPEC power project in accordance with the approved payment mechanism and the same shall be treated as pass-through item”.
While the power producers and stakeholders have their reservations against the new notice – stating that the consumers should not be charged for security as they’re already paying enough taxes – however, NEPRA maintained that the provision of security is the responsibility of the state and referred to the Article 10 of the CPEC agreement, which states:
“The Pakistani party shall take the necessary measures to ensure the safety of Chinese personnel and projects”.
In compliance with the agreement, a special division of the armed forces has already been put to work for the security of CPEC projects and personnel.
NEPRA stated that the provision of security by the government would mean the spending of public money which would be allocated from the budget meaning that the development budget would be cut short, therefore the power regulator ruled that:
“Since this cost is specific to the CPEC projects, it is more appropriate to charge this cost to the respective project. These preventive security measures shall enable the smooth operation of the CPEC energy projects and shall better protect the interest of the electricity consumers”.
While talking about the impact of these projects in the consumer bills, NEPRA said that six projects would charge 1-2 paisa per unit, three projects less than a paisa per unit whereas the remaining 10 will have zero financial impact.
The Independent Power Producers (IPPs) will include a separate capacity charge for security which will be calculated by reducing $150,000/annum for the first year from the annual security cost of the respective project. For next years, there will be 3% indexation divided by net annual output in kilowatt hours at an exchange rate of Rs. 105/dollar. The capacity charge’s security component will be indexed based on the exchange rate of preceding quarter’s last day, subject to NEPRA’s approval.
If the annual security of a project is less than $150,000 keeping in mind the respective indexation, the IPPs will not include the security cost in the capacity charge, therefore the Central Power Purchase Agency (CPPA) will not pay any amount in the name of security cost for the project.
In the future, if the security situation stays positive, the IPPs will no longer pay any amount on the account of special security and the special security division will no longer have to perform their duty.
The government is charging Rs. 4.7 per unit already on the account of covering low recoveries, tariff equalization, special debt servicing, high losses etc. Rs. 30 billion was allocated initially by the government under the Public-Sector Development Programme which would increase one percent in the capital cost of the projects.