Islamabad, Oct 23: K-Electric Secures Take-or-Pay Power Generation Agreement. In contrast to the previous model, which was somewhat different, K-Electric has been able to secure an IPP-type tariff for its power producing component. With a US$ ROE of 14 percent (against the need of 15 percent), the corporation has secured a “take or pay” structure for its power producing units in the new MYT FY24-30.
The new tariff will be unbundled in three distinct portions, namely (1) Generation, (2) Transmission, and (3) Distribution (network/supply) Tariff, per a report by Topline Securities. In the past, the business had a single tariff for every business division. NEPRA has only currently announced a generation tariff for KEL for a control term of seven years or the plant’s usable life, whichever is shorter.
BQS III is exempt from this tariff, which is valid for 11 years, or until the end of its debt servicing period. Similar to other IPPs, NEPRA has set distinct tariffs for each of KEL’s six power producing units and sites.
Within 30 days of this decision, the federal government must publish this in an official gazette in accordance with the NEPRA Act. According to Topline, generation-based businesses provide around Rs. 0.51 to the company’s cash earnings, but accounting earnings may be significantly higher because of debt servicing of Rs. 2.4/Kwh for BPQS 3 (more than Rs. 15 billion, or Rs. 0.6-0.7/share).
Principal Hazards
Consumption of RLNG is prohibited under the take-or-pay model: The cost of RLNG that KEL committed to paying to Pakistan LNG Limited (PLL) will not be passed through as energy payment if the merit order formula is used to meet the energy demand of KEL territory using other, less expensive alternative resources. The KEL-PLL agreement is scheduled to end in December 2025.
Potential return component revision: It is impossible to rule out adjustments to the KEL ROE component or the take-or-pay approach for older plants, especially in light of the current round of negotiations with IPPs.
In its ruling, NEPRA has additionally stated that the “If a reduction occurs for IPPs that have entered into agreements with the Government of Pakistan, the Authority may adjust this approved ROE downward.”
Tariff on Transmission and Distribution Not Yet Announced
In the FY24-30 Tariff, the corporation has requested a 15 percent return on equity (ROE) for transmission and a 16.67 percent ROE for distribution. The company received 15% of the Rs ROE for transmission in the preceding MYT since Sindh Transmission and Dispatch Company (STDC) was granted Rs ROE.
In contrast, an IRR of 17% was provided for the Matiari to Lahore HVDC transmission line project. Because DISCOs use the PKR return model, the corporation was previously given a 16.67 percent PKR return in the distribution business.
Both companies can increase their earnings by an additional Rs. 0.77 per share, bringing their total earnings to Rs. 1.29 per share (including generating), if NEPRA grants the company a dollar return for the transmission and distribution business as sought by KEL.
These companies can increase their earnings by Rs. 0.40 per share, bringing their total earnings to Rs. 0.92/share, if dollar indexation is prohibited in distribution and transmission.
