Pakistans Power Sector: Challenges faced What went wrong How to correct it

1
Pakistans Power SectorChallenges faced What
went wrong How to correct it
November 21, 2007

• Presentation by
• Pervaiz Khan
• CEO
• Uch Power

2

• Theme for Presentation
• Challenges faced by the countrys power
  sector.
• Question posed
• What are the issues that are preventing foreign
  and local companies to invest in the power sector
  of Pakistan?
• Presentation Outline
• The presentation comprises of four parts
• Macro level issues.
• Recommendations.
• Key Differences under 2002 Policy vs 1994

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Planning

• Demandsupply projections turned out to be
  seriously flawed.

Shortages
Surplus
Shortage projected for 2007 1,457MWs
Actual shortage for 2007 2,400MWs
Source PPIB Presentation March 2005
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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Planning

• Power load centers versus fuel sources
  transmission network a balancing act.
• Power shortages are being faced by large cities
  Karachi/Lahore.
• Major indigenous sources of fuel gas located in
  the south of the country (e.g. Mari, Uch,
  Qadirpur)

The Tradeoff
Build plants closer to fuel Additional
investment in providing grid access and
increased transmission losses.
Build plants closer to load center Additional
investment in fuel transportation network and
reduced transmission losses.
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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Planning

• Rethink on the generation-fuel mix.
• 67 of the installed capacity is thermal
  resulting in heavy reliance on imported liquid
  fuel and indigenous pipeline quality gas making
  it an expensive choice at US90 plus per barrel
  oil and dwindling gas reserves.
• Lack of development of alternative indigenous
  thermal resource (coal).
• Planning is almost non-existent for the promotion
  of ancillary industries.
• Lack of focus on planning for the replacement of
  ageing infrastructure (transmission and
  distribution).

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Investment

• Huge financing gap in the power sector.
• Lack of foreign investor interest.
• Public utilities are not profitable and are not
  able to raise finances for further investment.
• IPPs have a limited ability to borrow money from
  the international market (multilaterals, ECAs)
  largely due to
• 2002 policy security package
• Macro economic stability
• Country credit rating

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Investment

• Investment (FDI and local), is largely
  concentrated in the generation (70) and much
  less in transmission (14). (Source Deloitte
  Touche Tohmatsu)
• Fall in country credit rating has a positive
  correlation with the fall in FDI in the
  electricity. Zero investment at a rating level
  below CCC. (SP)

Policy

• Power Policy 2002 a reinvention of the wheel.
• Risk structure is not adequately balanced under
  new Policy.
• Current policy does not cater separately for
  expansion projects.
• Due to the overlapping roles of PPIB/NEPRA/WAPDA,
  Power Policy 2002 is not a one stop window.
• The establishment of a final tariff has been
  subjected to several rounds of reduction
  negotiations.

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Planning
Short Term (2008 2009)

• There is an urgent need to develop accurate
  forecasts of the power requirements. Estimates
  for the Peak and Base load requirements need
  to be developed for the short, medium and long
  term.
• The institutional capacity of PPIB/NEPRA needs to
  be enhanced.
• Well structured phased plan (short, medium, long
  term) should be put in place. Considering that we
  are behind schedule by 3 5 years in terms of
  adding a few thousands of MWs of additional
  capacity, rented turbines and IPPs in pipeline
  appears to be the most logical and probably the
  only choice.

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Planning
Medium Term (2010 2012)

• Ministry of Petroleum and Natural Resources shall
  be asked to allocate additional gas for power
  generation to plug the medium term demand-supply
  gap. Estimated gas reserves are 27tcf. Generation
  of 2,000MWs over 25 years will consume 3.13tcf of
  pipeline quality gas. Conversely in todays RFO
  prices the same generation will require a foreign
  exchange import bill of US1.1 billion p.a.
• Alternative energy sources should also be
  considered.

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Planning
Long Term (2012 onwards)

• Diversification of generation fuel mix shall
  become part of the long term plans and
  alternative energy sources shall be developed
  (e.g. Wind).
• Development and utilization of coal reserves is a
  feasible option in long term. Pakistans
  generation on coal is zero notwithstanding that
  we have one of the largest coal reserves in the
  world.
• Pakistans hydel potential has remained largely
  untapped. Construction of large and small dams
  shall be considered.

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Investment

• GoP shall consider dedicating a portion of
  infrastructure funds to bring equity to finance
  large scale IPPs.
• Future investment requirement shall be
  forecasted, as accurately as possible, and steps
  shall be taken to ensure that the future gap
  could be plugged through
• Private funds mobilization
• Launching a PSEDF II of US500 million to US1
  billion with assistance of multilaterals and
  bilateral agencies.
• Special funds shall be allocated in Annual
  Development Plan for upgrading and expanding the
  fuel transportation and electricity grid
  infrastructures.

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Investment

• The liquidity in the sector shall be improved by
• Setting a price structure that shall truly
  reflect cost
• Reduce under collections and thefts
• The security package offered in the policy shall
  be bankable.

Policy

• PPIB shall be made a one window facility in a
  true sense. It should be given the mandate and
  authority to coordinate / facilitate project
  implementation.
• The overlaps between various institutions shall
  be eliminated. (WAPDA PPIB NEPRA Ministry of
  Petroleum Natural Resources)

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Policy

• Tariff should truly reflect cost of the power
  producer.
• Existing projects should be the first port of
  call for capacity additions as they have the
  basic infrastructure already in place.
• GoP shall introduce policies to promote ancillary
  industries in the country (operations and
  maintenance, engineering).

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Power Policy 2002 vs - 1994

• Governing law is now Pakistan law instead of
  English law whereas arbitration is under UNCITRAL
  Rules instead of ICSID / ICC Rules.
• The payment /performance obligations of fuel
  supplier by GoP withdrawn.
• Lenders rights to assign and transfer have been
  substantially weakened. Lenders ability to sell
  and transfer the Complex in enforcement of their
  security is now subject to GoP approval.
• Transfers by initial shareholder to another
  initial shareholder or to the Affiliates of
  initial shareholders during six year lock-in
  period have been made more restrictive.

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Power Policy 2002 vs 1994 contd

• Force majeure provisions have been revised and in
  some cases specific events have been curtailed,
  amended or abridged (e.g Water Event, Lapse of
  Consent, availability of Fuel, political events
  occurring outside Pakistan).
• Provisions related to the payment of special
  compensation in the case of a force majeure event
  has entirely been deleted.
• Provisions in relation to the consequences of a
  Change in Law requiring a material modification
  or capital addition or damage to the Complex
  arising from a Pakistan Political Force Majeure
  Event (Restoration) have been moved from IA to
  PPA.
• Indemnification provisions have been deleted
  including defense of claims and double jeopardy
  provisions. The Company can not challenge fines
  imposed by the GoP (section 9.2 to 9.7 of the
  existing IA).

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Macro Level Issues
Key Differences under 2002 Policy Vs 1994
Recommendations
Power Policy 2002 vs 1994 contd

• Cure periods are curtailed for Company Events of
  Default whereas in case of GoP Events of Default,
  cure periods are now more generous (grace period
  for a payment default by power purchaser has been
  extended from 5 to 30 days).
• Delay in obtaining Consents does not result in
  extension of Required COD and Company has no
  termination rights in respect of prolonged delays
  in obtaining Consents.
• The cap of US100,000 for additional security to
  meet unusual security requirements has been
  removed.
• The Commissioning Tests have been restricted to
  10.
• Significant increase in required Annual
  Availability of the Project.