The “Mechanism for Determination of Tariff for Hydropower Projects” issued by NEPRA outlines a structured approach to establishing tariffs for hydropower projects, ensuring a transparent, objective, and predictable process. The primary objective is to address cost uncertainties and provide clarity for investors and stakeholders involved in hydropower development. This document delineates a three-stage process for tariff determination: Feasibility Level Costs, EPC (Engineering, Procurement, and Construction) Level Costs, and Final Costs at Commercial Operation Date (COD).

Purpose and Applicability

The mechanism aims to provide a uniform process for tariff determination, minimising ambiguities and ensuring compliance with NEPRA’s laws and regulations. It is applicable to all hydro licenses or applicants for generation licenses within NEPRA’s jurisdiction.

Key Definitions

To facilitate consistent interpretation, the document defines several key terms such as “Feasibility Study,” “EPC Decision,” “NEPRA Laws,” and “Tariff Reopeners.” These definitions ensure that stakeholders understand the specific stages and criteria for tariff adjustments.

Feasibility Stage

At the feasibility stage, applicants must submit a comprehensive feasibility study that includes detailed cost breakdowns, implementation schedules, and tariff tables. This study must be complete and accurate, supported by a statement from the Panel of Experts, and comply with international best practices. The feasibility study should also outline potential tariff reopeners, such as cost variations due to geological conditions, civil works cost escalations, and resettlement costs.

EPC Stage

Applicants with an initial tariff determination based on feasibility costs can seek revisions based on EPC costs by filing a petition with NEPRA. This stage involves more detailed investigations, particularly for underground tunneling and mechanical and electrical works. NEPRA may accept the lowest competitive bids without extensive prudence exercises, provided the costs are substantiated through EPC contracts.

Commercial Operation Date (COD)

Upon application, NEPRA will allow adjustments at COD to account for any final cost variations due to geological conditions, civil works cost escalations, and variations in hydraulic steel structures and M&E works. Adjustments for resettlement costs will be allowed if the initial schedules and variations are certified by the respective provincial government and approved by NEPRA.

Tariff Adjustments

Recognising the inherent uncertainties in hydropower project costs, NEPRA permits adjustments at different stages:

  1. At EPC Stage: Adjustments are allowed for variations in geological conditions and civil works costs escalation.
  2. At COD: Final cost adjustments are permitted based on actual construction conditions, including variations in rock classification and unit rate escalations.

Monitoring and Verification

NEPRA ensures the accuracy of tariff adjustments through verifiable references and may appoint consultants or experts to review any aspect of the project. The prices for adjustment elements are sourced from official publications like the Statistical Bulletins by the Government of Pakistan.

Mechanism for Determination of Tariff for Hydropower Projects – Q&A

  1. Q: What is the total estimated hydroelectric potential in Pakistan? A: The total estimated hydroelectric potential in Pakistan is 45,000 MW.
  2. Q: How much of the hydroelectric potential is currently installed in Pakistan? A: The current installed hydroelectric capacity in Pakistan is 6,608 MW.
  3. Q: Why is additional hydroelectric capacity needed in Pakistan? A: Additional hydroelectric capacity is needed due to present electricity shortages and future growth requirements.
  4. Q: What are the three distinct stages identified by NEPRA for tariff determination? A: The three stages are Feasibility Level Costs, EPC Level Costs, and Final Costs at the Commercial Operation Date (COD).
  5. Q: What is the primary objective of the NEPRA Mechanism for tariff determination? A: The primary objective is to provide a uniform, transparent, objective, and predictable process for tariff determination and adjustments.
  6. Q: Who does the Mechanism apply to? A: The Mechanism applies to all hydro licenses or applicants for generation licenses for constructing, owning, operating, or managing hydro generation facilities for power generation within NEPRA’s jurisdiction.
  7. Q: What is a Feasibility Study in the context of NEPRA’s Mechanism? A: A Feasibility Study is an investigation conducted to determine the feasibility of a hydropower project, including costs and technical specifications, acceptable to NEPRA.
  8. Q: Who must approve the Feasibility Study? A: The Feasibility Study must be approved by the Panel of Experts of the Private Power and Infrastructure Board (PPIB).
  9. Q: What is the purpose of defining key terms in the Mechanism? A: The purpose is to ensure consistent interpretation of terms used in the Mechanism.
  10. Q: What are Tariff Reopeners? A: Tariff Reopeners are costs related to project components identified in the Feasibility Study that may vary and are subject to adjustment, such as geological conditions, civil works cost escalation, and resettlement costs.
  11. Q: What is the Commercial Operation Date (COD)? A: COD is the date on which a hydropower project begins commercial operations, as defined in the standard Power Purchase Agreement (PPA).
  12. Q: What is required for the filing of a tariff petition at the Feasibility Stage? A: The applicant must file a petition before NEPRA in the form and manner required under NEPRA Laws, including a complete and accurate Feasibility Study.
  13. Q: What must the Feasibility Study include? A: The Feasibility Study must include a breakdown of major components and costs, a detailed implementation and payment schedule, and details of Tariff Reopeners.
  14. Q: How does NEPRA handle comments and recommendations from provinces? A: NEPRA invites and considers comments and recommendations from the province where the project is located before determining a tariff.
  15. Q: What is the purpose of the EPC stage in the tariff determination process? A: The EPC stage involves filing a tariff petition based on more extensive investigations and costs substantiated through EPC contracts to seek revision in the tariff.
  16. Q: How does NEPRA treat cost variations at the EPC stage? A: NEPRA allows adjustments for cost variations due to geological conditions, civil works cost escalation, and variations in hydraulic steel structures and M&E works.
  17. Q: What are the conditions for allowing tariff adjustments at COD? A: Adjustments are allowed for final cost variations due to geological conditions, civil works cost escalation, and resettlement costs, provided they are verified and approved by NEPRA.
  18. Q: How does NEPRA ensure accuracy in tariff adjustments? A: NEPRA requires verifiable references and may appoint consultants or experts to review and comment on any aspect of the project.
  19. Q: What sources of prices are used for tariff adjustments? A: Prices are sourced from the Statistical Bulletins published by the Statistical Division of the Government of Pakistan, statutory notifications, and official prices from public sector organizations like the Pakistan Engineering Council.
  20. Q: What role do consultants or experts play in the tariff determination process? A: NEPRA may appoint consultants or experts to review project aspects, facilitate site visits, and carry out necessary investigations.
  21. Q: What is included in the calculation of unit rates for different rock categories in tunnel construction? A: The calculation includes both non-adjustable portions like equipment costs and adjustable portions like labour, cement, steel, and fuel costs.
  22. Q: What adjustments are allowed at the EPC stage for tunnel construction? A: Adjustments are allowed for cost variations due to geological conditions and civil works cost escalation.
  23. Q: What factors contribute to cost variations in tunnel construction at the COD stage? A: Factors include actual construction conditions, variations in rock classification, and escalation in unit rates.
  24. Q: What adjustments are allowed for hydraulic steel structure and M&E works? A: Adjustments are allowed based on costs in EPC contracts or feasibility costs if no adjustment is sought at EPC.
  25. Q: How does NEPRA handle resettlement costs? A: Variations in resettlement costs are allowed if certified by the provincial government and approved by NEPRA.
  26. Q: What is the reference date for cost adjustments? A: The reference date is determined by NEPRA, typically one month before the filing of an adjustment request.
  27. Q: What are the effective dates for adjustments at EPC and COD stages? A: For EPC, the effective date is one month before the filing request; for COD, it is one month before the scheduled completion date of the item in the construction schedule.
  28. Q: What is the ECC Decision mentioned in the Mechanism? A: The ECC Decision refers to the Economic Coordination Committee’s decision dated 22 January 2008, which provides guidelines for the implementation of hydropower projects under the Power Policy 2002.
  29. Q: How does NEPRA address cost uncertainty in hydropower projects? A: NEPRA addresses cost uncertainty by allowing tariff adjustments at different project stages, based on more extensive investigations and verified costs.
  30. Q: What is the role of the Panel of Experts in the tariff determination process? A: The Panel of Experts reviews and approves the Feasibility Study, providing assurance of quality and adherence to best international practices.
  31. Q: What information must be included in the geotechnical investigations of the Feasibility Study? A: The geotechnical investigations must include details on the nature, quantities, and characteristics of underground rocks or soils along the tunnel, with a comprehensive classification of expected rocks or soils.
  32. Q: What is the purpose of including a schedule of unit rates in the Feasibility Study? A: The schedule of unit rates provides transparency in the costs for various construction activities, ensuring accurate cost determination and adjustments.
  33. Q: How does NEPRA ensure transparency in the tariff determination process? A: NEPRA ensures transparency through a uniform and predictable process, requiring detailed documentation and verification at each stage.
  34. Q: What is the significance of the NEPRA Act and Regulations in the Mechanism? A: The NEPRA Act and Regulations provide the legal framework for tariff determination, ensuring compliance and consistency with established laws.
  35. Q: What are the main risks associated with hydropower projects addressed by the Mechanism? A: The main risks include cost uncertainty due to geological conditions, civil works cost escalation, and resettlement costs.
  36. Q: How does the Mechanism benefit investors in hydropower projects? A: The Mechanism provides a clear and predictable process for tariff determination, reducing uncertainties and encouraging investment in hydropower projects.
  37. Q: What is the importance of the PPA in the tariff adjustment process? A: The PPA defines key dates and terms for tariff adjustments, ensuring that adjustments are made based on verified and agreed-upon schedules.
  38. Q: What is the role of the Statistical Division of the Government of Pakistan in the Mechanism? A: The Statistical Division provides official price data used for cost adjustments, ensuring accuracy and consistency in the tariff determination process.
  39. Q: How does NEPRA handle changes in design during the construction of tunnels? A: Changes in design must be approved by the Panel of Experts, and adjustments for cost variations are allowed based on the approved changes.
  40. Q: What is the purpose of inviting comments from provinces in the tariff determination process? A: Inviting comments ensures that local considerations, such as resettlement costs and land costs, are accounted for in the tariff determination.
  41. Q: What are the typical components included in the cost breakdown of a hydropower project? A: Components include civil works, hydraulic steel structure, M&E works, engineering and supervision, administration costs, resettlement and mitigation, interest during construction, and debt and equity financing costs.
  42. Q: How does NEPRA handle cost escalations in civil works? A: Cost escalations in civil works are allowed from the date of tariff determination to a specified date, with adjustments for changes in prices of steel, cement, labour, and fuel.
  43. Q: What adjustments are allowed for resettlement costs at COD? A: Adjustments for resettlement costs are allowed based on variations from the Feasibility Study, certified by the provincial government and approved by NEPRA.
  44. Q: What is the significance of competitive bids in the EPC stage? A: Competitive bids provide a basis for NEPRA to determine the lowest reasonable costs without extensive prudence exercises, ensuring cost efficiency.
  45. Q: What factors are considered in the final cost determination at COD? A: Factors include actual construction conditions, variations in rock classification, unit rate escalations, and any changes approved by the Panel of Experts.
  46. Q: How does NEPRA handle geological uncertainties in tunnel construction? A: NEPRA allows for cost adjustments based on variations in rock classification and geological conditions encountered during construction.
  47. Q: What is the role of the ECC in the tariff determination process? A: The ECC provides overarching decisions and guidelines for the implementation and tariff determination of hydropower projects under the Power Policy 2002.
  48. Q: How does NEPRA ensure the quality of the Feasibility Study? A: NEPRA requires the Feasibility Study to be supported by a statement from the Panel of Experts, ensuring it follows best international practices and meets the required standards.
  49. Q: What is the impact of the NEPRA Mechanism on future hydropower projects? A: The Mechanism provides a structured and predictable process for tariff determination, encouraging investment and development in the hydropower sector.
  50. Q: How does NEPRA balance the interests of investors and consumers in the tariff determination process? A: NEPRA ensures that tariff determinations are based on accurate and verified costs, providing fair returns for investors while protecting consumers from undue cost increases.
  51. Q: What is the importance of having a detailed implementation schedule in the Feasibility Study? A: A detailed implementation schedule ensures that the project is planned and executed in a timely manner, with clear timelines for cost adjustments and tariff determination.
  52. Q: How does the Mechanism address the unique risks of hydropower projects compared to other forms of electricity generation? A: The Mechanism addresses unique risks by allowing for cost adjustments based on geological conditions, civil works escalations, and resettlement costs, providing clarity and reducing uncertainties for investors.

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