Legal Aspects of Setting Up A Solar Power Project in Pakistan

Are you looking to get legal advice for setting up a Solar Power Project in Pakistan.Below is our client guide to the legal aspects and other considerations involved.This guide is not meant to be a full client guide.If you have specific questions, please give us a call at +92-300-5075993 or email us at aemen@joshandmak.com

Pakistan As A Key Location for Investment in the Solar Power Sector

A federal parliamentary republic, Pakistan is made up of four provinces namely Sindh, Punjab, Balochistan and Khyber Pakhuntkwa with a single capital territory known as the Islamabad Capital Territory. Pakistan has two disputed and autonomous territories of Gilgit Baltistan and Azad Jammu and Kashmir as well as FATA (Federally Administered Tribal Areas). It has a rapidly increasing population of more than 190 million and currently the sixth country globally in terms of population.

Pakistan’s recent economic development record has been positive for the most part. Inflation went down to about 4.5 percent in 2015 as GDP grew by 4.2 percent from 2014’s 4 percent. Growth has been forecasted to take an upward trajectory to hit 4.5 percent by the end of 2016 and 5.2 percent by the year 2018. Risk perception of the country has been enhanced dramatically as the Emerging Markets Bond Index Plus spread risk for the country went down to 461 bps by the April of 2015, from a high of 1011 bps in 2013, March. The S&P Pakistani credit rating was also changed to “positive” from “stable” by May of 2015, with the country rated a B Minus (B-).

The energy sector of Pakistani has gone through diverse structural reforms within the past twenty years. Around 1998, the need for the participation of the private sector within the energy market was sought through the formation of the Pakistan Electronic Power Company to help in unbundling WAPDA (Water & Power Development Authority). Before the unbundling happened, the Karachi Electricity Supply Company (KESC) that covered the Karachi region only, together with WAPDA, was mandated with the distribution, transmission and generation of the country’s power. The power function of WAPDA was unbundled in 2007 in four Generation Companies, the National Transmission and Distribution Company (NTDC) and ten other Distribution Companies from the public sector.

After the unbundling, WAPDA has been left with the mandate of efficient development of hydropower and water services. After the privatisation of KESC in 2005, its name changed to K-Electric.

Within the last decade Pakistan has experienced a critical energy crisis. The country has generation capacity of power installed of around 23,600 Mega Watts and faces a shortage of power of about 3,000-6000 Mega Watts in peak hours. Power issues worsen excruciatingly in summer months that see load shedding of eight to eighteen hours, which varies a lot between rural regions and urban areas. The 37 percent fuel mix of the country is fuel oil based, meaning the generation cost are very expensive apart from depending highly on the fluctuating price of oil and a cost vulnerability for the country. Apart from hydro, renewables that could lower the cost vulnerability only contribute below one percent of the entire renewable energy current mix.

International investors have enjoyed the long successful history of Pakistani IPPs completion for two decades. Currently, 36 IPPs are in place operating a 9GW installed capacity as well as an extra 18 IPPs with a 5GW installed capacity currently being constructed. Consistent and clear regulations and policies are in place for the development of IPP and an independent, strong regulator. Fiscal incentives exist, including offtake long-term tariff contracts founded on a cost-plus type of approach and indexation FITs (feed-in-tariffs) as well as standardised support documents from the government. Over the last two decades stress testing of the contractual framework has been done by situations and different events, such as the 1998 crisis at the foreign exchange, political instability instances, renegotiations of contracts, federal level circular persistent debt issues, considerable oil prices increases and sector liquidity issues in recent times. In the renewable area IPPs have accomplished a financial close in gas, wind and hydro. Investors from around the world like AES Corporation, International Power UK, DEG Germany, Oman Oil, GE Capital and Engine have mounted successful investments in IPPs in the country with finances from OPIC, Asian Development Bank and IFC among others.

  1. Pakistani Solar Potential in Solar PV

Pakistan does have a huge potential of meeting its power needs and demands from sustainable renewable sources of energy, especially solar. Some areas of Pakistan have levels of solar irradiance, such as the southwest, on the same level with the some of the best globally with GHI (global horizontal irradiance) values above 1500 kWh/m2 in more than 90 percent of Pakistan’s land area squared. GHI mean annual value for the entire country as per a preliminary World Bank analysis stands at 2071 kWh/m2.

GHI highest values are largely spread across Punjab, Balochistan and Sindh provinces with the lowest levels estimated towards the Northern areas of Pakistan, which include Kashmir and Azad as well as Khyber Pakhtunkhwa.

Figure 3- showing GHI annual sums between 2000 and 2012 for Pakistan and its provinces as estimates by a satellite

2400
2200
2000
KWh/m2 1800
1600
1400
1200
1000
Pakistan 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Northem Regions 2104 2100 1859 2073 2111 2059 2050 2103 2088 2090 2075 2066 2149
Sind 1447 1506 1273 1382 1415 1355 1404 1545 1487 1455 1454 1523 1504
2254 2215 2049 2245 2273 2259 2215 2260 2244 2256 2225 2194 2333
Balochistan
2284 2260 2030 2254 2293 2247 2227 2254 2256 2252 2256 2227 2319
Punjab
2112 2104 1843 2084 2123 2055 2061 2099 2086 2113 2061 2049 2156
Islamabad 1966 1997 1654 1931 2006 1897 1866 1964 1920 1966 1942 1944 2025
FATA 1996 2026 1713 1980 2020 1931 1918 1970 1961 1954 1965 1960 1997
NWFP 1807 1869 1530 1758 1804 1728 1728 1837 1801 1778 1784 1819 1836

 

A mapping and resource assessment comprehensive project is currently in progress and covers wind, solar and biomass that will culminate in the complete Solar Atlas to be released by early 2017. A World Bank implemented project, it’s also done in cooperation with AEDB (Alternative Energy Development Board) and funded by ESMAP (Energy Sector Management Assistance Program) as well as ASTAE (Asia Sustainable & Alternative Energy Program). The Solar Modelling Report and preliminary outputs that the data source has been derived from can be retrieved from the ESMAP site. The component of solar mapping includes a total of high quality two years of solar measurements on the ground derived from Pakistan’s nine sites. The Energy and Extractives Open Data Platform of the World Bank is publishing the measurement data that’s downloadable for free.

Figure 4-ESMAP Solar Stations Measurement

Figure 5-Pakistan GHI Including Solar and North Solar Feed According to Tariff Divide

  1. Pakistan’s Solar Sector Development to Recent Times

The GOP (Government of Pakistan) first took strong steps of its renewables in the country back in 2006 through the release of the Policy for Development of Renewable Energy Generation or the 2006 RE Policy, which handles small hydro, solar and wind apart from setting out a basic plan for renewables development in Pakistan.

Nonetheless, since 2006 to date the progress has not been satisfactory with investors showing serious interest in the last five or so years, especially in the hydro and wind sector and solar more recently. The 200 RE Policy development was to serve as a policy for the short term with a long-term and medium policy development hoping to be done with the development of the market. Even so, the 200 RE Policy is still applicable and currently stands as the single policy to have been implemented.

To date, Pakistan’s only utility solar project connected to the grid that has reached its COD (Commercial Operation Date) remains the 100 MW publicly sponsored project commissioned in May 2015 by the Punjab Government. Lots of other projects are also expected soon as investor interest has soared hand in hand with the tariff determinations recently completed in 2014 by NEPRA (National Electric Power Regulatory Authority). AEDB (Alternative Energy Development Board) has reported that about 35 projects that could give out 1111.4 Mega Watts are already underway within the procedures and policies of AEDB framework. Upfront tariffs (FITs in Pakistan) for ten developers have already received approval with three of these ten projects seeking to hit a 100 Mega Watt capacity having signed with the public off taker an agreement for power purchase. Table 1 below shows the 25-year Solar PPA FITs that NEPRA has granted in 2016. This FIT had to be applied for by Developers by June 30th 2016.

Table 1-FITT Determination and Solar Upfront Tariff of 2016 by NEPRA

Category   > 1 ≤ 20MW > 20 ≤ 50MW > 50 ≤ 100MW
Northern Pakistan – Levelized Tariff (US Cents/kWh) 11.5327 11.3560
11.4460
Southern Pakistan- Levelized Tariff (US Cents/kWh) 10.8920 10.8101 10.7251

The development of the industry within the solar space distribution has been going up. The electricity cost has always been rising in Pakistan as well as grip supply that cannot be relied upon; lots of commercial organisations and industries have turned towards solar confined solutions. Domestic rooftop PV installations have been surging strongly in the country’s large cities. In 2013, the private sector of Pakistan imported solar panels equivalent to 350 Mega Watts.

For projects below one Mega Watt metering net regulations started taking effect from September 1st 2015. Expectations are high that the sector will continue seeing huge growth within next few years as Pakistan targets a minimum of one million customers as well as adding a net metering of about 3000 Mega Watts worth of solar power.

In the 2006 RE Policy, developers of solar power projects can seek contracts of a bilateral sales nature with end users/consumers towards selling the power they’ve generated directly to their customers. The remaining power sold can then be relayed for general distribution to the utility company. In terms of direct sales, wheeling charges need to be paid to cater for the transmission as well as grid distribution network transporting the power all the way to the purchaser from the plant. Currently, Pakistan doesn’t have solar projects known that are currently selling power bilaterally.

  1. Institutions of Power Sector

Major regulatory agencies are set out by 2006 RE Policy that developers have to engage.

4.1.1. NEPRA (National Electric Power Regulatory Authority)

In accordance with the 1997’s Regulation of Generation, Transmission and Distribution of Electric Power Act, NEPRA remains the sole appointed regulator of the power sector. The establishment of NEPRA is to allow for a commercially oriented, competitive and transparent Pakistan power market. NEPRA generally issues licenses of power generation, enforces and establishes standards, and approves utility companies’ power acquisition and investment programs while determining the investment tariffs in cases of bulk generation as well as retail distribution and transmission of electric energy.

4.1.2. AEDB (Alternative Energy Development Board)

AEDB is an autonomous body established with the goal of facilitating and promoting renewable power projects exploitation across Pakistan. The board is designated as a federal level one-window type of facilitator for processing all kinds of solar projects. AEDB issues the LOI (Letter Of Intent), basically the initial contract entered by a developer with the board. It’s also worth observing AEDB has already developed the EPA (Energy Purchase Agreement), a standard agreement for power purchase including the IA (Implementation Agreement), government support agreement.

AJK and Provincial Agencies

The provincial governments as well as AJK (Azad, Jammu and Kashmir) have supported renewable power projects development in their geographical setups and jurisdictions with AEDB collaboration or on their own. Lots of provincial agencies also have one-window type of facilities of their own mandated with the processing of solar projects provincially. Around the KPK/Northwest Frontier Province the SHYDO (Sarhad Hydro Development Organisation) is the agency of the government issuing the Letter Of Intent (LOI). In Balochistan, Sindh and Punjab one-window processing facilities for solar applications can be found in the Power and Irrigation departments. All these agencies at the provincial level support renewable through the facilitation and expediting of land allocation, creating and permitting renewable energy awareness.

Power Purchasers/Off-takers

Within the 2006 RE Policy, after the securing of all required approvals by a developer within the process of development and signing of the EPA, it’s required that distribution utilities purchase all the offered electricity to them by projects of renewably power. Developers of solar power in Pakistan have the following power purchaser choices:

4.2.1. CPPA (Central Power Purchasing Authority)

The central publically owned off taker is the Central Power purchasing Authority. The CPPA is a National Transmission & Despatch Company department with the authority as provided by its license to buy renewable power of any voltage from companies producing renewably energy, which equals 11kV or more.

DISCOS (Distribution Companies)

Public DISCOS

Across Pakistan are 10 corporatized separate DISCOS. They include:

4.2.2.1 LESC (Lahore Electricity Supply Company) supplying electricity across Punjab and Lahore.

4.2.2.2 GEPCO (Gujranwala Electric Power Company) supplying electricity to Punjab and Gujranwala.

4.2.2.3 FESCO (Faisalabad Electric Supply Company) supplying electricity to Punjab and Faisalabad.

4.2.2.4. MEPCO (Multan Electric Power Company) supplying electricity to Punjab’s Multan.

4.2.2.5. IESCO (Islamabad Electric Supply Company) supplying electricity in Jheleum, Indus River area, Kashmir’s Neelum and Attock.

4.2.2.6. PESCO (Peshawar Electric Supply Company) supplying electricity to all civil Khyber districts and Pakhtunkhwa.

4.2.2.7. HESCO (Hyderabad Electric Supply Company) supplying electricity to Khairpur, Ghotki, Uthal, Sukkur, Rahimyar Khan, Shaheed Benazirabad, Naushehro Feroze, Jacobabad, Kandhkot, Larkana, Kashmore, Dadu, Shahdadkot, Shikarpur, a number of Jamshoro sections and other areas in Sindh apart from Karachi.

4.2.2.8. SEPCO (Sukkur Electric Power Company) supplying electricity to Sindh province outside Uthal, Karachi plus other sections that HESCO covers.

4.2.2.9. QESCO (Quetta Electric Supply Company) supplying electricity to all the areas of Balochistan.

4.2.2.10. TESCO (Tribal Areas Electricity Supply Company) assures distribution of electricity across the Federally Administered Tribal Areas.

NEPRA’s annual industry state report offers more insight on each of the distribution companies and their performance.

4.2.3 K-Electric

Apart from the 10 DISCOS that are publicly owned, K-Electric is also in the renewable power industry, a utility privately owned company that distributes, generates and transmits electricity across Karachi as well as other adjoining regions in Balochistan’s Bela district and Sindh’s Uthal adjoining areas. K-Electric appears on the Karachi, Lahore and Islamabad Stock Exchange and currently stands as the only utility company from the private sector in Pakistan.

Nonetheless plans are underway to continue with the privatisation of other Pakistan DISCOs. Solar developers can sell their electric power at a maximum of 132kV to K-Electric. Since it’s a privately distributed company in Pakistan K-Electric doesn’t qualify for a guarantee from the government on the IPP projects it engages in, including power agreements of purchase while supporting guarantees have to be directly negotiated with K-Electric. Even so, NEPRA still has to approve the tariff.

The Tariff Process Overview has to be contacted to understand their negotiations and processes since it doesn’t apply to a negotiation between them and K-Electric. Practically, IPPs execute EPAs (Energy Purchase Agreements) with K-Electric or CPPA with the track record and capacity to manage the EPA process of negotiation.

4.3 National Transmission & Despatch Company

NTDC (National Transmission and Despatch Company) was organised with the sole purpose of taking over the asset obligations, rights and properties of transmission lines or network and Grid Stations of the 220 kV/500 kV. NTDC maintains and operating the Grid Stations of 500kV, 500kV type of transmission line and the 220kV type of transmission lines within Pakistan. It’s required that NTDC approves and reviews interconnection and evacuation studies that solar developers provide before approval of tariff for the developers and the signing of grid connection type of agreement is done.

  1. Determination of Tariff

5.1 Overview of Tariff Process

Within the 2006 RE Policy three clear methods of determining tariff have been set for renewable of a utility scale connected to the grid. This includes:

  • Bidding competitively (Solicited proposals)
  • FIT setting or upfront tariff in Pakistan
  • Cost-plus tariff direct negotiations (proposals are unsolicited)

The tariff level is determined by NEPRA unless it’s a solicited type of competitive bid. The tariff upfront determination is a NEPRA determined fixed tariff cost with attached conditions and terms. This is what is referred to as FIT internationally and also within this document whose focus is largely on the FIT process. The other methods might be possible theoretically but haven’t been used in the area of solar power projects of a utility scale and connected to the grid.

FIT Process

At first a type of FIT determination notice is published by NEPRA and any stakeholder interested can file an intervention notice. With the notice is a FIT proposal draft accompanying it. Parties interested may appear in the hearing where proposals or amendments can be submitted in connection to the FIT suggested. The arguments and proposals are listened to by NEPRA during the hearing and a FIT will be determined once all arguments have been taken into account. So far solar FIT determinations have been only three and the latest will take place by 2016 December. FIT is determined by NEPRA based on a set of principles clearly indicated in the 1998 Tariff Standards and Procedures Rules of NEPRA.

Generally, value is assigned by NEPRA to the cost of the project developers would have to meet such as financial costs both principal and interest, depreciation, opex, insurance, capex among others as well as incorporating a rate of return assumption to developers. Calculation of FIT is done based on this and as much as the NEPRA financial model is not available to the public the figures therewith containing the assumptions for FIT calculation are publicly provided in the determination by NEPRA. After the final order of the FIT has been NEPRA determined, motions by parties can be filed for review and recalculated. The FIT may be reviewed by NEPRA at its own good judgment.

After the approval or determination of the FIT, developers can apply for the FIT in six months of the tariff publication in the official government gazette. Financial closure should be done within the determined acceptance time by NEPRA. Tariff based decisions are published also in NEPRA’s website.

Just like in diverse programs of renewable energy, the solar power projects’ Pakistan FIT has been reducing from the date of its announcement in 2014, which is in tandem with global trends. If the FIT is highly set it remains unsustainable over time.

Figure 6-Renewable Tariff Trends Decline

 

5.2 Indexations, Adjustments and Assumptions of FIT

As NEPRA determines, the FIT does assign specific values to the cost of the project incurred by developers in solar project development. Taken into account are specific indexations, assumptions and adjustments allowed for the tariff components resulting and for the values that should be comprehended. They are described below:

South/North Division of Tariff

Pakistan has two zones demarcated in terms of levels of solar irradiance. The northern Pakistan area has a higher tariff applied due to the lower levels of solar irradiance with the southern Pakistan section receiving lower tariff since it’s dry and hot almost all year round and has a higher production than happens in the north. In all the determinations the division has been well accepted to date.

Table 2- South/North Irradiance Division and Covered Locations

 

   Northern Pakistan

  • Northern Punjab
  • Federally Administered Tribal Areas
  • Kyber Pakhtunkhwa
  • Islamabad Capital Territory
  • Azad Kahsmir & Jammu, Gilgit-Baltistan)

Southern Pakistan

  • Balochistan
  • Sindh
  • Southern Punjab (including Cholistan)

Capacity Benchmark Factors

In tariff calculation and the amount of energy to be generated by plant dealing with solar power, capacity factors for plant benchmarking has been used by NEPRA. The tariff of 2016 indicates the Benchmark Capacity Factors for northern Pakistan as 17 percent and 18 percent for Southern Pakistan.

Indexation and Costs of Project

Figures as assumed by NEPRA are assigned to specific projects that are further broken down in financing and CAPEX. Table 3 shows the assumed 2016 figures.

Table 3: Costs of Assumed Project Tariff

Project Costs (USD/MW)

Costs > 50 MW ≤ 100 MW >20 MW ≤ 50 MW >1 MW ≤ 20 MW
EPC Costs 1,034,000 1,054,680 1,075,360
EPC Costs (including Degradation) 1,071,431 1,092,859 1,114,288
Land 23,810 23,810 23,810
Project Development Cost 36,658 38,490 40,320
Insurance During Construction 10,714 9,107 7,429
Capex 1,142,613 1,164,266 1,185,846
Financing
Financing Fees & Charges 29,994 30,562 31,128
Interest During Construction 21,334 16,043 10,565
Subtotal 51,328 46,605 41,693
Total Project Cost 1,193,940 1,210,871 1,227,540

One recognition by NEPRA is that the largest part of the project will mostly be foreign contracted. The exchange rate reference is $US/PKR 105. Considering the specific time for EPC contractor payment is not clear during the NEPRA tariff determination period, under the Tariff of 2016 adjustment is allowed for relevant fluctuation of foreign currency for 90 percent of the EPC foreign component contract price against the exchange rate reference based on mean monthly exchange rates that prevail on the first day of every month at the period of construction. It’s required that the developer provides all the relevant details necessary, including documentary evidence. Adjustment will be made for currency fluctuations only against the exchange rate reference.

Maintenance and operations

Just like in project costs, a specific cost is assumed for O&M (operations and maintenance). In the tariff calculation of 2016, US$26,541 O&M component was assumed. An O&M tariff component for local and foreign operations is allowed by NEPRA. The tariff of 2016 has local component as 70 percent of the operations and maintenance tariff component as indicated in Table 5, while the foreign component stands at 30 percent. The tariff component of O&M is adjusted as per local inflation, according to the CPI (consumer price index), US CPI/foreign inflation as well as the quarterly rate of exchange by 1st July, 1st April, 1st January and 1st October as per the available latest information and the PBS (Pakistan Bureau of Statistics notified CPI, the issued US CPI by the United States Bureau of Labour and Statistics and the Pakistan National Bank.

Debt

In tariff calculation NEPRA has various premiums and depends on whether local or foreign debt is used by the solar developer. Within the 2016 Tariff, the allowed foreign debt was LIBOR (London Inter Bank Offered Rate) 0.31 percent at a 4.5 percent premium for foreign types of loans. KIBOR (Karachi Interbank Offered Rate) is the local debt that was 7.32 percent by December 28th 2015, including 3 percent quarterly as Table 4 below indicates. In case of any premium savings, they’ll be shared at a 60/40 basis between the developer and purchaser. Fixed loan’s interest remains the same unless of course in three months there’s a variation in the LIBOR. In a quarterly basis, where there’s a LIBOR variation a tariff interest portion adjustment can be made, which can either be negative or positive. Note that the tariff makes an assumption of a 75/25 debt/equity ratio, a 10 year loan tenor and repayments on a quarterly basis.

Table 4-Local versus Foreign Debt 2016 Allowance Tariff

NEPRA Foreign versus Local Debt Allowances

Foreign Debt Local Debt
Debt Tenor (years) 10 10
Repayment (Qtrly) 4 4
LIBOR 0.31%
KIBOR (actual) 7.32%
Spread 4.50% 3.00%
Total Debt Cost 4.81% 10.32%

 

Periods of Construction

It was determined by NEPRA that the maximum construction time-frame determined is 12 months, 10 months and 8 months once financial closure has happened for >50MW≤100MW, >20MW≤50MW and >1MW≤20MW projects respectively. In this tariff it’s worth noting no adjustments are allowed to cater for the impact of a financial nature on a delay on the construction of the project. Nonetheless, the developer’s failure to have the construction completed within the agreed or indicated time doesn’t invalidate the granted tariff.

Equity Return

NEPRA has set 17 percent as the ROE (Return on Equity) before taxes for each determined tariff. After COD (Commercial Operations Dated), the ROE tariff component can be indexed quarterly as per the variations on the exchange rate of the PKR against the US dollar.

Sinosure Fee and Insurance

For insurance a part of the EPC costs during the construction is allowed as Table 3 sets out. During construction, insurance is re-established as per the financing of the actual project and a quarterly weighted LIBOR/KIBOR as well as applicable premiums on 4.5 percent and 3 percent respectively. Sharing of any premium saving is done in a 60/40 basis between the purchaser of the power and a developer.

Within the period of operation, a cost of actual insurance of 1 percent maximum of the cost of the EPC can be charged to the purchase of power. The cost of actual cost of insurance for the required minimum coverage on an obligated contract with the off-taker that doesn’t go above 1 percent of the cost of the EPC is indulged as a pass-through. The reference tariff’s insurance component shall be annually adjusted according to the actual with the production of evidence of authentic documents.

With various large-scale types of projects looking for Chinese financial institution’s funding, the condition of funding the projects requirement is that a financial institution has to get coverage from Sinosure (China Export Credit and Insurance Corporation) for certain risks. Within the upfront tariff NEPRA has allowed a Sinosure fee to cater for projects of solar energy. 7 percent Sinsoure fee of the entire debt servicing can be included within the cost of the project. Adjustment of the project cost is done at the COD period as per the real Sinosure fee, but subject to a 7 percent total debt servicing maximum that can be allowed as a cost to the purchaser of power within the tariff.

Allowed Taxes

Within the EPC there were allowed duties rate and taxes allowed up to 2016 at US$47,365 per Mega Watt that could be adjusted according to the actual rate during the time of adjusting the COD’s tariff following documentary verifiable evidence. The 2016 tariff doesn’t mention it with the adjustment seemingly not applying any more.

It’s stated in the 2016 determination that where the Project Company is required to meet tax as per its income from electricity generation or any taxes/and or duties that are not refundable imposed on the company the amount as exactly paid is to be reimbursed by the DISCO/CIPPA on producing original receipts.

5.3 Tariff of 2016

As per the indicated assumptions in Section 5.2, the determination of the 2016 Tariff plus other of its components have been set out below in Table 5, basically reference tariffs based on a foreign financing of 100 percent. Where financing is a local one, a 3 percent premium + KIBOR have to apply as laid out in Section 5.2. Every developer should note that paid tariffs are step-down centred with the first a decade/ten years of the project attracting a higher tariff.

Table 5-Reference Tariffs of 2016

Specified Reference Feed-in Tariff – NORTH  
       
Category > 1 ≤ 20MW > 20 ≤ 50MW > 50 ≤ 100MW Indexations
     
US cent/ kWh US cent/ kWh US cent/ kWh
O & M 1.7823 1.7826 1.7823 CPI, US CPI, PKR/US $
Insurance 0.7483 0.7338 0.7194 Actual on annual basis
ROE 3.7058 3.7054 3.7029 PKR/US $
Debt Servicing (10 Yrs – Foreign) 7.8242 7.7179 7.6100 PKR/US $ & LIBOR/KIBOR
Total Tariff (1 – 10 Yrs) 14.0604 13.9394 13.8146
Total Tariff (11 – 25 Yrs) 6.2363 6.2215 6.2046
Levelized Tariff 11.5327 11.446 11.356
Reference Feed-in Tariff – SOUTH  
       
Category > 1 ≤ 20MW > 20 ≤ 50MW > 50 ≤ 100MW Indexations
     
US cent/ kWh US cent/ kWh US cent/ kWh
 
       
O & M 1.6832 1.6832 1.6832 CPI, US CPI, PKR/US $
Insurance 0.7067 0.6930 0.6795 Actual on annual basis
ROE 3.4999 3.4995 3.4971 PKR/US $
Debt Servicing (10 Yrs – Foreign) 5.0022 4.9343 4.8652 PKR/US $ & LIBOR/KIBOR
Total Tariff (1 – 10 Yrs) 13.2792 13.1650 13.0470
Total Tariff (11 – 25 Yrs) 5.8898 5.8758 5.8598
Levelized Tariff 10.892 10.8101 10.7251

Excess Generation Sharing of Revenue

Each FIT has been structured by NEPRA where excess generation benefit (above the Benchmark Capacity Factors assumed) sharing is done with the purchaser of the power and the final consumer by extension. The 2016 Tariff as indicated in Table 6 clearly indicates payments adjustments to the developers for generation surplus of Benchmark Capacity Factors.

Table 6-Excess Generation 2016 Tariffs

Excess Energy
Plant Factor (North/South)   Percent of Tariff Chargeable
Above 17%/18% to 18%/19% 80%
Above 18%/19% to 19%/20% 90%
Above 19%/20% 100%

 

Sharing is subjected to a limit with the South maximum standing at 20 percent and 19 percent for the North. The maximum is set towards encouraging the developers to make the most of possible highly efficient equipment. The adjusted payments are annually calculated. Section 6.3.1 further discusses this, including energy shortfall that is below the benchmark capacity factors within any year.

  1. FIT Development Process

In this section, the Pakistan process for a project development is set out within the FIT (Feed In Tariff). Key steps are listed in the 2006 RE Policy as well as requirements right from the registration process to financial close for every renewable power project in the country where the FIT is opted for.

Indicative timelines and stages

There’re generally three critical stages for the development of unsolicited project of solar energy in Pakistan. This includes:

First Stage: LOI (Letter Of Intent)

Accessing the Letter Of Intent (LOI) usually takes around 30-60 days as per the AEDB and the agencies in the provinces. The process could be delayed for the developer during the land identification period.

Second Stage: From LOI to LOS (Letter of Support)

The AEDB processed LOI has a duration of 18 months but shorter in case it’s provincial agencies issuing the LOI.

Third Stage: LOS to Financial Close

From the date of NEPRA approval of the tariff, the Letter of Support is provided for duration of 12 months. It’s incumbent upon the developer to financially close within that 12 month period or seeks an extension.

The costs, procedures and processes that follow each stage are set out below:

Steps

-Identification of Lands

The first process involves the identification of land, where the developer has to work with AEDB, private parties or provincial government. The Land has to be identified before the LOI has been applied for but change can be made later. The governments at the provincial level can assist with public land identification. AEDB can also help with the identification of suitable private lands.

The solar power developer then submits an application directly to the AEDB with the right and required documents, which is then approved after review by AEDB. A project committee is appointed by AEDB for the review of the proposal and has to be approved within 30 days. After the project has been approved, the developer has to pay processing and registration fees. Within 15 days the developer then posts in favour of AEDB a Bank Guarantee. Once the Bank Guarantee has been posted the LOI is issued by AEDB in seven days.

Note: A developer can also approach the AJK/Provincial agencies for a LOI. Nonetheless, Federal Government Guarantee only extends to those projects that have been initiated under LOIs initiated at the provincial level as far as developers get tripartite LOS (IPP, AEDB and Provincial Government).

After the issuance of the LOI the developer goes ahead and hires consultants who’re given the task of carrying out interconnection grid study or the developer can approach the DISCO/NTDC to do the grid evacuation study. Whatever the case, it has to be approved by DISCO/NTDC within 10 months after the issuance of the LOI.

The developer then proceeds by carrying out an EIA or IEE. The environmental approval is granted by EPA who approves IEE for those projects <200MW or EIA for those projects >200MW after 10 months of being issued with the LOI. The feasibility study is finalised by the developer with the AEDB, who then approves it also within ten months after the issuance of LOI.

Prior to making an application for generation license the developer has to go ahead and set up an SPV, done under the 1984 Companies Ordinance. It’s worth noting that this can be carried out at step or stage up to that moment when a generation license application has been done.

The developer approaches NEPRA by making an application for a generation license under the Licensing 1999 of NEPRA (Application and Modification Procedure Regulations).

Within four months of feasibility study approval by AEDB as well as the approval from DISCO/NTDC and after accessing a LOI, including an affidavit that confirms both machinery and plant are new an application can then be done to NEPRA to Opts for Upfront FIT/Tariff. It’s worth noting that the Generation License should have been applied for but approval doesn’t need to have happened.

Performance guarantee is posted by the developer within 15 days of the approval of the tariff. AEDB then issues a Letter Of Support (LOS) within 7 days after the posting of the performance guarantee as far as the developer already has a license for generation.

Within one year of the approval of the tariff by NEPRA and the awarding of FIT to the solar power generating project, the developer has to achieve financial close. The developer can now finalise the acquisition of the land since land acquisition needs to happen before financial close. If the lands are public, the lease has to be signed following the LOS but subject to financial close. The Private Landowner/Provincial Government executes the land transfer or lease. Energy Purchase Agreement has to be negotiated by the developer with the Power Purchase as well as negotiating the Implementation Agreement (IA) with the AEDB.

After the signing of the EPA, the developer has to issue a Letter of Credit (LC) to the Power Purchaser in a $35/kWac amount that has to remain so awaiting commercial operation to start.

The Developer also goes ahead with the application of consents. Consents are issued by the State Bank of Pakistan, NEPRA and the Ministry of Commerce/Federal of Inland Revenue. Financial Close is then achieved. These includes a consent for the conduction of foreign exchange transactions given by the State Bank of Pakistan, commitment by the State Bank of Pakistan to avail foreign currency whenever required, Power Purchase consent from NEPRA to power offtake and permits from the Ministry of Commerce or Federal Board of Revenue.

6.1 First Stage-LOI (Letter of Intent)

The initial step in solar tariff development within the FIT/upfront solar tariff scheme involves securing a LOI provided by AEDB or from a provincial agencies mandated for the same.

6.1.1 Provincial Agency or AEDB

While most of the local RE and international project sponsors make application for Letter of Intent via the AEDB, territorial and provincial agencies also have the power to provide LOIs within similar terms for such projects taking place within their areas of jurisdiction. Such relevant agencies in the provinces include:

  • Azad Jammu & Kashmir Region and AJK Private Power Cell (PPC)
  • PPDB (Punjab Power Development Board)/Energy Department of Punjab
  • Energy Department of Sindh/Directorate of Alternate Energy
  • BPDB (Balochistan Power Development Board)/Department of Energy of Balochistan
  • PEDO (Pakhtunkhwa Energy Development Organization)/Energy and Power Department of KPK

A developer can decide on the pathway or process they would like to follow. Nonetheless, AEDB is mostly chosen due to its widespread experience in the execution of Pakistan projects of renewable energy. In case developers decide to go via AEDB, an interaction with the agencies in the provinces will be a must if they decide to go for public lands. In case a developer decides to go the provincial agencies way, the Implementation Agreement’s Government Guarantee will be provided only to those initiated projects within the Letter of Intents from the Province, but they have to get tripartite LOS (IPP, Provincial Government and AEDB).

There’s a variation between the provincial governments when it comes to procedures and timelines for getting a LO1. A good example is where a developer seeks a Punjab Power Development Board LOI, which generally has different procedures and costs and more aggressive.

The Sindh government on the other hand uses the standard LOI from AEDB, including timelines and procedures. However, where public land is required by the developer of the solar power project the Sindh energy department has a provision within its LOI indicating its intention in assisting with land procurement.

Unless it has been expressly stated, the details of the process within this document generally refer to an AEDB application for a Letter of Intent.

-Letter of Intent (LOI) to Letter of Support (LOS) Process through PPDB

Registration with PPDB is $100 before buying pre-qualification documents for $1000. Evaluation of SOQ Financial and Technical evaluation is done in 60 days. Then the PPDB Committee recommends it and the board approves. Bank Guarantee submission, $1000 per Mega Watt and the establishment of an SPV within seven days follows. LOI is then issued but with timelines.

Within 6-9 months a feasibility study is submitted and approved by an Experts Panel in PPDB, NEPRA issues a Generation License and determines the Tariff and the developer submits Performance Guarantee in AEDB favour of $2,500/MW.

AEDB and PPDB then issue a LOS if lease or public lands agreement has been signed. Finalization and negotiation of the agreements of the project is done which includes the IA and PPA. Financial Close is then achieved within 15-12 months after the LOS issuance.

Letter of Intent (LOI) to Letter of Support (LOS) AEDB Process

The application for the Letter of Intent (LOI) for AEDB commences with a panel of experts reviewing the application before the LOI is approved. $100 is paid as the registration fee as well as the Processing Fees of up to $20,000 depending on the size of the project. Within 15 days a $500/MW Bank Guarantee has to be submitted and the LOI is then issued followed by the establishment of SPV.

Within 18 months a feasibility study has to be submitted, including AEDB panel of experts’ approval, determination of tariff and generation license issuance by NEPRA and performance guarantee submitted in AEDB favour by the developer of $2,500/MW.

In 12-15 months AEDB issues a LOS once a lease or public lands agreement has been signed, finalization or negotiation of the IA/PPA project agreements and Financial Close within 12 to 15 months after LOS issuance.

Note: the Punjab issued LOS difference with the AEDB issued standard document is shrouded in ambiguity. In this matter PPDB suggest that their laid out timelines are a bit aggressive with six months needed to complete a Financial Close. It’s also clear that in cases where a tripartite LOS has been issued, which means a government guarantee is needed, AEDD requires the standard LOS to be used with the guarantee issued in AEDB’s favour and hardly the Provincial Government.

6.1.2 Land Identification

Land titles might not be really needed in LOI issuance and the developer can, after the issuance of the LOI, apply for site location change with the identification of the lands by the developer clearly done within the AEDB application for the Letter Of Intent. Land identification is not very straightforward and developers are advised to begin the land identification process as early as they can.

The developer of the solar project interested in Pakistan solar power development can secure land in two ways. Firstly through landowner direct negotiations or provincial government supported process.

Public Lands

Provincial Governments have the sole mandate of remitting Public Lands. Land lease conditions vary from one provincial government to the other. While the resources in diverse Pakistan sections are highly robust, lots of solar energy projects in Pakistan are hugely concentrated in Sindh and Punjab provinces. The Punjab and Sindh governments have notification procedures on the issuance of government land concerning solar projects in the provinces.

A major difference between Sindh and Punjab however is that in Punjab the property has to be advertised prior to its allocation to a developer, while in Sindh any identified land is provided to the first developer who requests and meets the requirements. For solar power developers the two provinces have one-window type of facilities identified. Sindh has particularly identified various solar park sections intended for development and the LOI will have a provision supporting developers in obtaining public land. A developer can identify land on their own and then approach the Sindh government about it.

It’s also possible for developers to partner with sponsors and companies that have public lands allocated to them already. The Pakistan government as well as the Sindh government are already digitizing all public lands that could be of help to developers.

Developers with the intention of leasing public lands are advised to be in contact with the agencies in the provinces as possibly as they can. Sindh and Punjab one-window facilities contact details are as follows:

Engr. Mehfooz A. Qazi,

Energy Department,

Government of Sindh,

3rd Floor State Life Building No. 3,

Dr. Zia-uddin Road, Opp: CM House Karachi,

Email: mehfoozkazi@yahoo.com

www.sindhenergy.gov.pk

Managing Director,

Punjab Power Development Board,

Old Anarkali Lahore,

Ph: +92 4299212794,

Email:ceppunjab@gmail.com

http://irrigation.punjab.gov.pk

Or

S.Ashar Abbas,

Energy Department,

Government of the Punjab,

+92 321 8408099,

http://dsec.ed@energy.punjab.gov.pk

Figure 9-Punjab Solar Irradiance Map

Figure 10-SINDH’s SOLAR Irradiance Map

 

Private Lands

It’s important for negotiations to be done directly between developers and land owners when it comes to the acquisition of private lands. AEDB can help developers in acquisition of the lands or the developers can find land on their own. AEDB doesn’t have provincial lands jurisdiction but encourages developers seeking land to buy lands via private treaties. Nonetheless, together with NTDC the AEDB has identified diverse areas or sites close to substations that can easily be developed. The private sites identified by AEDB are nearer sites of transmission in Punjab, Sindh, KPK and Balochistan. Any of these areas/sites could take a total of 200 to 300 MW. As such AEDB has been encouraging projects to stick under 50 MW for easier use of the 132kV network. This in turn will ensure NTDC doesn’t construct large lines of transmission largely for solar power evacuation as was needed for the 1000 MW Punjab QA Solar Power. Private lands market rate is estimated at $1000-$4000 per acre. About ten developers have already acquired land via this procedure.

AEDB Contact Details,

Irfan Yousuf,

AEDB, Second Floor, OPF Building,

Shahra-e-Jumhuriat, G-5/2,

Islamabad.

Telephone Number: +92 51 9241288 or +92 22360-61

Mobile Contact No: +92 300 5220122

Process of Letter of Intent (LOI) Application Under AEDB

Securing an LOI takes about two months. AEDB starts the LOI processing even if identification of the exact lands hasn’t happened yet. Obtaining LOI requires that a developer presents documents known as the “Proposal” as indicated in the RE Policy of 2006 that a sponsor has to submit. In the proposal package, a number of things are included at a minimum:

  • Project sponsors Statement of Qualification together with the relevant sponsor and corporate profiles, including a financial capacity proof for carrying out the project.
  • List showing the projector sponsors requisite corporate experience.
  • Location of the proposed project indicating the GPS coordinates considering the site of the project should be within an area where the environmental effects will not be adverse. The location of the project can definitely be changed later.
  • The MW net installed capacity proposed as well as the yearly annual power output expected in MWh as per the available solar resource at the location.
  • Structures and plant outline’s basic proposal.
  • A small summary of the implementation plan of the project that covers project preparation milestones proposed, completion date and implementation. The plan can include diverse areas related to human resource, options of financing the project and technology.
  • Grid’s estimated distance from the site proposed as well as the distance estimated from the closest grid station and the 132 kV/ 11kV line.
  • Proposed project’s land acquisition/availability indication secured prior to the LOI expiry.

The complete proposal’s soft copy can be sent to the AEDB via email through: solarsection@gmail.com or handed to:

Solar Section,

Alternate Energy Development Board,

2nd Floor, OPF Building,

Shahrah-e-Jamhuriat, G-5/2,

Islamabad, Pakistan.

Telephone: +92 051 9222360 – 61

The Project Committee that has been appointed by AEDB examines the submitted proposals. Once the proposal has been carefully reviewed, the committee designated informs the approval part concerned or any other follow-up actions required as needed with a month/30 days.

After the Committee has approved the LOI, the sponsor needs to pay a registration fee to the AEDB of $100 (a hundred US Dollars), including the process/facilitation fee for the project depending on the project size in the following manner:

5MW maximum-US$ 1,000

20MW maximum-US$ 5,000

50MW maximum-US$ 10,000

50 MW maximum-US$ 20,000

The payment to the AEDB is done through payment order or bank draft. US $500 per MW bank guarantee should be AEDB posted in 15 days once the AEDB approval has been obtained. After the bank guarantee and processing fees have been received the final Letter Of Intent should be issued in 7 days.

AEDB Letter of Intent Terms

Both the project’s sponsor and the AEDB sign the LOI. In fact, the LOI provided by AEDB is a document available to the public. A standard LOI’s time is 18 months with the bank guarantee validity being around 24 months, six months after the duration of the LOI. In a standard LOI a one time extension provision is provided for the LOI for an extra 90 months accomplished after the doubling of the bank guarantee amount, essentially US $1,000/MW. Even so, in practice it’s quite easy to secure as much repeated extensions as possible courtesy of a number of factors delaying the development and approval process, which might be way beyond the control of the sponsor.

In case the tariff awarding is delayed after the initial LOI validity, the Project Company must have the bank guarantee extended in the process ensuring that the LOI expiry date has been extended. The extension process aforementioned can be repeated in case the announcement of the tariff has not happened, including within any of the Project Company’s filed reviewed petition. In case of such a review, it has to be filed in within the NEPRA rules prescribed period as detailed in the Tariff and Procedures & Standards in 15 days ahead of the current expiry date.

Stage 2-Letter of Intent (LOI) to Letter of Support (LOS)

There are milestones that need to be reached prior to the issuance of LOS and are clearly indicated in a LOI schedule. The timelines and milestones to be met as indicated in the LOI are indicated in Table 7.

Table 7-The AEDB Letter Of Intent Milestone Schedule

Milestones Time Frame (in Months)
   
Issuance of Letter of Intent (LOI) T0
Submission of complete feasibility study to AEDB, comprising of;
(i) Technical study including resource assessment, plant and
equipment details, layout and energy production analysis.
No later than ten (10) months after issuance of LOI
(ii) Grid Interconnection Study (approved by NTDC)
(iii) EIA / IEE study (approved by provincial Environmental
Protection Agency)
Vetting and approval of feasibility study by AEDB (including Within two (2) months after submission to AEDB. (provided any
verification of production estimates through third party requisite modifications are timely made by the Sponsor(s) and
consultant, if required, cost of which shall be borne by the the modified feasibility study is resubmitted within 15 days of a
Sponsor(s)) letter by AEDB requiring the modifications)
Tariff and Generation License from NEPRA Within four (4) months of approval of feasibility study by AEDB
Acceptance of Tariff by IPP Within fifteen (15) days of determination of tariff by NEPRA
Posting of Performance Guarantee for Issuance of Letter of Within fifteen (15) day of acceptance of Tariff by IPP
Support (LOS)
Issuance of Letter of Support (LOS) by AEDB Within fifteen (15) days of posting of Performance Guarantee (PG)

 

If at all the developer hasn’t met the Letter Of Intent Milestones or carried out other obligations set up within the Policy and the Letter of Intent, as well as the date of expiry extension of provided bank guarantee, the termination of the Letter Of Intent by AEDB can be done before encashing the bank guarantee.

As far as the developer has met the Milestones of the LOI on the dates stated, the LOI expiry date will be extended day-for-day up to the total delayed days by which the review or approval by the proper public sector body indicated in the LOI Milestone has been delayed above the stated corresponding period in the Milestones of the LOI.

6.2.1 Acquisition of Land

Before the Letter of Intent (LOI) stage, developers are requested at least to have begun the identification of the land and the process of land acquisition. Nonetheless, at the stage of LOI the acquisition process, the precise piece of land should have started. On the bare minimum a developer should have been offered land access order towards carrying out a feasibility study as needed as per the LOI. In Pakistan, as already indicated, solar power developers generally have two ways of securing land; direct negotiations with a landowner and via provincial government support. The solar developers’ activity in Sindh and Punjab, particularly their land acquisition procedures have been dealt with thoroughly in this section.

Public Lands Acquisition Provincial Governments Support

Punjab

During the early development stages of solar power in the Pakistan market, the Punjab Government allocated a huge piece of land for the Quaid-e-Azam 1000 MW Solar Park that’s located in the region of Bahawalpur within the province of Punjab. A Government of Punjab wholly owned company, the Quaid-e-Azam Solar Power Private Limited did develop and commission a power plant of 100 MW. Zonergy Ltd., a Chinese owned company has also been developing the rest 900 MW, including having power purchase agreement signed for 300 MW within the tariff of 2015.

The Punjab Government had a notification issued on 9th May, 2014, the Statement of Conditions that specified the land allocation criteria and solar energy projects leasing with a committee with the mandate of recommending suitable lease lands appointed under the notification. The notification also indicates that the Government can allow the leasing of public lands for a particular project once this has been advertised in a minimum of two daily national newspapers. Those companies who might want to lease the public lands have to apply via the Energy Department, after having complied with specific requirements. These include:

-The company ensuring it has a valid Letter Of Intent from the PPDB (Punjab Power Development Board) or/and the AEDB, including being eligible in carrying out the feasibility study of the project. An application form fully completed has to be submitted in the manner indicated in notification of conditions Schedule I and has to be accompanied by the Letter Of Intent and company profile. Where the AEDB has issued the Letter of Intent, it’s required that the company present all the other documents also submitted to AEDB during the Letter of Intent issuance process.

In 30 days after the application has been received the Energy Department can recommend to the Punjab Government to go ahead and allocate the applicant the land or recommend the application to be rejected. After such a recommendation, the Punjab Government then directs the land allocator to have the land allocated under a land Allocation Letter as per the Letter of Intent period. In case a Letter Of Intent is extended, the allocation can be extended as well. In case the cancellation of the Letter Of Intent is done the allocation of the land also has to be cancelled.

The collection is a Board of Revenue in Punjab appointed officer for the reviewing of application of land.

The company is required to accomplish the Letter of Intent set milestones. Through the Allocation Letter given a company is authorised to go ahead and complete a Feasibility Study including other surveys as needed. Once the Feasibility Study has been accepted, and Letter of Support issued by the Punjab Power Development Board as well as the AEDB, the application of the land lease can be done by the company via the Energy Department.

In case the Energy Department is fully satisfied by the lease application, it’ll then forward the application to the committee for the preparation of a recommendation to the Punjab Government towards the leasing of the land to Company/applicant. Once the committee recommendation is complete, a collector could subject to the Punjab Board of Revenue control allotment the land to the applicant and have the lease agreement executed with the company as the Government has clearly prescribed for the duration of the Generation License, including six months after the advance payment has been received of the lease amount. The payable rent according to such a land lease is a Punjab Government decision as per the prevailing conditions of the market. The Punjab public lands lease rate stands at US$1 for every acre annually, which is meant to incentivize the solar energy projects. After the financial close the lease agreement will be in effect.

In case the project developer does the public lands identification on their own, they only need seek its allotment by approaching the provincial government. However, it’s also required that the parcel of land be advertised first with the Punjab Power Development Board having the full discretion of awarding the land to another even after the advertisement.

Sindh

Project companies or/and sponsors seeking to create solar power plants within the Sindh jurisdiction can use the primarily public land acquired for the Sindh Government under its own policy of land grants. Sindh has 42,000 hectares of land identified that they grant to sponsors and project companies where the first to come is given the first choice. In case developers find and identify public land on their own, the Sindh Government goes ahead and helps them acquire the land as per the already land grants policy in place. In contrast with Punjab, the public land identified doesn’t have to be advertised publicly in a national daily newspaper.

The grants policy mentioned administration is pursuant to the Government of Sindh issued Statement of Conditions on June 11th 2015. Through the statement the Sindh Government can grant about 30 years lease that can also be renewed for another 30 year period for solar/renewable power projects development to a company, groups of people or a person. The Sindh government wields absolute discretion when it comes to grantees selection. The leasing of the granted land has to be done at the market rate as far as no leasing rates go below US $28 per acre for the first 10 years, US$47 for 11 to 20 years and $76 per acre for 21 to 30 years.

The Collector proposes the land’s market price, essentially a Sindh Board of Revenue appointed officer. The Collector considers land prices of lands transferred in the last one year, Sindh Board of Revenue notified table of valuation under the 1899 Stamp Act for stamp tax levying, including other modes that could be called upon to offer the fairest of assessments. The Collector’s proposed market price is scrutinized, decided and considered by a committee.

Land grant application is made via the “one-window” service specifically for renewable projects that was established within the Sindh Government’s Energy Department. The grant application is then forwarded after review to the Land Utilization Department by the Energy Department with a valid Letter Of Intent (LOI) copy, including the recommendations and observations of the Energy Department. The Sindh Government’s Land Utilization Department after taking into consideration the Energy Department’s observations can call for the Collectors’ report on the land availability, market price and site plan. The scrutiny committee receives the report, a committee featuring the Sindh Board of Revenue senior members, Land Utilization Department, Finance Department, Energy Department, the Collector and concerned division’s commissioner. Verification of all the documents is done by the scrutiny committee as received before formulating recommendation as required for the Sindh Government. After the approval of the lease by the Government, execution of the lease deed is carried out after the lease money payment has been done for the initial 10 years. For the next 10-year periods rents due they have to be paid around three months before the initial 10-year period lease deed has expired. Execution of the lease before financial close has taken place.

Granting the lease is subject to diverse conditions, such as the need to have the lessee make contribution in improving the livelihoods of the population living around and clearly preferring the hiring of both unskilled and semi-skilled locals for such jobs. The Sindh Government then has to be provided with a yearly report on the jobs provision to the local population. In addition, any interest transfer in the land has to be done with the Government’s approval.

Registration of the Land needs to be done with the relevant area’s local registrar. Developers need to remember this was a little hard for wind related transactions along the wind corridor although it might not be a huge concern in other regions, including other areas in Sindh. Registration costs are as per the value of the price of the land.

Provincial Governments Support in Attaining of Private Lands

Developers seeking to obtain private lands can be supported by the provincial government. Attaining lands can be done pursuant to the 1894’s Land Acquisition Act. The Act allows the developer to request the government to obtain the land on their behalf as per the procedures clearly indicated by the act. The government as indicated gets the land for the developer. In Pakistan the truth is that a developer is encouraged to directly negotiate the prices of the land with a landowner in contrast with seeking the aid of the provincial government.

Private Lands Direct Negotiation

In case the developers haven’t obtained the lease or grant of a public land they’re encouraged by the AEDB to buy the land directly on their own. Together with the NTDC, the AEDB has identified sites in diverse provinces across Pakistan. It’s important for developers to correspond with AEDB and request for information on the availability of the sites.

Grid Interconnection Feasibility and Feasibility

As per the Letter Of Intent (LOI), any Feasibility Study has to be done in 10 months after the LOI has been issued. A feasibility study is supposed to encompass, inter alia, details on PV solar equipment sitting, comprehensive estimates of data production as per the data on solar irradiance of the site of the project, reports on soil test, technical information on the PV solar panels, including other related equipment the solar PV plant will be using, solar PV grid tied project and electric study that should include short-circuit study. Others include study on power quality, study of load flow, and study on stability, environment study, financing plan, project costing, financing terms, carbon credits, and calculations of tariff, financial calculations assumptions, including financial and economic analysis. Owner of the solar power project/developer is advised to be in contact or liaise with the purchaser of the power when it comes to ascertaining the layout of the project, site, layout and design of the sub-station, line of transmission; arrangements on interconnection including other important areas pertaining to the project.

Study on Grid Interconnection

For the application from NEPRA for a Solar FIT to be done, a DISCO or NTDC approval is needed for the project’s grid interconnection. To get this type of approval a grid interconnection study has to be provided. Local consultants need to prepare the study, with diverse local consultants already available and can help along the way supporting the whole process of grid connection approval. In the grid connection study simulation studies should be included where the power based on solar will be grid evacuated as per the timeline of the project and should indicate that the power the grid is injected with won’t adversely affect the national grid in accordance with the Grid Code. Once the Grid Interconnection Study has been submitted, the developer should get an NTDC approval or DISCO relevant in this matter for connectivity to the grid. The approval should conclude that the injected power into the grid from the project under discussion won’t adversely affect the national grid, which is a Grid Code requirement. The specific timeframe estimate for the securing of the grid interconnection approval from NTDC is usually two weeks but in practice the approval can take 2-3 months due to a process of iterative reviews of related studies and interconnection proposal.

NTDC contact information and seeking Grid Interconnection Study approval include:

National Transmission and Despatch Company Limited,

Room # 414, WAPDA House Shahrah-e-Quaid-e-Azam,

Lahore, Pakistan.

Telephone number: 92 (042) 9202229

Fax: 92 (042) 9200894

The application fee for approval of grid connection is US$1,746 flat fee no matter the size of the project and has to be paid to the NTDC after submission. Within the 2006 RE Policy, the NTCD has to provide interconnection to the grid although approvals could take longer since grid interconnection is generally costly and complicated, particularly in the remotest of areas. Developers are requested and recommended to approach NTDC as fast as they can with the developers working with them for the identification of those areas best for power evacuation.

Generation License Application and Application for NEPRA FIT

After the Feasibility Study approval by the AEDB and within four months its’ required that the developers should have officially applied or opted for the FIT. Application process importance is the securing of FIT approval for the solar power generation project and connectivity to the grid from NEPRA, including the right off-taker, NTDC or the required DISCO (local distribution company).

The time frame suggested for the tariff grant/approval is ten working days according to NEPRA Upfront Tariff Regulations of 2011. Even so, delays could occur, particularly in case inadequate information related to the project is not available with the developers encouraged to begin the entire process as fast/early as they could.

For application for the FIT to be carried out, the 2011 NEPRA Upfront Tariff Regulations application require application to be completed according to the regulation’s Fourth Section. The main requirements to “opt” or apply for the FIT include:

-A Valid LOI (Letter Of Intent) for the projects as provided by the AEDB or other relevant agencies within the provincial governments.

-Description of the generation site and facility proposed by the developer.

-An application of a Generation License from NEPRA should be done or a Copy of the Generation License provided. It’s important for a power company to get a NEPRA generation license towards setting up the power plant. The 1999 NEPRA Licensing (Modification and Application Procedure) Regulations clearly lays out the requirements and procedure to be followed to obtain a generation license, transmission or distribution business across Pakistan. Applying for the generation license requires that the following main requirements be met from the license application regulator:

  • Process application fee-indexed fee with the Pakistan CPI
  • Certified company incorporation copies and the latest annual tax return filed
  • Experience in detail of the applicant as well as the management staff, members within the electricity industry
  • Senior management CVs, as well as for professional and technical staff
  • Sufficient evidence of technical and financial resources that have been backed by sub-contractors and technical staff profile among others and audited financial statements
  • Facilities design, technical details, model, technology and type proposed for acquisition, installed, developed or constructed
  • For a new system or facility license a feasibility study is required of the entire project and should cover details like equipment model and type, technology, design details including the facility’s expected life

Table 8-Fees of Generation License Application

NEPRA Fee for Generation License Application

 

Size of Plant Fees (US $) 43
Up to 1 MW 384
> 1 MW up to 10 MW 768
> 10 MW up to 20 MW 1,151
> 20 MW up to 50 MW 1,535
> 50 MW up to 100 MW 1,919
Above 100 MW 3,838

The entire application process of getting a generation license is comprehensively indicated in the 1999 NEPRA Licensing Regulations, as well as a couple of amendments. A Generation License within Pakistan has to be obtained within 4-8 weeks approximately.

-Documents related to the company incorporation include related documents. At this stage after the developer’s decision to create an IPP within Pakistan a Special Purpose Vehicle company also has to be set up, registered within Pakistan as per the 1984 Pakistan companies Ordinance, which is also well pointed out in the RE Policy of 2006. For an SPV company to be set up the process takes around 30 days and offices for company registration are spread across all the provinces. Nonetheless, it’s advisable to begin the process very early in case the directors are non-nationals; clearing them takes time by the SECP (Securities and Exchange Commission of Pakistan).

-Also required is an affidavit usually submitted by a law firm locally operating in Pakistan that follows the laws of Pakistan declaring that the plant equipment proposed as well as the machinery are new according to the design and planning of the project.

-NTDC approval or the DISCO relevant for the connection of the grid is also required.

-Also required include application fee, which is non-refundable including the Generation License Fee.

Table 9-Uprofront NEPRA Tariff Application Fee

NEPRA Fee for Application of Upfront Tariff

 

Size of Plant Fees (US $)
Up to 1 MW 192
> 1 MW up to 10 MW 479
> 10 MW up to 100 MW 960
Above 100 MW 1,919

 

After the developer has applied for FIT, cost-plus tariff application is not possible and they could risk losing any of the payments or guarantees unless they’ve agreed otherwise with the relevant authorities. In this case the developer needs to ascertain their risk appetite and risks associated to the project prior to making a FIT application.

Application of the FIT, done in tripartite form, has to be filed with the NEPRA Registrar through:

The Registrar, National Electric Power Regulatory Authority,

NEPRA Tower Ataturk Avenue (East), Sector G-5/1,

Islamabad, Pakistan.

Email address: registrar@nepra.org.pk

Telephone no: +92 51 9206500

Fax: +92 51 2600021

It’s also important for developers to remember that opting for upfront tariff is a decision that once exercised cannot be revoked.

6.2.4 Environmental Assessment

Environmental approval is required for all the solar projects from the office of the EPA (Provincial Environmental Protection Agency). This is needed in 10 months after the Letter Of Intent issuance. For an EPA to be approved, it’s important for developers to have prepared:

IEE (Initial Environmental Examination) in case the project is below 200 MW

Or

EIA (Environmental Impact Assessment) where the project is above 200 MW.

Obtaining these requires that the Review of EIA and IEE Regulations of 2000 be followed for the process. Local consultants are hired by developers towards carrying out the process that lasts for about 2-4 months. Essentially, the EPA two main concerns when it comes to solar power projects include requirements of water and environmental waste disposal. The EIA and IEE have to be submitted at the same time with the review fees and application form. An environmental approval is provided subject to continuous compliance and monitoring with the recommendations and conditions that EIA or IEE has raised.

Punjab and Sindh Contacts for the Environmental Protection Agencies include:

Punjab Directior (EIA),

Mr. Nasim-ur-Rehman Shah,

Email address: dir.eia@punjab.gov.pk

The Secretary,

Environment and Alternative Energy Department,

Government of Sindh,

Plot No ST/2/1, Sector 23, Korangi Industrial Area,

Karachi.

Additional Environmental Considerations

It’s important for developers to remember that if they’re to deliver an acceptable project particularly to global lending institutions for financing purposes, it’s important for work to be carried out according to the extra requirements of the major principles and standards, for instance the World Bank Health and Safety Guidelines, IFC Performance Standards and Equator Principles.

6.2.5 LOS (Letter Of Support) and Performance Guarantee

The LOS is applied for by the developer once certain perquisites have been obtained, which includes:

-Generation License

-Performance guarantee has been posted

-Tariff Determination from NEPRA

Performance Guarantee

Developers have to post performance guarantees in 15 days after NEPRA have approved their application for tariff for securing Letter Of Support. PG (Performance Guarantee) stands at US$ 2,500/MW and usually takes around 15 months, three months longer than the term of a Letter Of Support, which is 12 months.

Letter Of Support (LOS)

The Letter Of Support is signed by the AEDB and the key projector sponsor. In case the Letter Of Intent is issued by an agency in the provinces, the same agency has to sign the LOS as well. The LOS then governs the project together with the IA and EPA. If conflicts ever arise the LOS will always precede the IA and EPA. AEDB issues the LOS in seven days after PG has been posted as far as the developer holds a generation license. AEDB website has a sample LOS.

Fees

Processing fees of a maximum US$100,000, non-refundable for 50 MW and above projects, US$ 50,000 for 6-50 MW projects while projects of 1-5 MW parts with fees of US$20,000. The fees are charged as the LOS is being signed and have to be paid within 30 days of LOS signing.

Letter of Support Term

The earliest point of LOS validity is dependent on accomplishment of financial close and one year after NEPRA determination date known as the RFCD (Required Financial Closing Date). In case the AEDB has ascertained that a delay of the solar project company in accomplishing financial close as per the RFCD is generally because of circumstances beyond the project company’s reasonable control or the financial close achievement in the shortest time is not possible, the AEDB is entitled to, through writing, grant the project company an extension of one time up to six months after the RFCD.

Essentially, the extension is only granted where:

  • Consent from NEPRA has been obtained
  • PG has been extended for another six months
  • The maximum value of the PG has doubled

Consent from NEPRA is not needed and where currency convertibility consent from the SBP (State Bank of Pakistan) hasn’t been obtained and an automatic extension is in place. The developer automatically receives extra time from the AEDB to obtain the consent.

In case financial close hasn’t reached either by the RFCD or any other extension provided the AEDB has to encash the PG fully. Where the delay has been brought by the Government of Pakistan actions, Purchaser or AEDB Project Companies are not penalised.

Letter Of Support (LOS) Termination

Prior to the RFCD, the Project Company is offered the chance to have the Letter of Support terminated, including any or all the executed Project Agreements by counterparties to that. In such an option the termination might be exercised once the Project Company has paid the AEDB a termination Amount that equals (a) the total amount encashed to the PG multiplied by the months since the LOS issuance date the Termination Amount is received by the AEDB divided by total number of months since RFCD was issued with the LOS and (b) the receipt of the full amount of the processed fee by the AEDB.

In case the Project Company’s LOS termination event or/and the Project Agreements is done without the Termination Amount paid, PG will have to be encashed by the AEDB. Confusion is avoided in case the termination is exercised by the Project Company during the extra time-frame offered for achieving Financial Close by ensuring the entirety of the PG’s double amount will be encashed by AEDB on call. Where financial close by the RFCD is achieved or by the extension date granted, the developer has the PG returned to them.

6.3. Stage 3-Letter of Support (LOS) to Financial Close

After the project has FIT granted the developers need to work towards achieving financial close in one year, which can only be different if the AEDB grants an extension under the Letter Of Support.

6.3.1 EPA (Energy Purchase Agreement)

Within the FIT Regime agreements and documents key to the project include the Implementation Agreement (IA) and the Energy Purchase Agreement (EPA) also found on the AEDB portal. Note that the project documents’ basic terms have been in use for IPP type of projects in Pakistan for the last twenty years. Sovereign guarantee and security package provided has for a number of times been banked by international lenders and investors in the past.

EPA (Energy Purchase Agreement)

Term 25 years (unless extended by a Force Majeure Event)
Parties The EPA is signed by the Project Company (the Seller) and the Power Purchaser (DISCO or CPPA). The EPA is
directly negotiated with the Power Purchaser, which could be the CPPA as a central off-taker, or a DISCO, which
is a distribution company in the respective geography of project location.
Take or Pay The EPA is a take or pay agreement. The Seller is paid for all net electrical output delivered, as measured by
the meter. Payments are made for net electrical output that would have been delivered but for curtailment or
specific dispatch instructions (i.e. deemed output).
Contract Capacity The Seller must state its Contract Capacity in MWp DC. The Seller may, where necessitated by unforeseen
circumstances, reduce the installed capacity before the Commercial Operations Date by a maximum margin of
%10 of the Contract Capacity.
Required Commercial This is negotiated by the Seller with the AEDB with the following limitations: 8 to 12 months for 1 to 20 MW, 10 to
Operations Date 18 months for +20 to 50 MW, 12 to 18 months for +50 to 100 MW. 52
Letter of Credit A Letter of Credit (LOC) in the amount of US 35$ per kW of the Contract Capacity must be delivered to the
Power Purchaser prior to Financial Close. The LOC must be maintained in full force and effect and will not
be returned to the Power Purchaser until COD (unless terminated prior to COD, in which case the LOC must
be maintained until 30 days after such termination). The LOC may be drawn on if the Seller has not paid the
liquidated damages prior to COD, as set out in the Liquidated Damages (LD) section below.
The LOC may also be encashed in full if there is a Seller Event of Default prior to COD.
Liquidated Damages Liquid Damages (LDs) apply if:
• Contract Capacity is reduced by between %5 and %10. LDs are payable in an amount equal to 350,000$
multiplied by the number of MW (prorated for any fraction thereof) if the Contract Capacity is reduced by
between %5 and %10.
• Failure to achieve COD by Required COD. Here, the Seller shall pay the Purchaser as LDs an amount equal to
US 2.50$ per kW of the Contract Capacity for each Month (prorated Daily) thereafter until the COD is actually
achieved.
• EPA is terminated prior to COD for a Seller Event of Default. In this scenario, the Seller shall reimburse the
Purchaser for all costs and expenses (including reasonable attorneys’ fees) relating to the Project incurred by
the Purchaser prior to such termination, which amount in any event shall not exceed the Rupee equivalent of
one hundred and fifty thousand Dollars (US 150,000$).
• Liquidated Damages for Shortfall Energy. The Seller is required to pay LDs to the Purchaser if their annual
electrical output falls below the benchmark annual electrical output (based on the benchmark capacity factors
provided in the tariff). This is known as Shortfall Energy. To calculate Shortfall Energy, the Seller may take into
account any surplus energy produced in previous years as credit energy. The LDs are calculated as the kilowatt
hours representing the positive balance of the Shortfall Energy and the then-prevailing use of system charge
per kWh allowed by NEPRA to the Purchaser for interconnection to and use of its grid system.

 

Term 25 years (unless extended by a Force Majeure Event)
   
Operations and The developer must maintain an operations and maintenance (O&M) fund. The Reserve Fund shall be funded by
Maintenance Fund the Seller out of retained earnings commencing on the date that the first Energy Payment is received. On the
date of each Energy Payment receipt, one thirty-sixth (36/1th) of the annual O&M budget for the Complex will be
deposited into the Reserve Fund until a reserve equal to nine such deposits has been established.
The Reserve Fund is to ensure that the developer has sufficient funds available for major maintenance expenses.
“Major Maintenance Expenses” means expenses for an item of maintenance or repair of the Complex which
would require substantial expenditure and which is anticipated to be performed in accordance with the
manufacturers’ determinations, sound engineering practices or Prudent Utility Practices, but which is not
expected to be performed on a recurring basis. The developer can draw on the Reserve Fund only to the extent
it lacks other funds available for paying maintenance and associated operating expenses with respect to the
facility, or to pay for alterations, repairs, improvements, renewals and replacements necessary for the proper
operation of the facility. It has to replenish if and when it uses such expenses.
This Reserve Fund is not required if the developer has entered into a Long-Term Major Maintenance Services
Agreement with a reputable O&M contractor
Pass-Through Items The Purchaser shall pay the Seller, any amount for the Pass-Through Items evidenced in accordance with the
and Supplementary EPA. Pass–Through items are contained in Schedule 1 to the EPA and are standard and set out below.
Tariff (a) Payments by the Seller into the Workers’ Welfare Fund and the Workers’ Profit Participation Fund53 for its
employees required to be paid in relation to the Project pursuant to the Laws of Pakistan;
Sales tax, excise duty or any other taxes, duties, levies, charges, surcharges, or other governmental impositions
(including without limitation export tax, octroi, rawangimahsool etc.) wherever and whenever payable on the
generation, sale, exportation or supply of electricity or electricity generating capacity by the Seller during the
Term, provided that the Seller has not been previously compensated fully for any such item by the Purchaser
or by the GOP;
(b) Sales tax, excise duty or any other taxes, duties, levies, charges, surcharges, or other governmental
impositions (including without limitation export tax, octroi, rawangimahsool etc.) wherever and whenever
payable on the generation, sale, exportation or supply of electricity or electricity generating capacity by the
Seller during the Term, provided that the Seller has not been previously compensated fully for any such item by
the Purchaser or by the GOP;
(c) The cost of the Metering System if not procured by the Purchaser;
(e) Any upgrade to the protective devices of the Complex required by the Power Purchaser; and
(f) The cost of the DPLC or Fiber Optic System including OPGW/ADSS, SDH/PDH unit along with all the related
in-door and out-door equipment, as provided in Section 7.7(a)(iii) of the Energy Purchase Agreement.
Each invoice for the Pass-Through Items delivered to the Purchaser must be accompanied by the original
invoices or payment receipts for which the Seller seeks recovery from the Purchaser.
A supplementary tariff is permitted when:
• There is a change in law resulting in a material change in cost or revenue. Any modifications or expenditures
required to comply with the change in law are reimbursed through a supplemental tariff.
• If the plant is restored, the cost is permitted as a supplemental tariff.
Purchaser Delayed There is compensation payable by the Purchaser if there is a delay in commissioning caused by the Purchaser.
Commissioning The Purchaser shall pay to the Seller monthly, in arrears, the interest component of the tariff plus %50 of the
O&M Component and %50 of the Insurance Component multiplied by the Average Daily Energy for each Day
during the period of such delay.
If the delay continues for 60 days, the Purchaser is required to pay the debt when it falls due. If commissioning
subsequently occurs, the payments made by the Purchaser to service any principal debt shall be recovered
together with interest at KIBOR plus %3.5 per annum (on the monthly outstanding balance of such amounts)
commencing on the date of such payments by the Purchaser and ending on the date of complete repayment
thereof by the Seller through successive deductions of the ROE Component from the monthly Energy Payments
until such amounts have been completely recovered.

 

Term 25 years (unless extended by a Force Majeure Event)
Purchaser Step-In If, after COD, and without the prior written consent of the Purchaser, the Seller ceases to operate the plant for a
period of 30 consecutive days other than because of:
(i) a Force Majeure Event,
(ii) a Scheduled Outage or a Maintenance Outage,
(iii) a Forced Outage or a Partial Forced Outage,
(iv) a Non-Project Event, or
(v) any act or omission of the Purchaser and/or the Grid System Operator that effectively prevents the Seller or
its Contractors from operating the Complex, then the purchaser is entitled to step-in and operate the project
until the the Seller demonstrates, to the reasonable satisfaction of the Purchaser, that the Seller can and will
resume normal operation of the Complex or until the Lenders shall have exercised their rights in accordance
with the Financing Documents, including the Lender’s Direct Agreement, to enter the Complex and operate it.
The Purchaser is obliged to pay to the Seller the Debt Principal Repayment Component and the Interest Charges
Component of the applicable Energy Price multiplied by the Average Daily Energy during such period.
Force Majeure There are a number of Force Majeure events outlined in the agreement:• Any event beyond reasonable control
of either Seller or Purchaser, including an Act of God
• Natural Causes
• Strikes
• Lapse of Consents
• Change in Law
• Pakistan Political Event (“PPE”)
If there is a force majeure event that results in material damage/material modification greater than the
threshold amount, the Seller will be compensated for restoration less any insurance proceeds and less the
threshold amount. The costs will be reimbursed via an increase in the tariff.
Event of Default Mutual Events of Default
• Failure to pay within 35 days notice
• Material Misrepresentation
• Material Breach not remedied within 30 days
• Tampering of meters on three or more occasions

Seller Events of Default

  • Construction Date greater than 90 days after Financial Close
  • COD greater than 365 days after required COD
  • After construction start date, failure to prosecute project in a diligent manner for 30 days
  • Abandonment for 30 days (subject to carve outs)
  • Failure to maintain Seller LOC
  • Output less than %60 of capable capacity over any year (subject to carve outs)
  • Breach of share transfer restrictions
  • Insolvency
  • Irrevocable revocation of generation license
  • Funder step in and failure to transfer to a third party within 240 days.
  • Material breach of Implementation Agreement resulting in termination
  • Termination of a site lease or loss of rights to own or operate the facility

Purchaser Events of Default

  • Loss of guarantee coverage
  • Material breach of Implementation Agreement or Guarantee by the Government not remedied within 30 days.
  • Change in law rendering agreement invalid lasting for more than 180 days
  • Delay of interconnection by more than 155 days beyond required COD

 

Term 25 years (unless extended by a Force Majeure Event)
   
Lender Step-In The Purchaser shall not terminate the agreement without giving notice to the Lenders. The Lenders have the
cure periods set out above which begin from the moment such notice is delivered to the Lenders. An election
notice can be given by the Lenders to extend the cure period by 180 days and the Seller’s right to terminate is
suspended so long as the Lenders are diligently attempting to cure or mitigate or procure the cure or mitigation
of such Seller Event of Default or are pursuing the enforcement of their rights and remedies under the Financing
Documents against the Seller. A separate direct agreement with the lender can also be negotiated by the Power
Purchaser.
Termination In the event of a termination of this Agreement prior to the Commercial Operations Date for any reason other
Payments than a Seller Event of Default, the Purchaser shall reimburse the Seller for all costs and expense (including
reasonable attorneys’ fees) relating to the Project incurred by the Seller prior to such termination, which amount
in any event shall not exceed the Rupee equivalent of one hundred and fifty thousand Dollars (150,000$).
For termination payments that may arise under the EPA in favor of the Purchaser prior to COD, please see the
LOC section above.
All other termination payments are provided for in the IA.
Excess Energy On a yearly basis, the annual electrical output of the generator is calculated based on the benchmark capacity
factors (%17 for North and %18 for the South in 2016 tariff). If annual electrical output is in excess of this, a
reduced tariff may apply as per the relevant NEPRA tariff determination. See Section 5.3 for more details on this
in relation to 2016 tariff.

 

6.3.2. IA (Implementation Agreement)

IA (Implementation Agreement) is generally the sovereign support guarantee payment framework offered by GOP (Government of Pakistan). Major terms set out include the following:

Term 25 years (unless extended by a Force Majeure Event)
Parties Project Company (the Seller) and GOP. It is negotiated by the AEDB on behalf of GOP.
Term The same term as the EPA.
Title Protection If the Seller has leased land from the provincial government, GOP indemnifies the Seller from any losses arising in
connection with or relating to any defect in title that impedes or delays the project.
Taxation of the During the Term, the Seller shall not be subject to taxation in Pakistan on its profits and gains derived from sale
Project Company of electricity under the Energy Purchase Agreement, including payments made by the GOP to the Seller under
Section 15.1 (Compensation upon Termination). Any change in this shall not give rise to a breach or default of
the GOP so long as such change results in a Change in Tax and can be treated as a Pass-Through Item under the
EPA.
Taxation of the Local investors will be taxed according to the laws of Pakistan and Foreign Investors will be taxed according
Investor to the Bilateral Tax Treaty with their country. If no tax treaty exists, they are taxed according to the laws of
Pakistan.
Right to Import/ The Seller and its Contractors shall be entitled to import without restriction and shall be exempt from (or
Customs Duties shall enjoy a reduced rate of) Customs Duty and Sales Tax on plant, machinery, equipment and spare parts,
and replacements required to be imported for the design, construction, completion, operation, repair and
maintenance of the solar plant56 and any other item or items of plant, equipment or machinery that are
incorporated into the solar plant or whose use is dedicated to the operation and/or maintenance of the solar
plant approved by the AEDB and concurred to by the Federal Board of Revenue. Any charge in excess of that
which is law at the time of signing can be treated as a Pass-Through Item under the tariff.
Provided customs Duties and Sales Taxes are paid, all imported items will be cleared for release from customs
within 15 business days of arrival at the port of entry.
The agreement guarantees full currency convertibility provided the request is made 15 days in advance of
need. Consents from the State Bank of Pakistan to foreign currency accounts must be obtained. There are also
provisions on free transfer and repatriation of certain funds including equity.
Term   25 years (unless extended by a Force Majeure Event)
         
Payment Guarantee Schedule 3 of the IA contains the unconditional and irrevocable payment guarantee from the Government for
the payment obligations of the Purchaser under the EPA, which is entered into as a separate document.
Force Majeure There is compensation on termination for Force Majeure. The affected party is under an obligation to incur
reasonable sums of money to mitigate the effects of the Force Majeure. However, GOP will not be allowed to
claim relief of its obligations under the IA or the Payment Guarantee if there is a Political Force Majeure or a
Change in Law Force Majeure.
Restrictions on Share Under the IA, there are a number of lock-in periods for investors. The initial shareholder cannot reduce its
Transfer shareholding below %51 prior to COD. The lead investor cannot reduce its shareholding below %20 prior to COD.
Post COD, AEDB consent is required for any share transfer. However, the IA states that this will be granted
unless AEDB determines that such transfer is contrary to national security interest.
Consents The Implementation Agreement requires a number of consents from various government agencies, which must
be procured by the Seller prior to Financial Close. These include:
• State Bank of Pakistan consent to conduct transactions in foreign exchange;
• State Bank of Pakistan commitment to make available foreign currency if required;
• NEPRA consent to the Power Purchaser to off-take the electricity (required under the generations license); and
• Ministry of Commerce/Federal Board of Revenue import permits.
These consents are relatively straightforward to obtain. If there is a delay in obtaining these consents through no
fault of the Purchaser, an automatic extension of the LOS is given by the AEDB.
Compensation on The IA contains compensation on termination of the EPA. The compensation varies depending on the
Termination termination event. The key termination events and the compensation applied is outlined in the table below. Note
that the amount of debt, equity and ROE payable in any of the termination events reduces throughout the Term
and debt includes the interest owed to the Lenders. The mechanism for calculating each of these is detailed in
the EPA.
Termination Event Compensation
• Government Event of Default Debt, Equity and 4 years ROE
• Change in Law
• Pakistan Political Event (PPE)Purchaser Termination
• PPE greater than 180 days Debt, equity and 4 years ROE/2
• Seller termination
• Seller Event of Default Debt (only if the Purchaser elects to transfer
the facility)
• Force Majeure Termination Debt and Equity (only if the Purchaser elects
to transfer the facility.

6.3.3 Interconnecting with the Grid

In Pakistan there’s no agreement on grid connection. The obtained information for the study on grid connection required towards obtaining the LOS, including any attached conditions for its sanction is inserted with the EPA’s technical schedules.

In the available EPA standard on the AEDB portal it’s required that the off-taker needs to construct, design, commission and finance the interconnection facilities of the purchaser. There have been a couple of solar power projects applications to the NTDC and their processing has been delayed. At the same time, there has been some preference by the NTDC towards placing renewable power clusters across the grid in case there’s capacity to ensure high voltage lines of transmission are hardly built exclusively for projects of solar power.

The transmission lines construction is expedited, including the interconnection facility by the DISCOs or NTDC. The Project Company could decide to create and provide finance for the facilities on an agreed mutual basis, which a few developers have done in recent times. The agreement is however done differently and under the concession documents but settled upon one-on-one with NTDC. Currently, there has not been a wind or solar developer who has agreed to such an agreement.

7.0 Fit Main Risks and Mitigants

There’re a number of risks that exist under the Pakistan FIT regime including some potential mitigants.

7.1 Risks Related to Security

In recent times the security situation of Pakistan has improved to some significant extent. Improvements in financial markets perception of risk for the country have been seen. In fact, the April 2015 Emerging Markets Bond Index Plus reported a decline in the spread risk to 461 bps from a high of 1011 bps in March of 2015. Even so the country still has security concerns to ponder, particularly in specific regions of the nation, which developers have to remember as they decide on the best location to locate their plant. For solar parks designated in public lands under provincial governments the lease agreement does come with security guarantees.

Additional protection is provider within the Implementation Agreement. The Seller is generally required to offer security personnel, protection, secure equipment and facilities adequately for the solar energy project. Nonetheless, the GOP (Government of Pakistan) makes sure the relevant agencies of law and order enforcement will enforce security on a non-biased manner to the Project Company without extra expense or cost to the Project Company. It’s expected that the Project Company might time and again request GOP to release extra security forces to deal with remarkable security related challenges. Such extra security detail will remain under the GOP’s exclusive direction and control. The GOP will also incur out-of-pocket reasonable expenses in the provision of the security forces as the developer has requested, which the GOP should then be repaid. Nonetheless, a cap on this type of expenditure exists that currently stands at US$10,000 for 1-5MW/US$50,000 for 5-20MW/US$100,000 for 20-50MW/US$150,000 for 50-100MW.

7.2 Risks Related to Politics

A Change in Law and the Political Force Majeure of Pakistan has already been factored in the compensation payments and risk coverage by the IA. Even so, it’s advisable for credit enhancement to be obtained from such third parties as the Partial Risk Guarantees of World Bank, associated guarantees of the MIGA (Multilateral Investment Guarantee Agency) or such available instruments from the ADB (Asian Development Bank). Chinese Sinosure among other export credit agencies offer associated insurance providing risk coverage where there’s the involvement of the Chinese Export Credit Agency. Sinosure fee could be agreed upon in the tariff, a facility that’s only unique to Sinosure.

7.3. Currency Convertibility and Currency Projection

Included currency risks relate to macroeconomic types of shocks like devaluation of currency, indexation and inflation of a number of constituents of tariff costs. The Project Documents contain mitigants via the foreign currency indexation denominated components as provided in the EPA once consented by the State Bank of Pakistan and local current convertibility to international acceptable currency as per the IA. The calculation of the exchange rate is done on the due date for the payment as well as if investors haven’t reported issues with currency convertibility within the Pakistan EPAs. At the same time developers need to consider the insurance document like the guarantee from MIGA as well as the currency hedge.

7.4 Mitigating Institutions for Active Risk

From the mitigants indicated, extra risk-mitigating instruments for finances are in place from a number of institutions a developer might want to investigate further. A number of these instruments might be required by a number of international lenders to be purchased before credit is offered. For developers investing in the power sector of Pakistan a number of risk mitigating institutions are available.

7.4.1 MIGA (Multilateral Investment Guarantee Agency)

MIGA (Multilateral Investment Guarantee Agency) is a World Banks Group member launched by 1988. The role of MIGA is the promotion of cross-border type of lending and investment. This is done through the provision of guarantees (risk insurance) against specific non-commercial cross-border risk investments as well as by the provision of resolution services for disputes for investments guaranteed. MIGA clients are equity and debt investors in 181 countries where it’s in operation. The insurance of MIGA for foreign direct investments is extended to diverse risks including:

  1. i) Transfer restrictions and inconvertibility of currency-Essentially the inability to transfer/convert loan payments or dividends as a result of restrictions related to foreign exchange
  2. ii) Expropriation-where the government has nationalised or made it hard for a project to operate by executing discriminatory measures

iii) Sabotage, terrorism, civil disturbance and war-It includes interruption and destruction of businesses as result of political violence

  1. iv) Contract breaching-when a government has failed to honour its obligations as per the contractual agreements in place as well as successive failure to respect arbitral awards
  2. v) Failure to honour sovereign financial obligations

MIGAs’ coverage criteria for eligibility or basic requirements for coverage include:

  • Investments in a cross-border sense by investors within a country and a member of MIGA into a member of a developing country
  • Existing and new investment that meet a specified criteria
  • Shareholder loans, non-shareholder loans, equity investments and shareholder loan guarantees
  • Economically and financially investment projects that the environmental and social performance standards of MIGA and are viable

MIGA’s website (www.miga.org) is a good place for investors to star and fill out the online application. The standard information will be reviewed by MIGA team in confidence and once the initial screening is over the investor will be contacted by MIGA.

A good example of an investment guaranteed by MIGA is the Korea K-Water and Daewoo E and C’s 147 MW Star Hydropower Project. MIGA guaranteed US$148.5 million issued to offer coverage for equity investment for the Patrind Hydropower project that’s undergoing, constructed under the BOOT (Build, Own, Operate & Transfer) basis, generally a Pakistan power sector concessional common arrangement; though the coverage is for contract breach risk for a maximum of 20 years. Financing of debt is offered by the Korean Exim Bank, IsDB, ADB and IFC.

Figure 11-MIGA Investment Hydropower Project Guarantee Example

7.4.2 World Bank (IDA/IBRD)

The risk guarantee programme offered by the World Bank majorly works with government to cover risks related to diverse types of private and public sector types of projects usually in concessional and infrastructure financing. World Bank offers a number of guarantees towards the protection of investors:

PRG (Partial Risk Guarantees)

These offer coverage for commercial lenders for projects within the private sector against government owned defaults entities that fail to carry out their obligations. As a result PRGs easily cover law changes, nationalisation and expropriation, failure to handle contract based payment obligations, convertibility and transfer of currency, late license issuance, diverse risks under a government entity’s contractual obligation and lack of compliance with clause on dispute resolution agreed. Since they are provided in IDA and IBRD countries, PRGs required a counter-guarantee from a government.

The PRG could be structured in a way that the limited-recourse lenders finance project debt is protected or the protection of a Project Company (Deemed Loan or Letter of Credit PRGs).

Projects eligibility

Eligible projects include private participation ones that depend on specific contractual undertaking of a government such as concession projects, BOT (Build-Operate-Transfer), privatizations and PPP (Public Private Partnerships) projects.

Debt eligibility

PRGs also come into use for diverse instruments of commercial debt, particularly bonds and loans offered by a private institution as well as debt that sponsors might have provided in shareholder loans form. PRGs also offer coverage for both local currency and foreign currency debt.

Figure 12-Investment Guaranteed by World Bank

Coverage of risk

PRGs can also offer coverage for diverse risks associated with government performance, including failure to respect payment obligations under contract, changes in law, arbitration process obstruction, nationalisation and expropriation, convertibility and availability of foreign currency, termination amount non-payment or covered default arbitration award, failure to issue consents, approvals and licenses timely.

World Bank has offered two PRGs currently in Pakistan, which include the IPP Hubco Power Project of 1995 offering a landmark 1,292 MW. The cover stood at US$240 million for the project against the total cost of the project that stood at US$1.5 billion. The 560 Uch Power scheme is another project offered PRG by World Bank in 1996 to the tune of US$67 million.

7.4.3 ADB (Asian Development Bank)

The Asian Development Bank (ADB) has been active in the energy and power sector within Pakistan in public and private capacities. Together with the World Bank Group, the bank has been one of the largest partners in development in Pakistan, considering ADB has offered loans worth over US$25 billion, including grants worth over US$200 million by December 31st 2014.

ADB remains one of the largest partners of Pakistan within the energy industry and has provided energy projects being ADB’s half portfolio for the entire Pakistan. The bank has US $5.1 billion already committed in continuing operational funding for the development of energy security in Pakistan, transportation infrastructure, reforms, and networks of irrigation, social protection services and urban services. ADB like many other multilaterals has created risk mitigating guarantee products for sponsors/partners financing. The main guarantees include:

PRGs (Political Risk Guarantees)

This risk mitigating product is used by ADB to cater for political related risk by offering a unique PRG made for facilitation of co-financing by having financial partners provided with coverage just in case of sovereign or political risks. At the same time investors are covered via PRG in case of such events as:

  • Political violence
  • Restriction of transfer
  • Expropriation
  • Non-honouring of guarantee or obligation of a sovereign nature

ADB’s type of PRG just like MIGA has been designed for the facilitation of the development of the private sector, either via private or public sector related projects. The PRGs are perfect when commercial lenders are ready to accept the credit or commercial risks and hardly the risks of a political nature. The ADB guaranteed amount in relation to a single transaction or project varies as per the diversity of factors as well as the assessment of risks by ADB including country applicable exposure limitations. ADB on the upper side could guarantee a maximum of 40 percent of the entire cost of the project according to the finance project transactions or sum of US $400 million or whichever amount is on the lower side. Note that the upper limit does not apply where the ADB has been protected within the relevant transactions by the government of the respective country through a counter guarantee. Limits that are lower than the set out amount come into play in case the ADB is exposed to transaction or project via direct instruments of financing such as credit guarantee, equity or loan.

PCGs (Partial Credit Guarantees)

PCGs are provided by ADB to lenders offering most types of debts. Such lenders include shareholder made loans, commercial bank loans, shareholder or third parties guaranteed loans, debt instruments of the capital market, financial leases, promissory notes, bonds, bills of exchange and LOCs.

PCGs coverage includes non-payment by an issuer or borrower against the portion guaranteed of the interest and principal due. The guarantee product is applied in principal to the capital markets such as insurance, fund, leasing and banks, and financial services, infrastructure such as telecommunications, waste treatment, water supply, transportation and power. PCGs is generally applied to diverse debt instruments or loans that have been issued by public and private sector related projects in limited recourse financing, sub sovereign entities, corporate and PPPs.

7.4.4. Additional Financial Institutions

Additional international institutions also exist that invest and offer specific coverage within the Pakistan power sector. Such institutions include de Promotion et de Participation pour la Coopération Economique (PROPARCO), Korea EXIM Bank, China EXIM Bank, Netherlands Development Finance Company (FMO), Chinese Sinosure, Islamic Development Bank and OPOC.

For additional information on other entities both in the public or private sector offering risk coverage via PRGs, PCGs and coverage of political risks visit http://www.globalclearinghouse.org/InfraDev/rmlist.cfm.

  1. Renewables Taxation and Fiscal Regime

8.1 Income Tax

Electricity Sale Income Tax

Income or tax derived for electricity generation doesn’t exist considering in Pakistan all manner of power projects, including renewable energy have been exempted from paying income tax. An additional exemption is offered in respect of minimum tax (turnover tax). The minimum or turnover tax applicable (in situations where a taxpayer doesn’t have corporate type of tax liability is specifically exempted from corporate tax or tax liability) is not more than 1 percent of the turnover. In most cases, the exempted person from corporate tax has to pay minimum tax or turnover tax as per the gross turnover. Nonetheless, taxpayers from the electricity generation sector remain exempted from turnover type of tax.

Other Income Sources and Income Tax

In case of incomes for other sources beyond electricity generation that includes interest income, they’re taxable at the rate of 32 percent of the corporate tax for 2016 tax year. Interest income and income received by corporate individuals within a tax year remains tax chargeable as per the rates appropriate to that relevant year. Currently, the 2001 Income Tax Ordinance has provided certain tax rates for Five years to about TY18 as indicated in the table below:

Table 10-Corporate Tax Rates of Pakistan

2001 Ordinance

While the 2001 Ordinance specifies that starting TY (Tax Year) 2019 going forward the tax rate will revert to 35 percent or the income tax rate before Tax Year 14, its worth noting that the corporate tax rates gradual reduction was in accordance with the initiated government policy as the corporate sector had requested. Forthwith, at a minimum the tax needs to remain at a static of 30 percent as much as this can’t be confirmed authoritatively.

Individual person’s tax rates are founded on progressive slabs. In the case of salaried persons, the rates of tax range from 0 percent to 30 percent, while in the case of non-salaried persons the tax rates vary from 0 percent to 35 percent.

  • Tax Withholding

Dividends Tax Withholding

According to the 2001 Ordinance Section 152, each person paying a non-resident has to withhold tax as per the rate specified. Dividends tax withholding is not allowed as Pass-Through Item in accordance with the solar and wind power projects. Solar and wind power projects withholding tax rate is 7.5 percent.

Withholding Tax on Interest

As per the previous section, withholding tax as per interest payments released to foreign lenders by the company need to stand at a rate of about 20 percent. Even so, the rate is lowered to 10 percent for non-residents who have no Permanent Pakistani Establishment. Such a withheld tax has to constitute tax advance payment against the lender’s final tax liability that for a company need to be calculated on the basis of a bottom-line at the prevailing corporate tax rate. As a result, lenders will have to file income returns in Pakistan. In case of excessive tax reduction if any, refund claim can be made.

  • Provincial Taxes

Only the Federal Government of Pakistan levies income taxes. The provinces on the other hand are only empowered to levy to the extent of services provision related indirect tax. Thus, provincial withholding or income tax applies only when it comes to dividends.

8.4. Import and Custom Duties

Renewable energy projects equipment is import duties exempted. From July 1st 2015, the exemption has generally been integrated within Fifth Schedule to the Customs of 1969 under Heading 12. In the heading, the provision for exemption include spare parts machinery and plants imported specifically for projects related to renewable energy, although subject to specific conditions. There’s also an exemption of a similar kind provided that relates to sales tax collection at the stage of import (Head 7, Table 3, Sales Tax of 1990 Sixth Schedule) as well as the import stage income tax (Part IV, Clause 76, Second Schedule , 2001’s Income Tax Ordinance).

  • Turnover Tax/VAT/Sales Tax

Normally, Pakistan sales tax is charged at a rate of 17 percent. Projects related to solar are levied a sales tax and not exempted, although in electricity sale NEPRA has indicated that the sales tax under the EPA can be passed on to the off-taker.

  • Islamic Tax (Zakat)

A 2.5 percent rate of Zakat is charged typically on paid dividends to shareholders who’re Muslims. Even so, all non-resident shareholders and non-Muslims are exempted.

8.7 Additional Incentives

NEPRA indicates that dividends and equity repatriation are permitted. The State Bank of Pakistan (SBP) can grant the required permission for dividends and equity repatriation for foreign investors, which is required before financial close as indicated in the IA. A foreign investor’s initial investment can be remitted only to the shareholders in case it was SBP registered as equity repatriation eligible, i.e. the received foreign investment by the company that has invested is foreign direct equity declared in the investor’s name and registered that way by the SBP after the Proceeds Realization Certification has been issued to shareholders. SBP provided consents are obtained according to the IA.

In case at the period of investment equity repatriation is granted to the investment the same is available for investor remittance without being taxable inside Pakistan. Then again, in case such permission wasn’t obtained remittance of the capital investment cannot be done to the owners.

International and local finance can be raised by sponsors as well as corporate bonds. Non-residents also have the authority to purchase power company shares without the permission of the central bank.

9.0 Recommendations and Challenges

There’re different issues that have been identified with diverse developers input, including FIT determination observations as well as industry norms.

9.1. Policy Uncertainty and Timeline

No solar IPP privately financed has achieved financial close within Pakistani. Projects that were awarded tariffs as per the 2014/2015 FIT determinations as it currently stands have stalled even as the CPPA (Central Power Purchase Agency) awaits a reduced tariff. As a result investor confidence has been impacted upon. NEPRA has been categorical that CPPA has no choice, but honour the tariffs amidst being consistent with the granting developer extensions to financial close timelines in cases where the government organizations haven’t cooperated. Even so the issue remains unsolved at the time of preparing this document.

Also, the LOIs issuance by the AEDB as well provincial agencies remain stalled by 2015 in the expectation of a new tariff. Hopefully, this is expected to be resolved once the 2016 tariff have been published.

9.2 Land Identification

One of the major hurdles remains land identification for international project developers seeking to try out the Pakistani market. Where a local partner with land access is not identified, identifying lands could take a longer time that’s ideal for development. The lack of digitalized maps publicly further hampers land identification.

As such, the Sindh Government and AEDB have been trying to ensure the process is way investor friendly through the identification of developmental land.

9.3. Issues of Transmission

A number of solar projects applications remain pending at NTDC and as a result of the uncertainty in regulations applications have not been processed as fast as required by the timelines.

The approval process of the Grid interconnection takes some time in Pakistan. Within the RE Policy of 2006, NTDC is mandated with the provision of grid interconnection although it can take funding and a bit of time. Recommendations include the fact that NTDC should be approached fast with developers working with them as well as locally based consultants in the identification of areas highly suitable for power evacuation and doesn’t need considerable transmission lines constructed.

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