AKD Securities Limited – Power Policy 2015: Missing the mark by a mile

Karachi, April 16, 2015 (PPI-OT): With the Power Policy 2015 on final stages of approval, AKD Securities Limited presents a comparative policy analysis of the present draft’s salient features and present departures from initiatives agreed upon during negotiations with the IMF.

Analyzing public policies prevalent in the power space in a frontier as well as regional market peer, Vietnam, having made great strides in attracting investors, increasing generation levels and maintaining a sustainable generation mix, AKD Securities Limited aims to highlight the shortcomings of the proposed policy in Pakistan. AKD Securities Limited presents AKD Securities Limited’s perspective for tangible, short term and long term measures that the GoP can undertake to achieve its vision of eliminating the power supply shortfall.

Lastly, with the short-comings of the draft policy aside, AKD Securities Limited flags its approval as a positive for KAPCO, which is slated to complete its PPA by 2021, with the current draft of the policy creating impetus for renegotiations extending its PPA.

Power Policy 2015: With the 2013 Power Policy failure to live upto its promise, falling short on achieving targets of, 1) reducing the Peak Demand Shortfall by 5000MW, 2) reducing T%D losses to below 16% and, 3) increasing collections to 95%. Resultantly the GoP is set to release its Power Policy 2015, with the aim of rectifying shortcomings of previous regulatory regimes in this space. In this regard, Power Policy 2015 highlights the need to expand generation promoting investments in Hydel power, dedicated gas field projects, public-private partnerships and extensions of existing IPPs.

Furthermore, the power policy stipulates a lock-in period of 6yrs for project sponsors and reduction in penal interest rate to 3M KIBOR + 2%. Stipulating a range of incentives, at a relative disconnect from previous policies (including the National Power Policy 2013 and NTDC’s National Power System Expansion Plan) and devoid of a holistic approach i.e. taking into account structural reforms, oversight and mechanism to curb circular debt, this foray into developing a power policy framework will perpetuate the status quo.

IMF’s Power Plans: Specified in the LOI included in the Memorandum of Economic and Financial Policies as part of the fifth and sixth review of the IMF, the GoP is in a bind to implement some sweeping decisions to, 1) increase revenue collection through price adjustment, 2) clear up arrears, 3) improve governance and, 4 ) reforming the centralized power sector marred by systemic impediments. Rather than haphazard increases in the consumer tariff to manage the demand side, headway on the Energy Efficiency and Conservation Act (awaiting a vote in the NA) is required to improve load allocation and energy efficiency in renewable energy projects.

Vietnam; Surging ahead: Public policy reform has set the pace for increasing investment in generation capacity, and rationalization of electricity prices following a phased roadmap under the 2006 Electricity Law, the Power Development Plan 2011-20 and Vision 2030. Electricity Vietnam (EVN) dominates the power sector, being the state owned enterprise controlling distribution and supply, while being the center for wholesale electricity generation market based on competitive bidding.

Hydropower, natural gas, and coal are the primary fuels used for generation. Vietnam anticipates power demand to more than triple to 330GwH between 2011 and 2020, and in a bid to meet this anticipated increase in demand, the government has made pricing reform integral to sector reform. Parallel to pricing reform on primary energy sources, Vietnam has planned for establishment of competitive electricity generation market by 2012, a competitive wholesale market by 2022 and extending competition to the retail electricity market after 2022. Market based pricing and accompanying electricity tariff rationalization have propelled Vietnam’s electricity generation levels past that of Pakistan in ten years over 2002-12.

AKD Securities Limited’s Perspective: Increasing ease of doing business by streamlining Pakistan’s electricity regulation structure will go far in streamlining tariff setup and by increasing NEPRA’s role as an independent, expert regulator setting the tariff subsidy instead of awaiting MoF approvals. The greatest risk for potential investors in the space remains uncertainty of payment by the purchaser due to the stranglehold of circular debt. Short term focused mechanisms to monitor and enforce initiatives to reduce technical losses, implement compliance procedures for raising recovery levels and reduce information asymmetry are required at the DISCOs.

Lastly, lessons from the growth story of the industry in Vietnam point to the plethora of benefits, rationalization of costs and autonomous pricing mechanisms delivered by liberalizing energy markets, allowing for rates to be set by competitive demand-supply. That said, these developments are far off and will require investments in developing a sustainable energy mix prior to competitive generation markets functioning.

A road map for rolling out these mechanisms needs to be presented, considering the ambitious privatization plan to offload entities by CY15. AKD Securities Limited believes the shortcomings of the draft power policy aside, KAPCO stands to benefit from the legislative foothold given to extensions for Power Purchase Agreements that have completed their previous period of operations. As KAPCO’s PPA terminated in 2021, AKD Securities Limited believes an extension is eminent as, 1)the plant runs on highly efficient combined cycle technology, 2) Kot Addu is located near load centers in central Punjab making it crucial for addressing the energy shortfall prevalent their and 3)gas based generation in Punjab is in line with GoP’s recent forays in LNG and reducing the energy shortfall.

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