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Transcript of The Hub Power Company Limited Discussion at the USAID Diamer Bhasha Dam Informational Meeting 08 th...
The Hub Power Company Limited
Discussion at the USAID Diamer Bhasha Dam
Informational Meeting
08th October, 2014
USAID Informational Meeting
Washington, D.C.
By:
Khalid Mansoor
CEO, The Hub Power Co. Ltd.
The Hub Power Company Limited
Table of Contents1. Hubco’s Introduction
2. Hubco’s Experience with Laraib Hydro Project
3. Pakistan, an attractive IPP Market
4. GOP as a partner and Off-taker
5. Ups and Downs of the IPP sector
6. Profitability of Major IPPs
7. Key to success of IPPs
8. Importance of local partners to offshore investors
9. Pakistan’s Energy Crisis – Offering huge business opportunity
10. Current Energy Crisis & Proposed Management
11. Conclusion & Recommendations
The Hub Power Company Limited
About HUBCO
3
Capacity 1292MWFuel RFOBoilers IHISt. Turbine AnsaldoGenerator AnsaldoAvailability 80%
Capacity 225MWFuel RFOEngines MAN DieselSt. TurbineDresser RandGenerator ABBAvailability 88%
Capacity 84MWType Run-of-the- RiverTurbines Andritz HydroGenerator Andritz Hydro
NAROWAL
FY-2013 Highlights
Turnover : PKR 166 Billion (USD 1.7 Billion)
Debt / Equity : 44 / 56
Gross Profit Margin : 10%
Return on Equity : 30%
HUB LARAIB ENERGY
Generating approx. 10% of Pakistan’s electricity with reliability & sustainability
The Hub Power Company Limited
2. Laraib - Pakistan’s 1st Hydel IPP (1/2)
Laraib (75% Hubco ownership):
• Type : Run-of-the-River (ROR) plant
• Power Policy : 1995
• Units : 4 x 21 MW units
• EPC : SAMBU (Korea)
• Main OEM : Andritz Hydro (Austria/China)
• O&M : TNB REMACO (Malaysia)
The Hub Power Company Limited
Experience of Laraib2. Laraib - Pakistan’s 1st Hydel IPP (2/2)
Long Gestation time of 14 years
No policy framework for hydroelectric power projects existed in 1995
Several governmental changes from 1995 to 2009 mostly having different priorities, only few having hydropower bias New Bong Escape (NBE) being located in Azad Jammu Kashmir (AJK) i.e an autonomous territory, where all the laws and rules of Pakistan does not apply in AJK. Hence, AJK is not the domain of traditional or star lenders
Inventing the wheel
Pakistan’s private sector hydropower policy evolved around this projectDevelopment of first hydel specific Power Purchase Agreement in Pakistan
Amendment in various AJK laws (Electricity Act, Income Tax Ordinance, Stamp Duty Act, Insurance Ordinance etc.)Resolution of legal and constitutional anomalies related to AJK hydropower resulting in back to back Implementation Agreements for a project based in an autonomous region to manage project risks for financing
Challenges for New Hydro Electric Power Projects
Need for a clear cut willingness from the Multilaterals to finance projects located in
Gilgit Baltistan and AJKLarge scale investment in transmission lines by GoP/Private Sector to ensure evacuationNEPRA Tariff Rules must provide a clear road map for dealing direct tariff applications for projects located in AJK and GB. Presently being done through state owned National Transmission Co. (NTDC) as purchaser of electricity in Pakistan. Hence, making the process inefficient and slow
The Hub Power Company Limited
Security Package
The Implementation Agreement (IA) and Power Purchase Agreement (PPA) provide protection to the IPPs against the followings :
1. Payment obligations of Off-taker2. Changes in taxes and law of land3. Remittance of foreign exchange4. Protection against Discriminatory action5. Events of Political Force Majeure6. Water usage and Land Acquisition
Fiscal Incentives
Exemption from Corporate Income Tax, Sales tax, levies of Workers Profit Participation Fund & Workers Welfare Fund. Concession on Withholding Tax of Dividends of 2.5% and concessionary custom duties on import of all IPP related equipmentFront loaded capacity tariff to cover the debt service obligations which ensures consistent returns on equity Attractive USD indexed 17% IRR for coal and hydel IPPs and 20% IRR in case of use of indigenous coal
Facilitation Measures
One window operation by the set up of Private Power Infrastructure Board (PPIB)Unrestricted Import of Plant & Machinery, no minimum local content requirementOperation and maintenance of Foreign currency accounts in Pakistan100% foreign/private ownership permitted for IPPs
Established Norms
Standardized processes and guidelines laid out by the Govt. for the IPP developersAttractive Feed in Tariff regimes announced for thermal, wind and solar projects
3. Pakistan, an attractive IPP Market
The Hub Power Company Limited
4. GOP as a Partner and an Off-taker
Pakistan is amongst the pioneer countries in developing Asia to introduce contractual
IPP market• The first power policy for
the private sector dates back to 1994 and modified in 2002
• Since then the policy framework, institutional capacity and approval processes have matured to a great extent
GoP is an overall reliable partner & off-
taker for IPPs especially those based on Hydro
• Hydro sources are expected to have least political risk due to their low Tariff and overall positive attitude by all stakeholders
• Major contributor towards the correction of the current improper energy fuel mix
Positives of GoP
• Supportive policy regime endorsed at the highest level in GoP
• Personal oversight of all energy projects by the Prime Minister of Pakistan with a resolve to remove all unnecessary hurdles & bottlenecks
Negatives of GoP
• Circular Debt continues to be the major impediment towards timely payments (although history does speak in favor of hydro projects)
• Lack of institutional capacity / resolve to take tough decisions to rationalize tariff in the wake of recent judicial activism
• Long and tedious approval processes as witnessed in the first hydro project
The Hub Power Company Limited
5. Ups and Downs of IPPs
IPPs in Pakistan have seen a smooth profitability despite of changing political regimes other than a few incidents that were particularly targeted to reduce electricity tariff
NEPRA is an independent regulatory authority which balances the interest of the investors along side the consumers which minimizes project risk with various insulation measures
Delayed Payment problems have caused some concern for all IPPs but incumbent government is focusing on the issue of inappropriate energy fuel mix, being major root cause of circular debt, through policy measures
Effective governance measures are being taken for improving collections and rationalization of tariff in line with the current high cost of power generation to curb the growth of circular debt
Renowned international developers like AES (US) and International Power (UK) have had successful investments with alpha returns and seamless exits
The Hub Power Company Limited
6. Profitability of Major IPPs
Hubco(1601 MW)
KAPCO(1340 MW)
2010 2011 2012 2013 20140
102030405060708090
- 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00
Kapco Earnings
Earnings (USDm) EPS (Cents/Share)
2010 2011 2012 2013 20140
10
20
30
40
50
60
70
80
- 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
Kapco Dividends
Dividends (USDm) DPS (Cents/Share)
2010 2011 2012 2013 20140
20
40
60
80
100
120
- 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
Hubco Earnings
Earnings (USDm) EPS (Cents/Share)
2010 2011 2012 2013 20140
102030405060708090
- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Hubco Dividends
Dividends (USDm) DPS (Cents/Share)
The Hub Power Company Limited
Low Cost Power
Generation
Strong Technical Resume
Water Tight security package
Transparency
7. Key to success of IPPs
The Hub Power Company Limited
8. Importance of Local Partner to Offshore Investors
1. Technical know-how2. Access to Foreign Financing
3. O&M experience 4. International Vendors
relationship
1. Political Risk Management of the host and investing country
1. Difficulty in reaching financial close under prevailing circular
debt situation
1. Regulatory Know-how2. Ability to attract quality HR in
Pakistan 3. Experience in bidding, tariff
and security structure negotiations with the Govt.
Synergic Partners
hip
Local Partner
Fore
ign
Investo
r
Weakn
ess
Str
en
gth
Weakness Strength
The Hub Power Company Limited
9. Pakistan’s Energy Crisis – Offering huge business opportunity (1/2)
Power load shedding (up to 20 hours) is currently the biggest socio-economic issue for Pakistan
Quick resolution of the energy crisis will be a huge economic boost for Pakistan and political win for the current government
2009 2010 2011 2012 2013
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
Computed Peak DemandCorresponding SupplySurplus/Shortfall
Source: NEPRA State of Industry Report 2013
The Hub Power Company Limited
Current DependableCapacity
100
,000+
M
W
expan
sion
Assumptions:• Annual GDP Growth Rate : 4.8% (Low), 5.9% (Normal), 6.5% (High)• Annual Population Growth Rate : 1.7%• Per capita power consumption : Expected to increase from 800 kWh/y (presently to
2,538 kWh/y by 2035. Malaysia is now at 3,724 kWh/y)
Source: National Transmission & Distribution Co. (NTDC), Pakistan
9. Pakistan’s Energy Crisis – Offering huge business opportunity (2/2)
The Hub Power Company Limited
• Inappropriate energy mix• Lack of governance• Irrational tariff due to lack of political will to recover higher cost of electricity
The root causes of circular debt include :
Despite payment of around USD 5 B circular debt in Jun /13, it has again reached USD 3 B within a year!
To address the energy mix issue, low cost power projects will need to be constructed immediately. Coal fired and high capacity hydro projects should be the prime focus
• The menace of circular debt is controlled• Transmission bottlenecks are removed • An integrated energy planning framework is established
Financial Close of upcoming Power Projects would be a challenge unless :
• Enhancing the power subsidy in the short term• Increasing Consumer Tariff• Improvement on Governance Issues
There is no other solution to resolve current circular debt issue other than :
10. Current Energy Crisis & Proposed Management (1/2)
The Hub Power Company Limited
Low Cost Generation
Fast Commissionin
gBase Load
Cornerstones of Crisis Management Strategy
Low Cost
Base Load
Coal
Fast Comm.
10. Current Energy Crisis & Proposed Management (2/2)
The Hub Power Company Limited
11. Conclusions & RecommendationsCountry’s Energy Mix has to be corrected in order to save the precious foreign exchange (~USD 15 B per annum) spent on oil import
• Hydel projects though requires long gestation period, are essential for long term sustainability given the huge potential in the Country
Pakistan should continue to strive resolving water and land disputes with neighboring India and seek active diplomatic mediation from friends like Us for expeditious development of hydel power projects
Transmission networks should be extended to autonomous territories to alleviate evacuation and financing bottlenecks for large hydro projects. Investment in transmission lines can also be justified due to the lower tariff offered by size and high load factor of hydel assets. Environmental and Social concerns should be addressed by GoP in a proactive manner
In order to ensure financing of the new IPPs, the Government must address issues related to circular debt and power sector governance. Privatization of non performing Govt. entities will provide a quick fix for improved efficiencies
• Pakistan’s energy mix contains around 1/3rd Hydro power and is one of the lowest carbon footprint countries in the world. Even with the addition of coal based power projects, in order to address power crisis in short term, the overall energy mix will still remain quite environmental friendly
Energy planning needs to incorporate short term, medium term and long term measures to fix crippling power outages on a sustainable basis
The Hub Power Company Limited
Q & A
The Hub Power Company Limited
Annexure
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Pakistan’s Energy Crisis
• Pakistan’s Energy fuel mix is not sustainable
• Coal needs to replace Oil to bring down the overall cost of power generation
Sources: Overseas Investors Chamber of Commerce & Investments (OICCI) Pakistan, Energy Sub Committee,NEPRA’s State of Industry Report 2013
Inappropriate Energy Fuel Mix