POWER STRATEGY IN PAKISTAN, HOW TO INVEST!

Invest in Power Sector in Pakistan

1. ENERTECH Energy
Management Services

2. ENERTECH Energy
Management Services

ENERTECH
Energy Management Services
Abrar Business Centre, Main Wahdat Road, Lahore-Pakistan
Tel: [phone], Fax: [phone]
Email: [email protected]

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PRESENT POWER
STRATEGY
IN PAKISTAN

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Management Services
INTRODUCTION
ELECTRICITY is the one of the most important component of
infrastructure and plays a key role in National growth and
development.
With only half of nearly 160 million people having access to electricity,
a huge population base provides an ideal opportunity for expansion of
electricity generation.
The growing base of urbanization & industrialization also puts a
premium on demand of electricity.
Reform of the power structure through restructuring & deregulation is
high on the agenda of the Government of Pakistan (GOP).
The GOP is committed to pursue a far reaching reform program for the
power sector and to help meet the country’s future needs.

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WHY TO INVEST IN PAKISTAN POWER SECTOR
Improved Economic and Investment Climate
In the Pakistan’s sovereign long term, foreign currency credit rating has improved from
B to single B+, and local currency, long-term rating going up to BB from BB-, because of
the consistent improvement in economic reforms of the country. A boost in growth
continued fiscal adjustment and a structural improvement in the external account have
meant what while debt declines, business conditions continue to improve in the country.
In fiscal year 2004, the rate of growth was almost 6.5 %, the highest level recorded
since 1996-and economic expansion is set to accelerate further. The average inflation in
FY04 was 4.6% while investment growth rates has jumped to a record 22.3%, the
highest ever in the recent history of Pakistan, pushing the investment-GDP ratio to 18.1
percent.
The success of the privatization program has risen over $ 1 billion. The trends are
promising and surging economic activity is good for Pakistan but the greater demand for
energy has raised fears that a shortfall is on the way. Riding on the strong economic
fundamentals in last couple of years, Pakistan’s economy has shown improvement in the
foreign exchange rate against US dollar that averaged Rs. 62.93 in FY 02, Rs. 60.23 in
FY 03 and Rs. 59.52 in FY 04 respectively.

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Strong Demand of Electricity
Demand is now outstripping supply of electricity and by 2010 demand is expected to
exceed supply by approximately 5,500 MW.
Strategic Importance
Adequate power supply is a key to achieving growth targets and every new upcoming
projects is strategically important to country. Forthcoming thermal projects are
economically viable if low cost “Residual Furnace Oil” is used in a combined cycle. The
new projects could be near large consuming centers like Big cities and industrial towns.
Commercial centers in all the provinces of Pakistan.
Transparent Regulatory Environment
The National Electric Power Regulatory Authority (NEPRA), entrusted with regulation of
power sector in Pakistan, has made considerable progress towards the development of
regulatory regime and future market design for power sector.
Available Infrastructure
The upcoming projects are being proposed to such locations where adequate
infrastructure is available.
Predictable Long Term Tariff
A long term tariff of 25 years will be contracted with power purchaser. The IPP’s are not
subjected to the market risk for their output. The projects are expected to provide good
and stable return on equity.

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Management Services
Pass through of the fuel cost and additional taxation
Any variation in price of fuel would be passed through to the power purchaser. Similarly
any additional taxation over and above the Tariff assumptions is liable to be passed on to
the power purchaser.
Risk of Exchange Rate Variation
To cover the exchange rate variations risk, various tariff components will be indexed for
variation in the Pak Rupee and US $ exchange rates.
Available GOP’s Guarantees
GOP guarantees the performance obligation of its entities such as the power purchaser,
fuel supplier, etc. and provinces. GOP also provides protection to sponsors and lenders in
case of termination of the project.
Protection against Change in Duties & Taxes and Political
Risk
GOP guarantees protection changes in taxes & duties and specified “political risks”.

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Management Services
POWER DEMAND AND SUPPLY POSITION
2,634
4,025
5,529
17,689
19,080
20,584
15,055
15,055
15,055
2008
2009
2010
Surplus/
Deficit
(MW)
Peak Demand
(MW)
Firm Supply
(MW)
Year (Year
Ending 30
th

June)
By the year 2010 additional power required will be 5,529 MW.
Induction of 5,000 MW Generation Capacity by year 2010 would
require an investment of over US$ 5.5 billion

9. ENERTECH Energy
Management Services
POWER SECTOR-TOTAL INSTALLED CAPACITY
PUBLIC SECTOR
6111,836SUB-TOTAL
2462NUCLEAR
5911,374WAPDA
10019,400GRAND TOTAL
397,564SUB-TOTAL
91,756KESC
305,808IPP’S
PRIVATE SECTOR
MW %
Installed Capacity
Private
Sector
Thermal,
7564 MW
Public
Sector
Hydel,
6489 MW
Nuclear,
462 MW
Public
Sector
Thermal,
4885 MW

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COMMISSIONED IPP’S

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Management Services
POLICY INITIATIVES
Encourage private sector to come forward for developing the
power sector
Privatization of the existing power sector assets
Policy for Power Generation Projects 2002

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POWR POLICY 2002 - PRINCIPLES
OPEN ARM WELCOME
Total private ownership
Private Public Partnership
BOD, BOOT Projects (Hydel on BOOT Only)
Solicited proposals through International Competitive Bidding
(ICB)
Raw sites – solicited and unsolicited proposals
MAERKET PROFIT
Competitive Returns
Free Repatriation of profits

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POLICY FOR POWER GNERATION 2002
Tariff Structure
Two-part structure of power purchase price
Capacity payment to cover fixed costs, debt servicing and
return on equity regardless of dispatch level
Energy payment to cover fuel and variable O & M costs
Indexation
Pass through of fuel price increase
Specified foreign currency exchange rate variations
Pakistan and US inflation

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POLICY FOR POWER GENERATION 2002
Concessions
Fiscal Concessions
Customs duty at the rate of 5% on the import of plant and
equipment
No sales tax on such imports
Exemption from corporate Income Tax
Hydel Projects
Hydrological risk to be borne by power purchaser

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POLICY FOR POWER GENERATIN 2002
Securities for Investors
Power Purchase Agreement for 25-30 years term
Long Term Tariff approved by NEPRA (Regulator)
Sovereign Guarantee for payments by Power Purchaser
Compensation for political risks and change in law
Protection for changes in taxes and duties regime
Protection for convertibility/ remit ability risks of project
related payments, profits and capital

16. ENERTECH Energy
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PRIVVATE POWER AND INFRASTURCTURE BOARD (PPIB)
MANDATE
Promote investments in power sector
Provide One-Window facility to investor on behalf of GOP
Assist GOP in development of Private Power related Policies
Implementation of Policies and execution of agreements wit
h independent Power Producers (IPP) on behalf of GOP
Support IPP’s in executing PPA/ FSA/ GSA
Assist IPP’s in obtaining consents/ licenses

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POWER GENERATION TECHNOLOGIES
An overview of Power Generation Techniques frequently available and
adaptable in the country are as:
 THERMAL POWER PLANTS
1. Gas Fired
2. Oil Fired
3. Coal Fired
 Hydro Power Projects
1. River Bound
2. Canal Bound
 Alternate Sources (e.g. Wind, Solar etc.)

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THERMAL POWER PLANTS
Thermal Power Plants convert heat energy into Electricity.
In fact any of gaseous, solid or liquid fuel is burnt to produce heat
energy technically known as “Thermal Energy”.
Thermal energy is, directly or indirectly, used to derive a common
horizontal shaft in a Prime Mover, the prime mover derives an
electrical generator to generate power.
The Thermal Power Plants are also classified according to the
technology used.
They may be ‘RESIPROCATING ENGINE’ based or TURBINE based

19. ENERTECH Energy
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TYPE OF FUELS AVAILABLE FOR THERMAL
POWER PLANTS
1. Coal
2. Natural Gas
3. Liquid Fuels
a- Diesel
b- Kerosene Oil
c- Jet Fuel
d- Heavy Oil (Furnace)

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COAL DEPOSITS

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COAL POWER GENERATION POTENTIAL

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THERMAL POWER PLANT Cont’d
RECIPROCATING ENIGINES are common “Piston & Cylinder” engines
as used in our automobiles.
Piston moves up & down in a cylinder and derives a common crank
shaft.
 TURBINES are rotary machines and rotate the common shaft directly
without up & down movement. They are used in jets / aero planes.

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AN OVERVIEW OF TURBINE

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AN OVERVIEW OF TURBINE

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Natural Gas
Country wide limited Natural Gas resources and improper
infrastructure is not reliable to support power generation at long
term basis. Thus Government of Pakistan is not encouraging
and/or accepting Natural Gas as primary fuel for turnkey power
projects in future.
Coal
Locally available coal is not that good to run the power plant
economically due to low calorific values, high sulpher contents
and huge amount of wastage
Because mines are to be developed which itself is a big
expensive exercise that producing power from coal.
Supply of coal may not be certain/uninterrupted that may result
in unwanted shutdown of power plant for unpredictable period.
To mitigate above mentioned drawbacks, one ma have to rely
upon the imported coal for smooth operation of power plant at
relatively higher fuel cost.

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For imported coal, it becomes evident to localize power plant
near the sea port in order to reduce the transportation cost
of fuel to minimum. Else wise transportation cost will highly
influence the economy of plant
In Pakistan, two sea ports are available one in Karachi “Bin-
Qasim Port” & other one is “Gawadar Sea Port”.
Karachi Sea port is in regular operation but KESC (Karachi
Electric Supply Corporation) Lines in this area are already
operating to their rated values. It won’t be easer to find
appropriate locality near Karachi port to dispatch load on
KESC lines. So chance become miner.
Gawadar sea port is yet not in conventional operation and
can’t be relied. Further more security problems directly
influence the decision of selecting this site for such project.
Possibility of moving site a bit east of Karachi near
Hyderabad can be considered but still transportation cost will
be there.
Locations of major coal resources available in Pakistan are
indicated in Fig in incoming slide

27. ENERTECH Energy
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RFO BASED POWER PLANTS
Residual Furnace Oil (RFO)
Commonly available Furnace Oil (termed as RFO, HSFO or LSFO)
has promoted it to widely used Fuel for Power Generation.
Wapda is now only approving Combined Cycle power plants
instead of Conventional (Open Cycle) on RFO. The best
technology considered, for turnkey power projects, is turbine
based instead of Reciprocating engines because of several
technical issues.
General Electric ,France (Equipment manufacturing Company)
has introduced special model of turbines capable of burning RFO.

28. We, keeping in view, our past experience in power sector and
country conditions recommend you to go for RFO based thermal
power project because of:
Recommended by PPIB & Government of Pakistan
Smooth operation
Low maintenance cost
Spare parts readily available in local market
Local market rich with technical experts to hire
Long life and durable
Reduced down time
RECOMENDATION

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COMMERCIAL ISSUES
COSTING
A reasonable approximation adapted globally is around US$ 1.00
Million per MW.
However, It can be reduced up to some extent after detailed
calculations.
FUNDING
The funding of power projects is acceptable at Debt : Equity Ratio of
80 : 20 as usually adopted in other projects.
The main sponsor, in his interest, should have controlling share
equal to at least 51% of the equity.
Debt funding from local banks as well as from foreign institutions is
acceptable.

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PROCESSING AN IPP WITH PPIB (GOP)
Proposal Submission (First Step)
A proposal with “Statement of Qualifications (SOQ) should be
submitted to Private Power & Infrastructure Board (PPIB), Government
of Pakistan (GOP).
This submission may cost around Rs. 1.2 million.
Feasibility Study (Second Step)
On approval of the proposal and after submitting Bank Guarantee of
US $ 1000/- per MW, a letter of interest (LOI) will be issued by PPIB
to proceed for preparation of ‘Feasibility Study Report (FSR).
The FSR prepared by a foreign engineering consultant in association
with local counterpart is considered authenticated and trustworthy for
funding by banks and other financial institutions. The cost of such FSR
is around US$1.5 million.
Tariff Approval & Power Purchase Agreement
After successful completion and approval of the feasibility study, next
stage will be submission of Tariff Petition for tariff approval from
NEPRA and drawing “Power Purchase Agreement (PPA)” with power
purchaser e.g. Wapda.

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Implementation Agreement
Tariff approval and PPA shall be followed by “Implementation
Agreement (IA)” that shall be followed by “Financial Closure”.
EPC (Engineering Procurement & Construction)
While Feasibility Study Report is being prepared, one has to move
simultaneously to select an International EPC Contractor.
EPC contractor is responsible for the engineering design of the power
plant, procurement of equipment and construction of power plant at
site.
Equipment hunting in accordance with technical parameters defined in
the Feasibility Study is also EPC Contractors responsibility.

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E&M EQUIPMENT SELECTION
Electrical & Mechanical Equipment is selected according to the
recommendations in the Feasibility Study.
An international tender is floated among the equipment manufacturers
& bids are received, evaluated technically & financially, considering
delivery period etc.
EPC Contractor also plays a vital role in it. Because he has to furnish all
guarantees / performance bonds / construction schedule etc.