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The Hub Power Company Limited Discussion at the USAID Diamer Bhasha Dam Informational Meeting 08 th October, 2014 USAID Informational Meeting Washington,

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Presentation on theme: "The Hub Power Company Limited Discussion at the USAID Diamer Bhasha Dam Informational Meeting 08 th October, 2014 USAID Informational Meeting Washington,"— Presentation transcript:

1 The Hub Power Company Limited Discussion at the USAID Diamer Bhasha Dam Informational Meeting 08 th October, 2014 USAID Informational Meeting Washington, D.C. By: Khalid Mansoor CEO, The Hub Power Co. Ltd.

2 The Hub Power Company Limited Table of Contents 1.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

3 The Hub Power Company Limited About HUBCO 3 Capacity1292MW FuelRFO BoilersIHI St. TurbineAnsaldo GeneratorAnsaldo Availability80% Capacity225MW FuelRFO EnginesMAN Diesel St. TurbineDresser Rand GeneratorABB Availability88% Capacity84MW TypeRun-of-the- River TurbinesAndritz Hydro GeneratorAndritz 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% 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

4 The Hub Power Company Limited 2. Laraib - Pakistan’s 1 st 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)

5 The Hub Power Company Limited Experience of Laraib 2. Laraib - Pakistan’s 1 st 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 project  Development 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 AJK  Large scale investment in transmission lines by GoP/Private Sector to ensure evacuation  NEPRA 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

6 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-taker 2.Changes in taxes and law of land 3.Remittance of foreign exchange 4.Protection against Discriminatory action 5.Events of Political Force Majeure 6.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 equipment  Front 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 requirement  Operation and maintenance of Foreign currency accounts in Pakistan  100% foreign/private ownership permitted for IPPs Established Norms  Standardized processes and guidelines laid out by the Govt. for the IPP developers  Attractive Feed in Tariff regimes announced for thermal, wind and solar projects 3. Pakistan, an attractive IPP Market

7 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

8 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

9 The Hub Power Company Limited 6. Profitability of Major IPPs Hubco (1601 MW) KAPCO (1340 MW)

10 The Hub Power Company Limited Low Cost Power Generation Strong Technical Resume Water Tight security package Transparency 7. Key to success of IPPs

11 The Hub Power Company Limited 8. Importance of Local Partner to Offshore Investors 1. Technical know-how 2. 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-how 2. Ability to attract quality HR in Pakistan 3. Experience in bidding, tariff and security structure negotiations with the Govt. Synergic Partnership Local Partner Foreign Investor Weakness Strength

12 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 Source: NEPRA State of Industry Report 2013

13 The Hub Power Company Limited Current Dependable Capacity 100,000+ MW expansion 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 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)

14 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)

15 The Hub Power Company Limited Low Cost Generation Fast Commissioning Base Load Cornerstones of Crisis Management Strategy 10. Current Energy Crisis & Proposed Management (2/2)

16 The Hub Power Company Limited 11. Conclusions & Recommendations Country’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 1/3 rd 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

17 The Hub Power Company Limited Q & A

18 The Hub Power Company Limited Annexure

19 The Hub Power Company Limited 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


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