ENGINEERING, PROCUREMENT AND CONSTRUCTION (EPC) STAGE TARIFF PETITION FOR wo MW GULPUR HYDRO POWER PROJECT

Transcription

1 ENGINEERING, PROCUREMENT AND CONSTRUCTION (EPC) STAGE TARIFF PETITION FOR wo MW GULPUR HYDRO POWER PROJECT BY NATIONAL TRANSMISSION AND DESPATCH COMPANY LIMITED 46 (NTDC) OFFICE OF GENERAL MANAGER (WPPO), 325 WAPDA HOUSE, LAHORE

2 A. INTRODUCTION Approval of EPC Stage Tariff and Power Acquisition Contract /PPA under Rule 3 of NEPRA's Interim Power Procurement (Procedures and Standards) Regulations, 2005 in respect of Mira Power. Limited for its 100 MW Hydel Power facility at Kotli in Azad Jammu and Kashmir. Petitioner's Name and Address Transmission License Grounds General Manager (WPPO) National Transmission Company Limited Tel No Fax No Transmission License No. TL/o1/2002 Dated: December 31, 2002 Grounds forming the basis for power acquisition are elaborated in this. Tariff Petition. Decision Sought Summary of Evidence Attachments Approval of EPC Level Tariff Petition along with Reference Tariff Table A brief detail of technical and financial data, which forms the basis of in tariff, is given in the subsequent Paras. a. Board of Directors Resolution b. Company's Tariff Petition (Annex-.1) c. Reference EPC Tariff Table d. Initialed Power Acquisition Contract/PPA between the Pox. er Purchaser and the Power Seller.

3 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA ioo MW GULPUR HYDROPOWER PROJECT APPROVAL OF EPC STAGE TARIFF UNDER NEPRA'S SPECIAL 3-STAGE TARIFF MECHANISM FOR HYDROPOWER PROJECTS This application is a request on behalf of NTDC for approval of the negotiated EPC stage tariff for the 100 MW Gulpur Hydropower project. Since the project is located in AJ&K, it falls in territory outside NEPRA's jurisdiction and issuance of generation license for the generating company by NEPRA is not applicable for the project. However, approval of tariff for the project is still required since the power generated by it would be imported for consumption in Pakistan. NEPRA's Special 3-Stage Tariff Mechanism allows a 3-Stage determination of Tariff for hydropower projects. This application constitutes a request for approval of the EPC stage tariff, i.e., the negotiated EPC-level tariff for 100 MW Gulpur H PP. It is further clarified that this negotiated Tariff Petition being submitted to NEPRA reflects the lowest level of Tariff that the Company/Sponsors were willing to agree with NTDC. It is being recommended for approval because hydropower projects constitute the best alternate available for electricity generation in Pakistan being an indigenous source and a mature technology. NEPRA as the independent regulator is, however, free to make any changes it deems appropriate in the negotiated tariff and the final tariff for the project would be the one determined by NEPRA. 1. BACKGROUND 1.1 Project Location The 100-MW Gulpur Hydropower Project is located in Kotli district of Azad Jammu & Kashmir about 5 Km south of Kotli Town on Poonch River. The Project is 100 MW runof-the-river hydroelectric power generation facility on Poonch River some 28 kms upstream of Mangla Dam and 167 Km from Islamabad. The Project is being developed in private sector under the Power Policy 2002 on a Build-Own-Operate-Transfer (BOOT) basis for a period of 3o years (from Commercial Operation Date) exclusive of 4 years of construction period. 1.2 Project Development History i. The Letter of Interest ("LOI") for the development of Project was issued on March 12, 2005 by the Private Power & Infrastructure Board ("PPIB"), Ministry of Water & Power, and Government of Pakistan to the Sponsors, M/s Mira Power Limited. (ANNEX-A). ii. The Sponsors engaged a consortium comprising of Associated Consulting Engineers (Pvt.) Limited ("ACE"), National Engineering Services Pakistan (Pvt.)Limited ("NESPAK"), Norconsultant International AS, Norway ("Norconsult") as consultants for carrying out the feasibility study of the project as per the terms of 1

4 100 MW Gulpizr Hydropozver Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA LOI and the 2002 Power Policy. The Feasibility Study was approved by PPIB appointed Panel of Experts (POE) on 27th, April, 2006 and PPIB further advised the Sponsors to approach NTDC/Power Purchaser for tariff negotiations (ANNEX-B). iii. The Feasibility Study envisages a Run-of-River scheme, consisting of 45 meter high dam on River Poonch, diversion of the river flows through a 3 km length and 8 m diameter tunnel and a underground type power house with 3 Francis Turbine units (3x34 MW). The power plant is expected to generate energy 465 GWh annually at a plant factor of 53% on the basis of average hydrological flows in River Poonch. iv. The Company submitted its Feasibility Level Tariff Proposal to NTDC in 2009 under the provisions of 2002 Power Policy and Mechanism for Determination of Tariffs for Hydropower Projects ("NEPRA Hydro Mechanism") by the National Electric Power Regulatory Authority ("NEPRA") to the Power Purchaser for negotiations. v. The Power Purchaser (NTDC) negotiated the tariff with the sponsors and forwarded the proposal to NEPRA for an approval of the proposed Feasibility Level Tariff. NEPRA issued its approval of the Feasibility Level Tariff of US /kWh at reference exchange rate of PKR 79 per US dollar on February loth, 2009, at a Project Cost of US$ 1, 8 million. vi. PPIB issued Letter of Support ("LOS") to the Company on April 27, 2010 to achieve the Financial Closing of the Project (ANNEX-C). vii. The company could not achieve the Financial Close in the stipulated period; the validity of the LOS was extended till April 29th, 2012 by PPIB. viii. Even though sponsors submitted the EPC Level Tariff to NTDC, but the project remained inactive for a long time. Eventually, a South Korean Consortium comprising of Korea South East Power Company, Sambu Construction Company ("Sambu"), Lotte Engineering & Construction ("Lotte") and STX Construction Company ("STX") (collectively called "Sponsors") expressed their desire to acquire Mira Power Company and approached PPIB for such acquisition. ix. PPIB also issued the "No Objection Letter" to the New Sponsors to acquire the Project with certain conditions including the satisfaction of pre-qualification criterion on December 19, x. The formal Share Purchase Agreement (the "SPA") was signed with the previous sponsors, acquisition process was completed and 100% shareholding in Mira Power (Pvt) Limited was transferred to the Sponsors (KOSEP). xi. In the meantime PPIB on the request of Sponsors again extended the validity of LOS till December The Amended and Restated LOS issued by PPIB is attached as (ANNEX-D). 2

5 100 MW Gu1pur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA COMPETITIVE BIDDING PROCESS a) To start the process of filing of EPC stage tariff, company initiated the "competitive bidding process" through previous sponsors and issued Request for Proposal (the "RFP") to the three (3) leading construction companies of South Korea on 16 May As Korean EXIM Bank is the main lender of the project, the competitive bidding process was limited to Korean companies as per one of the bank's conditions for lending. b) Project sponsors appointed Saman Engineering as a consultant, Korea to carry out the bid evaluation process and prepare a "Bid Evaluation Report". The Consultant, carried out the technical and financial evaluation of the bids, the result of which are as follows:- Technical 1) SAMBU-LOTTE-STX JV Rank Number 1 2) DEALIM Rank Number 2 3) DAEWOO Rank Number 3 Financial SAMBU-LOTTE-STX JV US$ 263,374,569 (lowest) 2) DEALIM US$ 276,500,000 (2nd lowest) 3) DAEWOO US$ 289,117,458 (highest) The Company on the basis of bids receivedt, submitted an EPC Level Tariff to the Power Purchaser on October, st EPC STAGE TARIFF PROPOSAL BY SPONSORS TO NTDC The Company proposed an EPC Level Tariff to the Power Purchaser / NTDC, on October 25, 2013 with a levelized tariff of US c 1o.4577/kWh equivalent to Rs: /kWh for a 3o year agreement term at a reference exchange rate of PKR 110 per US dollar (ANNEX-E). The Tariff Proposal was based on the total project cost of US $ million, debt equity ratio of 75:25, debt term of 16 years including a grace period of 4 years, 12 years repayment period, interest rate of LIBOR (0.350%) plus 500 basis points for debt and Return on Equity (I RR based) of 17%. 3.1 Project Features For t,t EPC Level Tariff based on Original Feasibility Study The Design based on feasibility study envisaged the following features /parameters for Gulpur Hydropower Project. isambu has later withdrawn from the consortium due to its financial troubles & has been replaced by Daelim as the EPC contractor and negotiated the bid price to US$ million

6 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA Salient Features Description Installed Capacity Net Plant Capacity Av. Annual Net Generation Details 100 MW (99.9 MW 465 GWh Plant Factor 5339% Water Source/River Location Weir Type Weir Length Weir Height Poonch Kotli, AJ&K Concrete Gravity 237 m 45 m Spillways Gated, 11.5 m x 26 m x 8 Headrace Tunnels Length, Diameter Tailrace Tunnel Tailrace Tunnel Length, Diameter Power House Type Power House Dimensions Number of Units Interconnection Voltage Switchgear Type One (1), Circular km, 8.o m One Open Channel L=6o.o m, W= 36.o m Indoor 8o x 42.3 x m Three Vertical Francis 132 kv GIS(Interior), Breaker & Half

7 , 100 MW Galpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA 3.2) Response of NTDC to the 1st Tariff Proposal On scrutiny of the Tariff Proposal submitted by the Sponsors, it was revealed that some of the costs claimed and stated assumptions such as Change in Location & Quantities of Project Structures, Electrical & Mechanical Cost, Interest Rate Spread, Grace Period, Land Acquisition & Resettlement Cost, Environmental Cost, Installed Capacity, Unaccounted /Additional Costs, Owner's Engineer, Lenders Financing Fee & Charges, Computational Mismatch, Sectional Completion Tariff, General Assumptions, Pass Through Items,One Time Adjustment at COD, Hedging Cost, were high, in comparison to the benchmarks set by NEPRA and the Tariff was found unacceptable by the Power Purchaser. NTDC vide its letter WPPO/NTDC letter dated 24th December, 2013 (ANNEX-F) pointed out its specific objections in the Company's Tariff Proposal and asked it to reassess all the project cost elements in detail with the objective to find out all doable cost reductions to bring the tariff down to an acceptable level. NTDC's comments related mainly to the following: a) High tariff level b) Justification of Design change as compared to the proposed design in the Feasibility Study c) Interest Rate Spread d) Owner's Engineer Cost e) Environmental Cost 0 Electrical and Mechanical Equipment Cost 3.3) M/s MIRA'S RESPONSE TO NTDC'S COMMENTS ON ist EPC TARIFF PROPOSAL The Company responded to the NTDC's viewpoint through its letter dated 30th January 2014, (ANNEX-G) and explained that major changes in the project design had been necessitated due to the fact that Poonch River had been declared a National Park by the AJ&K Government subsequent to the completion of the project's Feasibility Study as well as the unacceptable quantum of Resettlement issues being faced in the implementation of the original design and proposed location of the project. As a result of these problems, the Company had to carry out a detailed environmental and ecological study to avoid endangering the critically endangered fish species in the Poonch River. Moreover, review of the Resettlement issues had revealed that the original design and location of the project envisaged in the Feasibility Study involved the resettlement/ relocation of as many as 115 houses including 2 shrines, 3 graveyards, 3 water mills and 4 sand crushers. In addition, the location of the proposed Intake 2 km upstream of the Weir site raised serious questions about the sedimentation control. 5

8 100 %RV Gu1pur Hydropower Project - Negotiated EPC Stage fart)). Proposal by NTDC to NEPRA In order to overcome these issues, the project consultant MWH and Mott MacDonald revised the basic design of the project including its location. The Power Purchaser asked the Company to get its Revised Design approved by PPIB, which has now been approved by PPIB in its meeting held on 5th June 2014 (ANNEX- H) The salient features of the 100 MW Gulpur HPP as per revised Basic Design is as follows. 3.4) Salient Features of Revised Basic Design Description Installed Capacity Aux. Consumption & Power Losses Net Plant Capacity Av. Annual Net Generation Details 102 MW 2 MW loco MW 465 GWh Plant Factor 53.3% Water Source/River Location Catchment Area Dam Type Dam Length Dam Height Spillways Headrace Tunnels Length, Diameter Power House Type Poonch River Kotli, AJ&K 3648 km2 Concrete Gravity 205 m 66 m Orifice type Radial Gate (W x H 24.o Ill x 6 Nos.) Three (3), Circular Not im(incl. 56.0m of steel penstock) NO M(111C m of steel penstock) No m(Incl. 59.om of steel penstock, 5 m Surface 6

9 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA Power House Dimensions L m x W 80.0 m x H Number of Units Three(3), Francis Turbine Rated Output 34 MW Rated Head 56 m Rated Flow Interconnection Voltage Switchgear Type /unit 132 kv GIS(Exterior), Breaker & Half 4 2ild EPC STAGE TARIFF PROPOSAL BY SPONSORS TO NTDC The company submitted its revised EPC Stage Tariff Proposal based on "Revised Basic Design" in February The levelized tariff of the proposal was US /kWh (Rs: /kWh) for a 3o year agreement term based on the total project cost of US $ million, debt equity ratio of 75:25, debt term of 12 years including a grace period of 4.5 years, interest rate of LIBOR (0.350%) plus 500 basis points for debt and Return on Equity (IRR based) of 17%. (ANNEX-I). It was observed by NTDC that while the Company had acceded to some of the points raised by NTDC, it had maintained its earlier stance on "Interest Spread 5%", "Environmental Cost" adjustment at COD and "Owner's Engineer Cost." Moreover, the "Construction Period" in the new proposal had increased from 48 months to 55 months. NTDC did not agree to the above proposal and raised several observations. After several meetings between NTDC and the Company to resolve the issues, also clarifications/justifications were shared between the parties. It was decided in the meeting, that the Company shall send a revised tariff proposal along with the Revised Basic Design to Power Purchaser/ NTDC in the light of discussions in the meetings. 5. 3rd EPC STAGE TARIFF PROPOSAL BY SPONSORS TO NTDC The Company, in the light of deliberations between two parties, submitted the Revised 3rd EPC Stage Tariff Proposal with a levelized tariff of US c /kWh equivalent to (Rs: /kWh) based on total Project Cost of US$ million, at an exchange rate of PKR 98 per US $ to NTDC (ANNEX-J) wherein the Company accepted and incorporated NTDC's viewpoint on some issues in the revised tariff proposal but maintained that reduction in EPC cost, Interest Rate Spread of 5%,,"Owner's Engineer Cost" as well as foregoing of "Environmental Cost" was not possible as these were already kept at the minimum possible level. On NTDC's observation regarding longer construction period, the Company was of the view that, new Project design required minimum of 55 months construction period due to the substantial increase in the size of the Weir, however the company agreed to start 7

10 100 MW1pur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA construction prior to Financial Closing at its own risk and cost and keeping the construction period at 48 months: this decision reduced Project IDC, ROEDC as well as the levelized tariff. The Tariff Petition being put up to NEPRA for approval is based on this 3rd EPC Stage Tariff Proposal by the Company, i.e., a levelized tariff of US Cents /kWh (equivalent to Rs /kWh) for a 3o year agreement term based on the total project cost of US $ million, debt equity ratio of 75:25, debt term of 12 years including a grace period of 48 months, interest rate of LIBOR (0.350%) plus 500 basis points for debt and Return on Equity (IRR based) of 17% (Reference Table is attached as ANNEX-K) 5.1 SUMMARY & COMPARISON OF ORIGINAL & REVISED PROJECT COSTS COST HEAD ORIGINAL PROJECT COST (US$ MILLION) REVISED PROJECT COST (US$ MILLION) EPC Cost Custom Duty Insurance During Construction Project Development Cost Engineering & Supervision Lender's Financing Fees & Charges Environmental Cost I Resettlement & Rehabilitations Cost Project Cost excluding IDC Interest During Construction Total Project Cost

11 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA 5.2 Proposed Tariff Summary Tariff Component 1 to 12 years 13 to 30 years Energy Purchase Price (PKR/kWh) Water Use Charge Variable O&M Capacity Purchase Price (PKR/KW/Month) 4, , Fixed O&M- Foreign Fixed O&M-Local Insurance-Foreign Return on Equity during Construction Debt Service (Principal + Interest)- Foreign P KR/ KWh Levelized Tariff (Years 1-12) (PKR/kWh) Levelized Tariff (Years 12-30) (PKR/kWh) Levelized Tariff (Years 1-3o) (PKR/kWh) Tariff Structure The Reference Tariff has a typical two-part structure envisioned in the 2002 Power Policy having a Capacity Purchase Price (Rs/kW/Month) and an Energy Purchase Price (Rs/kWh). Capacity Purchase Price is derived by adding the yearly (Fixed O&M + Insurance During Operation + ROE + ROEDC + Debt Service) and dividing the sum by the Contract 9

12 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA Capacity, i.e., the guaranteed Capacity of the plant at a certain discharge capacity and head, and 12. The Energy Purchase Price is derived by dividing the sum of the annual (Water Use Charge + Variable O&M cost) by the estimated annual energy of the plant. The payments to the company would be made every month through Capacity Payment (Capacity Purchase Price for the relevant year X the Tested Capacity) plus the Energy Payment (the Energy Purchase Price X actual energy delivered). The main parts of the Capacity Payment, i.e., the Return on Equity (ROE), the Return on Equity during Construction (ROEDC), and the Debt Service are directly dependent on the Project capital cost while the Fixed O&M and the Insurance During Operation are part of the recurring or running costs. The Variable Payment's components, i.e., the Variable O&M and the Water Use Charge are also part of the running cost but the actual payments to be made against these heads are dependent on the actual energy (kwh) delivered during a month. 7 BREAK-UP OF PROJECT CAPITAL COST ALONG WITH JUSTIFICATIONS 7.1 EPC Cost The Company has requested an EPC Price of USD million (translates into per MW cost of USD 2.36 million) which apparently seems on higher side. The Company, however, is of the view that this EPC Cost is justified and cannot be reduced further. It has provided the following justification for the Cost: a). SITE SPECIFIC ISSUES It is a well-known fact that the capital cost of hydropower projects is a site specific issue mainly driven by the civil works cost. According to some estimates, around three-quarters of the total investment costs of hydropower projects are driven by site-specific elements. In case of Gulpur HPP, the flood design ( 17,208 m3/s) is very high for its size: higher than 870 MW Sukhi Kinari (1500m3/s), i5omw Patrind HPP (406 im3/s) and Chakothi Hattain (10,000 m3/s). The flood design of hydropower projects has a major impact on the cost as it directly influences the size of the dam, number of spillway gates, cost of diversion as well as handling of water flows during construction. Resultantly the dam and spillway size of the Gulpur HPP is substantially larger than Patrind HPP and similar to that of the much larger sized Suki Kanari HPP and Chakhoti Hattian HPP. The total Civil Works cost of Gulpur is USD 150 million out of which USD 90 million alone is the cost of Dam and diversion arrangements. 10

13 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA Gulpur HPP is a medium head project. A project with a lower/medium head must utilize proportionately more water flow to achieve the same power as another project with a higher head. More flow means larger water passages, bigger turbines and gates, larger civil works etc., all of which contributes to increased costs. Gulpur HPP BOQs provided by the Sponsors and its comparison with Patrind HPP substantiate the point to some extent that though the capacity and cost of Patrind HPP is larger than Gulpur, the civil works involved in Gulpur hydro are considerably greater than Patrind HPP as shown below: Description Units Patrind Hydro Gulpur Hydro %age Difference Soil & Rock Excavation m3 382,055 1,160, % Concrete Works m3 169, , % Underground Excavation m3 162,349 16,843 (89.6)% Steel Reinforcement Ton 4,925 14, % (Note: The civil works cost of Patrind is $ million vs $ million of Gulpur civil works) A comparison of quantities of Gulpur HPP has also been carried out with 87oMW Suki Kinari HPP (based on feasibility study quantities) and it is worth noting here that quantities of Suki Kinari are only 200% higher whereas the capacity is 800% higher than Gulpur HPP. Description Units Suki Kinari Gulpur Hydro %age Difference Soil & Rock Excavation m3 2,535,490 1,160, % Concrete Works m3 884, , % Steel Reinforcement Ton 45,902 14, % (Note: The civil works cost of Suki Kinari is $ 1,314.3 million vs $ million of Gulpur civil works) 11

14 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA b). COMPETITIVE BIDDING PROCESS The Company contends that the EPC Contract award and price was finalized through transparent and standard competitive bidding process. The process included the (i) issuance of RFP (ii) submission of technical and financial proposal, (iii) independent evaluation and (iv) selection of the EPC Contractor. However, the bidding was restricted to the Korean contractors only on account of securing the funds/loan from Korean Exim Bank in line with Patrind HPP. It is of the view that initially the consortium led by Sambu was selected as EPC Contractor, however, subsequently the project lenders raised serious concerns on Sambu's financial strength and the Company went for selection of second ranked bidder (Daelim) as the EPC Contractor. It provides this as proof that a transparent competitive bidding process has been followed and there was no prior understanding between the Sambu consortium and the Sponsors w.r.t selection and appointment of EPC Contractor. The Company also contends that highest price offered under the bidding process was USD million by Daewoo Construction Company which is the EPCC of Patrind HPP; and the Company successfully managed to bring down the EPC Price to USD million through value engineering and negotiations. c). OPINION OF CONSULTANTS ---MWH AND MO1T MACDONALD MWH, the Owner's Engineer has given the following opinion about the price: "We have independently checked selected unit prices of EPC Contractor and confirm that these are generally in accordance with our expectations. Cost of a hydropower project is dependent on a number of factors that are site-specific. The Gulpur HPP appears to have a reasonable cost per kw, keeping in view site specific conditions and falls in the typical range of hydropower cost worldwide for similar projects." (ANNEX-L) Mott Macdonald, the Lenders technical advisor, gave the following opinion on the price: "The price is considered slightly, but not unreasonably, on the high side, particularly in comparison to the previously tendered design. Our experience suggests that EPC prices are greater by 20-30% compared to conventional measurement type contracts to take account of the geological risks that the EPC contractor takes. Considering that aspect the EPC prices are considered reasonable. In general, the Gulpur capital costs are in the upper bound of similar projects we have seen in Pakistan and elsewhere. However as mentioned earlier, every hydro scheme is unique and the Gulpur cost is considered reasonable given the constraints of the site and the high flood flows that the design and construction need to accommodate. The quantity estimates and unit prices provided in the project cost breakdown seem reasonable." (ANNEX-M) 12

15 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA d) OTHER JUSTIFICATIONS PROVIDED BY THE COMPANY The Project is financed by development banks including IFC and ADB which keep a "strict" eye on the sufficiency and reasonableness of EPC Price to ensure that there are no corrupt practices are involved. Please note that following detailed due diligence IFC credit committee has approved the EPC Cost dated 15 September ADB approval is expected by end of October 2014 Due to rising political and security risks in Pakistan the financing costs of EPC contractors have gone up due to political and security risks in Pakistan, which automatically gets translated into higher EPC price; The Korean contractors are generally at par with reputed European and North American Contractors and have relatively higher overheads and labour costs. e) NTDC's OPINION REGARDING THE EPC COST: It may be noted that the above-stated justification for the cost were provided by the Company. Our opinion on the cost coincides more closely with that given by Mott MacDonald, the Lender's advisor. The EPC cost of Gulpur falls in the upper range of other hydropower projects driven in part by the high Civil Works cost and the high design flows at the site. We believe that the EPC Contractor has built in a cushion of 20-30% in the cost to cater for its risks; however, the Company did not agree to reduce the EPC cost any further than US million. Hence the cost (being the lowest that could be negotiated) is being recommended for approval. The Company has been further told that it would have to get European equipment for the plant. 7.2 Custom Duties & Taxes Custom 5% on import of plant and equipment not manufactured locally has been estimated at US$ 4.o million and included in the project cost. The cost would be adjusted on the basis of actual..3 Insurance During Construction Insurance during construction has been 2.0% (US$ 4.82 million) of the EPC cost (US $ million excluding the price of Design Cost of US $9.1 million) in the tariff proposals by the Company to NTDC. This amount may change as per actual, should be capped at 2.5% of the EPC. Since NEPRA has allowed higher 2.4o% of EPC cost to Karot HPP to cater for insurance during construction, the requested cost of US$ 4.82 million is found reasonable and being endorsed. 7.4 Project Development Cost The company has claimed US$ million for Project Development, which represents 6.84% of the proposed EPC Cost and is comparable with the percentage cost allowed to other HPPs. Moreover, the Company was of the view that these costs are based on firm agreement/ contracts, already incurred costs and are reasonable estimates until COD. The Project Development Cost includes following: 13

16 100 N/W Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA Feasibility & Technical Studies The Feasibility & Technical Studies Cost of US $2 million includes the cost of Project Feasibility Study, load flow studies, preparation of EPC specifications, tendering process and technical consultancy services for review of revised design of the Project Project Advisors & Agents: The cost of US $ 4.73 million under this head includes the cost of the following Project advisors: Legal Council Technical Advisors Insurance Advisors Financial Model Advisors Inter-creditor Agent Security Trustee Administration Cost The Company has claimed a total cost of US$ 7.24 million under this head, where as for New Bong Escape and Patrind HPP, US$ 9.73 and US $ 6.58 million have been allowed by NEPRA. The cost claimed by the Company is comparable with previously allowed costs by NEPRA O&M Mobilization Cost O&M mobilization cost of US $ 2.50 million for mobilization of 0 & M contractor, preparation of O&M manuals, training of O&M staff, and preparation of environmental and safety plans during operation of Plant and participation in commissioning of the Complex. This cost is comparable with already allowed cost of US$ 2.40 million, to the commissioned New Bong Escape HPP. Considering, NEPRA's precedence for other HPP's and an amount of US$ 2.5 million for O&M Mobilization is hereby endorsed to NEPRA for approval. 7.5 Engineering & Supervision Cost The Company has proposed US$ million as the investigation, design or engineering & supervision cost. It includes the Owner's Engineer's cost ($ 9 million), Engineering Design Cost ($ 9.1 million), Management Supervision ($ 3 million), Reopener Verifier ($ million). NEPRA, in its pervious FS Stage tariff determinations for 720 MW Karot HPP and 84o MW Suki Kinari HPP has approved higher costs for Engineering and Supervision in terms of percentages.i.e. US $ and US $ million at about 10% of the EPC cost respectively. The proposed cost of US$ million (8.91 % of the EPC cost) is therefore endorsed to NEPRA for approval. 14

17 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA 7.6 Front End Fee, Administration Fee & Commitment Fee / Lender Financing Fee and Charges The Sponsors has requested for front end 1.37% of the total debt amount as onetime payment, Loan working 0.175% of debt value of every year, Commitment 1.22% of undrawn debt value of every year, and Monitoring/Waiver % ("cumulatively, the Financial Charges"). The amounts calculated on the basis of aforementioned percentages and respective debt amounts are US$ million (Front End fee), US$ million (Loan working fee) & US$ million (Commitment fee). In aggregate, the cost under financial charges comes out to be US$ million (3.00% of the debt amount). NEPRA has also previously capped this 3.00% of debt amount, this amount of US$ % of debt be approved. 7.7 Environment Cost Company has requested an amount of US$ 1.61 million for environment and ecology cost in the Project cost estimates. This cost includes the cost for consultancy fees for CDM, environmental consultants (Implementation of Biodiversity Action Plan), UNFCCC registration cost and cost related to ERPA. However, for the intent of number's evaluation; it is stated that, NEPRA has allowed US $ million to 84o MW Suki Kinari HPP for Land and Environment & Ecology as well as US $ million to 720 MW Karot HPP in their FS Stage tariff determinations respectively. Thus above claimed cost of US$ 1.61 million is recommended for environmental protection. 7.8 Land Resettlement Cost The Company has claimed a cost of US$ 3.96 million for land resettlement. The cost is a pass-through item to be based on the actual expenditure incurred on this account with the involvement of the AJK government. The cost estimate is for acquisition of land for construction of dam and power house as well as compensation for the loss of houses, commercial buildings, trees, raising and replacement of bridges & roads and rerouting of utilities. The land acquisition area for project site is 6682 Kanal. It has also been assessed that about 5 households, 1 water mill, 2 bridges and 2 sand crushers in the reservoir area will need relocation. The Land resettlement cost will be adjusted at COD stage subject to actual expenditure. Thus above cost of US$ 3.96 million is recommended for land resettlement at EPC stage. 7.9 Interest During Construction (IDC) The financing plan for the project assumes a 75:25 debt equity ratio. The entire debt (US$ million) has been assumed to be a foreign loan. Interest during Construction (IDC) of US$ million has been worked out while using interest rate of 5.035% per annum (6- month 0.35% plus 5.00% spread) and on the basis 15

18 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA of 4-year construction period. Being an essential constituent of project finance and having existence in all tariff determinations, NTDC endorses this amount of US$ million for approval, which is adjustable at COD based on the then debt amounts, interest rates and draw downs. The reference debt disbursement profile is on page-41 of Annex-J. 8. REFERENCE TARIFF COMPONENTS 8.1 Operation & Maintenance (Fixed & Variable O&M Cost) In aggregate, the requested cost for total average annual O&M is US$ million per annum (1.50% of the total Project Cost). Out of this, the Sponsors have proposed US$ 4.50 million (1.39% of Total Project Cost) as the Fixed Operation & Maintenance works, while US $ million has been proposed as the Variable O&M. These costs are reasonable and are recommended for approval. 8.2 Water Use Charge The Water Use Charge is payable to the respective province (in this case, AJ&K) where the project is located. Its current rate is 15 paisa/kwh as per government policy and the same rate has been incorporated in the Reference Tariff. This rate is liable to be adjusted if and when the government policy changes in this regard. 8.3 Insurance During Operation Insurance during operation has been 0.75 % of the Total EPC cost (US$ 1.81 million per annum) in the tariff proposals by the Company to NTDC and shall be adjusted as per actual subject to be capped at 1.0% of the EPC Cost. This amount assumed by the Sponsors is considered reasonable for insurance expense during operational phase of the project keeping in view the size, complexity and structures involved in the project. The estimated cost is endorsed as it falls within earlier benchmarks of NEPRA. 8.4 Return on Equity NEPRA has allowed only 17% IRR on equity to hydropower projects in their tariff determinations so far, therefore 17% IRR on the equity amount of US $ million has been assumed in the final tariff. The Proposed equity drawdown schedule is as follows: 16

19 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA Tiniiigi %age 7th Year 1St Year 2.20% 2nd Year 2.25% 3rd Year 12.50% 4th Year 3.05% 5th Year 15.00% 6th Year 30.00% 35.0o% First three (3) years represents the special relaxation allowed by Government of Pakistan to be calculated from thirty (3o) months before the Financial Close. 8.5 Withholding Tax Withholding 7.5% of the ROE shall be payable to the Company as per standard practice being a pass-through item against the actual amount of tax paid on dividend. Due to being a pass-through cost rather than a recurring cost, it has not been included in the Tariff Table as it would be payable as a pass-through as per the NEPRA's devised formula given below: 8.6 Debt Service Debt Servicing is a major tariff component during the initial years of the plant operation. The project is envisaged to be financed through 75% loan of the entire project capital cost of US $ million, i.e., a debt portion of US $ million. The debt component is expected to be fully financed by foreign loan in US$. The Interest Rates assumed for the foreign loan of US $ million is 5.35% (the current LIBOR rate 0.35% +spread of 5.0%); repayment period of 12 years (excluding the construction period of 4 years). The Debt Repayment Schedule covering both principal and interest is attached as (ANNEX- N). Withholding Tax Payable = [{17% (E (Ref) E (Rod)) } + ROECICIRel)] X 7.5% 8.7 INDEXATIONS of TARIFF COMPONENTS Indexations on Tariff components would be applicable as per the standard NEPRA rules and then further subsequently elaborated in the Power Purchase Agreement. However following are generally applicable indexations allowed by NEPRA against various tariff components which are also being requested for Gulpur Project. 17

20 100 NM Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEDRA Tariff Component Water Use Charge Variable O&M (Local) Variable O&M (Foreign) Fixed O&M (Foreign) Fixed O&M (Local) Insurance during Operations ROE ROEDC Withholding Tax Loan (Foreign) Indexation Pakistan CPI (General) Pakistan CPI (General) PKR/US$ & US CPI PKR/US$ & US CPI Pakistan CPI (General) PKR/US$ PKR/US$ PKR/US$ PKR/US$ LIBOR (semi-annual) & PKR/US$ 8.8 SUMMARY OF ASSUMPTIONS USED IN TARIFF CALCULATIONS i Installed Capacity (MW) Net Capacity (MW) Annual Net Estimated Energy (GWh) Project Base Cost (US $ Million) Interest During Construction (US $ Million) Total Project Cost (US $ Million) Debt Equity Ratio 75:25 8 Agreement Term (Years) 30 9 Total Debt Amount (US $ Million)/All Foreign Interest rate (Foreign Loan)-including spread (%) 5.35% 18

21 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA n Debt Repayment Period for Loan (Years) Repayment Frequency Semi-annual 13 Equity Amount (US $ Million) IRR on Equity (%) 17% 15 Construction Period (Months) Reference Exchange Rate (i US $=Pak Rupee) NPV Discount Rate (%) 10 9 ONE TIME ADJUSTMENT i. Cost of Specific items of civil works (i.e., Cement, Steel, Labour and Fuel) shall be adjustable during construction period on account of variation in monthly prices of these items as per the federal bureau of statistics publications. Material Cost Escalation Table is provided as Schedule C of the Company tariff proposal. ii. iii. Cost variation due to geological conditions relating to tunnelling, if required, at COD as per the terms of the Hydropower Tariff Mechanism. Interest during construction (IDC) shall be adjustable at COD on account of actual debt draw down during construction period. No variation in interest rate shall be allowed during debt disbursement as well as repayment period. No variation due to increase in construction period would be allowed. 4111) iv. Custom duties along with other taxes/duties shall be adjustable at COD subject to the provision of documentary evidence of actual expenditure. v. Variation in US$/Rupee exchange rate at COD shall be allowed at COD. vi. vii. Para 7.4 of company's tariff proposal states that the composition and cost of debt shall be adjusted at Financial Closing which is contrary to the spirit of three stage tariff mechanism allowed by NEPRA for hydropower projects. At EPC stage tariff, the composition of debt and its cost must be finalized to arrive at EPC stage tariff. At COD, only those adjustments will be allowed which are provided in NEPRA's mechanism, hence this assumption should be deleted from the tariff proposal. It is mentioned in Para 7.8 of company's tariff proposal that any cost incurred in relation to Biodiversity action plan during construction phase is a pass though. 19

22 100 MW Gulpur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA This is not acceptable, so this cost should be covered in approved environmental cost. 10. PASS THROUGH ITEMS i. Withholding tax on dividends is also a pass through item just like other taxes as indicated in the government guidelines. Withholding tax shall be 7.5o% (or the applicable rate) of the reference equity. The Power Purchaser shall make payment on account of withholding tax at the time of actual payment of dividend subject to a maximum of 7.5% (or the applicable rate) of 17% equity according to the following formula. Withholding Tax payable=[{17%x (E(ref)-E(red))} +ROEDC (ref)] x7.5% Where: E(ref) = Adjusted Reference Equity at COD E(red) = Equity Redeemed ROEDC(ref) = Reference Return on Equity During Construction In case the Company does not declare a dividend in any particular year or only declares a partial dividend, then the difference in the withholding tax amount (between what has been paid and the total entitlement as per the Net Return on Equity) would be carried forward and accumulated so that the Company is able to recover the same as a pass through item from the Power Purchaser in future on the basis of the total dividend payout. ii. The Company has categorized the cost increase for implementing the biodiversity action plans as pass through item under Para 8.10 without providing any documentary evidence in support of such assumption. As per our understanding, such a cost adjustment is not allowed under NEPRA's mechanism, hence it cannot be agreed to HYDROLOGICAL RISK The hydrological risk shall be borne by the Power purchaser as per 2002 Power Policy 12.0 GENERAL ASSUMPTIONS a. Considering the three stage tariff determination process allowed by NEPRA for hydropower projects, the EPC stage tariff, based on the EPC contract, is being submitted for approval by NEPRA and is subject to adjustments during the Third (COD) stage tariff determinations for reopeners only. Typical tariff re-openers as are available under the applicable tariff mechanism will be available to the Project at later stage of tariff determination. 20

23 100 MW Gu1pur Hydropower Project - Negotiated EPC Stage Tariff Proposal by NTDC to NEPRA b. Tariff has been calculated considering 48 months of construction as envisaged in the feasibility report and based on average estimated annual energy of 465 GWh (net of auxiliary and station demand). c. The Debt: Equity ratio is assumed to be 75:25. d. An Equity IRR of 17% is assumed over the life of the Project. e. The Power Purchaser would be responsible for procuring, financing, constructing, operating and maintenance of the interconnection to the grid and transmission facilities, Metering System (as defined in the PPA) and the Power Purchaser transmission facilities at Project site. f. Applicable Custom Duties and Taxes for import of plant and materials are assumed to 5.0%. No other tax (including federal excise duty) has been assumed. g. Withholding tax on dividend is assumed as pass through item. h. Any taxes, duties and cess imposed either in Pakistan and or in AJ&K whether pursuant to a change in law or otherwise (where such tax, duty or cess has not been expressly assumed herein) shall be treated as a pass-through item. i. Interconnection with the Power Purchaser's transmission at 132 kv is assumed. In case the interconnection is required at other voltage level, the additional cost, if any, will be made part of the Project cost and will be reflected in the tariff at the time of COD. No provision for the payment of Workers Welfare Fund and Workers Profit Participation has been made in the tariff. In case, the Company has to pay to any such fund, it will be treated as pass-through item under the PPA. k. CDM revenues, if any, will be dealt with in accordance with Government Policy. 2 1