K-Electric Obtains Take or Pay Power Generation Agreement

K-Electric has managed to obtain IPPs type tariff for its power generation segment compared to the earlier model which was a bit different. In the new MYT FY24-30, the company has obtained a “take or pay” structure for its power generation units with a US$ ROE of 14 percent (against the demand of 15 percent). According to a report by Topline Securities, the new tariff will be unbundled in 3 different segments, i.e. (1) Generation, (2) Transmission, and (3) Distribution (network/supply) Tariff. Earlier, the company used to have a single tariff for all business segments. As of now, NEPRA has announced just a Generation tariff for KEL for a control period of 7 years or the useful life of the plant, whichever is lower, except for BQS III which is allowed this tariff for 11 years, till completion of its debt servicing period. KEL has in total 6 power generation plants/sites, and NEPRA has assigned separate tariffs for each, in line with other IPPs. According to the NEPRA Act, the federal government has to publish this in an official gazette within 30 days of this determination. The Topline report sees generation-based businesses to add ~Rs. 0.51 to the cash earnings of the company while accounting earnings can be much higher due to debt servicing of Rs. 2.4/Kwh for BPQS 3 (over Rs. 15 billion or Rs. 0.6-0.7/share). Nonallowance of consumption of RLNG under the take or pay model: In the case where the energy demand of KEL territory is met through other cheaper alternative resources under the merit order formula, the cost of RLNG committed by KEL to Pakistan LNG Limited (PLL) will not be pass through as energy payment. This agreement of KEL with PLL is set to expire on Dec 2025. Possible revision of return component: Given the ongoing wave of negotiations with IPPs, the changes in KEL ROE component or take or pay model for older plants can not be ruled out. NEPRA in its determination has also mentioned that the “Authority can adjust this approved ROE downward if a reduction occurs for IPPs that have entered into agreements with Government of Pakistan”. The company has asked for US$ 15 percent ROE for transmission and US$ 16.67 percent ROE for distribution business in the FY24-30 Tariff. In the previous MYT, the company was given 15 percent Rs ROE for transmission based on the fact that Sindh Transmission and Dispatch Company (STDC) was allowed Rs ROE. While, in the Matiari to Lahore HVDC transmission line project US$ 17 percent IRR was given. In the Distribution business, the company was given previously a 16.67 percent PKR return based on the fact that DISCOs are operating on the PKR return model. If NEPRA allows a dollar return to the company for transmission and distribution business as requested by KEL, then both businesses can add a further Rs. 0.77/share to earnings, taking total earnings to Rs. 1.29/share (including generation). If dollar indexation is not allowed in distribution and transmission, then these businesses can add Rs. 0.40/share to earnings, taking total earnings to Rs. 0.92/share. Risks: A key risk in the distribution segment is the allowable recovery ratio as every 1% contributes around Rs. 3-5 billion to KEL. The company has proposed a clawback method for recovery to NEPRA.