Pakistan: Power sector needs radical structural reforms

KapcoRecently released generation numbers for October’15 when combined with 3MFY16 numbers confirm two major trends impacting the power space. Firstly, generation for the period (4MFY16) has continued its rise (4.5%YoY) allowing net generation capacity to rise to 13,322MW. Secondly, share of gas in over generation rising to 28.4% from 19.8% during 4MFY15, despite the cost of gas based generation rising 15%YoY.
In the meantime NEPRA has concluded the hearing process for issuing multiyear tariffs (MYT) for FESCO, where the approval for the final tariff is imminent. Key issues that need to be resolved include: 1) allowance for T&D losses, 2) allowance for return on regulatory assets being set for the five year period, 3) allowance for O&M, investments and repair costs, in accordance with the need to limit technical T&D losses and 4) absorbing financial charges imposed on the entity for the current stock of TFCs, debt held under PHPL would be pass thorough.
Additionally, news items of particular significance are: 1) IPPs approaching international arbitration (final step before invoking sovereign guarantees) for Rs11 billion due to them because of overdue receivables from the power purchaser leading to non-availability of the plants, 2) signing of master power purchase agreements for CASA-100 to import 1000MW of power during summer and, 3) release of US$1.4 billion by Asian Development Back and US$500 million by the World Bank for power sector reforms.
Analysts are talking about issues pertaining to framing of MYT and process involved as positive for KEL, as the utility is scheduled to negotiate a revised MYT in June’16.
The impact on HUBC of a favorable outcome in the overdue receivables case amounts to a reversal of liquidated damages amounting to Rs802 million (Rs0.5/share) supplementing cash flows in a time of significant outlays.
Persistent increase in generation levels bodes well for power sector sustainability as the present nameplate capacity (23,531MW) is now being run at higher load factors (56.6% for 4MFY16), a sign of improving operations in the space.
Setting the ground for privatizations, the GoP aims at improving legislative framework and rationalization of current receivables.

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