Understanding NEPRA's Tariff Approval for K-Electric: Simplified for Everyone

Not long ago, NEPRA approved a generation tariff for K-Electric, and like many of you, I found the financial and technical terms a bit overwhelming. Curious to make sense of it, I dove into the details, researched, and came up with simple, relatable examples to explain it.

Whether you're a finance expert or just someone curious about how these decisions affect us, here’s a breakdown of the key points in plain, everyday language. If you've ever wondered how "unhedged debt" or "regulatory asset base" impacts your electricity bill, this is for you!

Let's make understanding power tariffs easier for everyone. Check out some of the important points and their simplified explanations below and feel free to share your thoughts!

1. Return on Equity (ROE): NEPRA has approved a 14% US dollar-based ROE for KEL’s power generation fleet, slightly below the previous rate of 15%. This aligns KEL's returns with other Independent Power Producers (IPPs). Now imagine you have a lemonade stand, and someone gives you money to help run it. In return, they want to earn some extra money from what you make, kind of like a "thank you" for letting them help. K-Electric's "thank you" rate was 15%, but now it’s 14%. It's still a good thank you, just a little less than before.
2. Debt-to-Equity Ratio: While KEL's actual debt-to-equity ratio in FY23 was 46:54, the approved tariff adheres to a 70:30 ratio as per the 2015 Power Policy. Any equity exceeding 30% is treated as debt for calculation purposes. Think of this like borrowing money from your parents to buy toys. If you promise to use your own pocket money and some borrowed money to buy toys, the deal is to use about 70% of borrowed money and 30% of your pocket money. K-Electric used more of their own money than they planned, so some of it is now treated as borrowed money.
3. Control Period: The tariff includes a control period of 7 years (or the remaining useful life of the plants as of July 2023). For BQPS-III, a separate 11-year control period has been set until debt servicing is completed. It’s like saying, "You can play with your toys for 7 years, or as long as they last." For one of their big toys, called BQPS-III, they get 11 years because they still owe money on it.
4. Cost Sharing: A clawback mechanism has been approved to share savings from fuel and O&M costs. For most plants, consumers will benefit from 60% of the savings, while producers retain 40%. BQPS-I has a 50:50 cost-saving sharing ratio. In simple terms, if you save some of your pocket money by finding cheaper toys or snacks, you have to share the savings with your friend. For most power plants, K-Electric shares 60% of what they save with customers and keeps 40%. For one special toy (BQPS-I), they split the savings evenly.
5. Fuel Arrangements: KEL is responsible for arranging fuel under a “Take or Pay” tariff for all power plants, including High-Speed Diesel (HSD). Imagine you have a pet and you promise to always buy the food, no matter what. K-Electric promised to always get the “food” (fuel) for their power plants, even if they don’t use it all.
6. Foreign Lenders Tax: KEL's request to include taxes on interest payments to foreign lenders as a pass-through cost was approved. If K-Electric borrows money from someone in another country and has to pay a fee (tax) for doing that, they’re allowed to pass that fee to customers instead of paying it from their own pocket.
7. Insurance and Additional Charges: Costs for insurance and startup charges require third-party evaluations. Specific charges, such as shutdown costs, were excluded. This can be explained by saying that before spending a lot of money to fix something, K-Electric has to get another grown-up’s opinion to see if it’s okay. Some costs, like if they stop the power, won’t be allowed.
8. Residual Values: Income from asset disposal and land sales (specific to BQPS-III) will be credited to consumers and adjusted quarterly. If K-Electric sells an old toy or a piece of land, the money they get goes back to the customers, like giving a little treat every few months.
9. Impact Estimation: The estimated annual impact on KEL’s earnings is about PKR 14.5 billion (PKR 0.52 per share), excluding BQPS-III’s principal debt payments. This part is about how much money K-Electric will make each year from this whole deal. They expect to get 14.5 billion rupees extra each year, which is like getting a few extra coins from everyone who buys lemonade from their stand, but it doesn’t include what they still owe on one of their big toys.

Understanding complex topics like power tariffs doesn’t have to be daunting. By breaking them down into simpler terms, we can all be better informed about the systems that impact our lives. Let’s continue learning and empowering each other with knowledge—because the more we know, the brighter our future shines.