I. INTRODUCTION Fig.

1 Sector-Wise Investment Distribution of

CPEC Project
CPEC has been one of the largest foreign investment
projects in Pakistan. Comprising of a series of energy
and infrastructure projects, it is presently valued at
1%
more than $60 billion (initially estimated at $46 billion
of investment).1 Overall, the project is planned to be 35%
carried out in four stages i.e: Early Harvest 2015‐
2019; Short-term projects 2019-2022; Medium-term
projects 2022-2025; and finally long- 64%
2
term projects envisaged till 2030. Scheduled for
completion in 2030, the 15-year program is expected
to cater to Pakistan’s much-required energy needs Energy
apart from the infrastructure development. Infrastructure
Education, public health,and telecommunications

Under the CPEC framework, energy projects have

been given the highest priority. Not only a sizeable
portion of the CPEC projects (around 64% of the total
investment) has been dedicated for the energy sector,3
but also most power plants have been put under the
early harvest programme, expected to be completed by
end of 2019. The expected addition of around 11000
MW’s in the first round will plug the endemic energy
shortages improving the lives of millions. It will also
diversify Pakistan’s energy matrix, marking a drastic
shift toward less costly fuels. The project is expected
to prove a huge stimulus for the revival of the
country’s economy.
Source: Ministry of Planning Development & Reform
However with its rolling out, where on one hand the
project has been hailed as an engine of growth for
overcoming crucial supply chain bottlenecks, at the
same time its payment obligations and net economic
viability has been questioned. Amidst the confusion
surrounding these apprehensions, plugging the
information-gap and bringing clarity on the regulatory
and financial aspects of the CPEC is vital. Currently,
there is a mix of different financing structures that pin
the CPEC projects. This brief will review only the
energy component of CPEC, which falls under IPP
mode and is dealt under NEPRA’s rules of

1 Salman Siddiqui, “CPEC investment pushed from $55b to $62b,” Express Tribune, April 12, 2017.
2 Husain, Ishrat. "CPEC and Pakistan Economy: An Appraisal." Centre of Excellence for CPEC, PIDE. Accessed 2017. file:///C:/Users/HP/Desktop/TARIFF
SETTING/pak/CPEC-and-Pakistani-Economy_An-Appraisal.pdf.
3 http://cpec.gov.pk/energy

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determination of tariffs. The purpose of the brief is to prompted by changes in fuel costs or currency
inform on the following aspects: exchange rates.

1- NEPRA’s guidelines on the determination of
tariffs for IPP’s.
2- In accordance with stated guidelines,
reviewing terms of reference of the CPEC
energy projects.
3- External payment obligations of these projects
(if any) in terms of actual debt and its
repayment schedule.
II. REGULATORY AND TARIFF REGIME IN
THE POWER SECTOR OF PAKISTAN
Tariff regulatory design plays a fundamental part in
driving economic efficiency of investment in any
sector as determining tariffs in accordance with the
principles of competition, end-users’ protection and a
viable rate of return for producers is central to an
efficiently functioning power market. The power
market of Pakistan is regulated by NEPRA (an
independent regulator) since 1998. Tariffs in the
market are determined in accordance with the
prescribed tariff standards and procedure rules 1998.
Issuing licenses, determining tariffs and conducting
Power Purchasing Agreements (PPA’s) for generation,
transmission and distribution, all falls within the
domain of NEPRA.4
The generation tariff in Pakistan comprises of two
components: Capacity charge and energy charge.
Capacity charge is fixed in nature and accounts for the
capital cost (including insurance of the equity and
debt-servicing) of investment. Retrieval of the
capacity charge for the power project is spread over the
lifecycle of the power plant. Whereas the energy
charge reflects the variable cost of energy procurement
comprising of fuel, operations and maintenance cost of
the power plant. Through a negotiated Internal Rate of
Return (IRR), the profitability of the project for
shareholders is determined; whereas return on equity
is due from the date investment is poured into the
project. Fig.2 shows the regulatory process for
determination of tariffs from each segment of power
entities.
Fig. 2 Regulatory Process for Determination of
Tariff for Each Segment of Power Sector

Projects drawn under NEPRA are either solicited or

unsolicited. Under solicited projects, government
request proposals from investors on the basis of pre-
defined specifications either by conducting reverse
auction or competitive bidding. Whereas for
unsolicited projects, up-front tariff or cost-plus tariff
mechanism are used for determining generation tariff.
Unlike competitive bidding, the cost-plus and upfront-
tariff based projects ensure payment of actual By law, “NEPRA is mandated to ensure that the
investment cost to investors along a profit. As per the interests of the investor and the customer are protected
standard procedures, an IPP submits a tariff petition to through judicious decisions based on transparent
NEPRA for a particular project along with the tariff commercial principals (sic) and that the sector moves
proposed for the project and supporting documents towards a competitive environment”. 5 Based on
evidencing the cost. In both cases, technical and National Electric Power Regulatory Authority (Tariff
financial parameters for the capital and operating Standards and Procedure) Rules 1998, an open
expenditures and a rate of return on equity are regulatory process is followed for the bidding of power
determined by NEPRA. Additionally, the tariff allows projects. All petitions for energy procurement are filed
for a flexible mechanism on tariff adjustments
4 NEPRA Web Portal: “NEPRA”. Accessed at: http://www.nepra.org.pk/nepra.htm
5 NEPRA Web Portal: “NEPRA”. Accessed at: http://www.nepra.org.pk/nepra.htm

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 with NEPRA, where different components of its Table. 1 Nepra Determined Tariffs on CPEC
revenue requirements are comprehensively Power Projects
scrutinized. In case of success, generation licenses are
issued to the Gencos and Power Purchase Prices (PPP) Project Name

Usc/kWh
Capacity
are determined in accordance with the Authority’s

IRR on
Equity

Equity
Debt:
MW
tariff methodology. All records ranging from petitions
filed by the private actors to licenses issued are
publically available on NEPRA’s website. Coal Projects
Huaneng 1320 75:25 17% 8.36
In the light of the above stated tariff guidelines, it Shandong Ruyi
could be observed that a transparent procedure is (Pakistan)
followed while considering petitions filed by the Energy (Pvt)
Gencos. Furthermore, throughout the chain of power Limited
sector, cost of power procurement is transferred to the Port Qasim 1320 75:25 17% 8.36
end-users. Against the backdrop, subsequent section Electric Power
will examine both: the financial payment obligations Company (Pvt)
of these projects and deviations (if any) in the CPEC Limited
and Non-CPEC regulatory tariff regime. China Power Hub 1320 75:25 17% 8.36
Generation
III. CPEC ENERGY PROJECTS: AN OVERVIEW Company
OF THE TARIFF PARAMETERS AND THE Limited
REGULATORY FRAMEWORK Thar Coal Block- 1320 75:25 20% 8.33
I Power
A total of 19 power-related projects are part of the Generation
CPEC priority framework. The power mix under these Company (Pvt)
projects would come from diverse sources with 76% Ltd
share of coal, 17% share of hydropower and 7% share Engro Powergen 660 75:25 30.65% 8.5
of renewable energy. The entire CPEC energy Thar (Pvt)
portfolio would operate in the IPP mode, where it will Limited
be dealt under same regulatory procedures as applied ThalNova (Pvt) 330 75:25 30.65% 8.5
to all other private power producers. Financing for Limited
these power plants will be done with borrowing from
Thar Energy 330 75:25 30.65% 8.5
Chinese financial institutions and commercial banks.6 Limited
In few projects, Pakistani companies have also entered
Gawadar Coal 300 80:20 17% 7.74
into joint ventures with the Chinese investors.
Power Project
Substantial investment in the energy sector has already
Renewable Energy
taken place and 6 projects are presently operational.7
Best Green 100 75:25 17% 14.15
Table.1 entails details on the cost, debt-equity ratio
Energy Pakistan
and rate of returns of CPEC power projects.
Limited
Crest Energyt 100 75:25 17% 14.15
Pakistan Limited
UEP Wind Power 99 75:25 18% 13.52
(Pvt) Limited
Sachal Energy 49.5 80:20 17% 14.86
Development
(Pvt) Limited

6 Husain, Ishrat. "CPEC and Pakistan Economy: An Appraisal." Centre of Excellence for CPEC, PIDE. Accessed 2017.
7 http://cpec.gov.pk/energy

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 Hydrochina 49.5 75:25 18% 13.52 compromised tariffs. However, in in the year 2017,
Dawood Power NEPRA did revise down upfront tariffs for Thar coal.10
(Pvt) Limited Also in the same year, upfront tariff regime was
Three Gorges 49.5 75:25 17% 10.45 scrapped down for renewable energy and was replaced
Second Wind with competitive bidding tariff regulations.11
Farm (Pvt)
Limited As stated in the previous section, both components of
Three Gorges 49.5 75:25 17% 10.45 generation cost are recovered from the end-consumers
Third Wind Farm (see Fig.2). 12 Hence, the rise in the fixed charge
(Pvt) Limited (capacity payments) and the ultimate increase in the
Hydel Projects energy procurement charges will be financed through
Karot Power 720 80:20 17% 7.62 power customers.
Company (Pvt)
Limited
S. K. Hydro (Pvt) 870 75:25 17% 8.81
Limited
Kohala Hydro 1100 70:30 17% 7.24
Power Project
The simultaneous initiation of so many projects
Most CPEC power plants fall under the up-front tariff (almost around half of the country’s existing power
scheme. The IRR (5th column, Table.1) shows the capacity) at such a breakneck pace will amply increase
guaranteed rate of returns of the projects.8 It is very the overall power procurement cost in the country. The
important to note here that IRR apply only to the equity total capacity payments in the NTDC system of
portion of the project cost. In the case of most CPEC Pakistan in the FY 16 were around PKR 280 billion.
projects, the capital structure has 75:25 debt to equity These payments amounted to more than PKR 350
ratio. The remaining 75% of the capital would be taken billion in FY 17, eventually increasing the per unit
and serviced against the investors respective balance capacity cost to PKR 4.1 from around PKR 3.4 in FY
sheets, with no future liabilities for Pakistan.9 16. 13 As the GoP provides energy to consumers at
subsidized rates in the pursuit of social protection, the
Keeping in view the energy shortages of the country, circular debt which currently stands at PKR 1.4 trillion
lucrative upfront tariff rates have been offered to the would inflate further. 14 So, the question of national
power plants (both CPEC and Non-CPEC plants), debt liabilities will itself be determined by the amount
particularly in the case of 3 power plants namely Engro of probable gap between government notified and
Powergen Thar (Pvt) Limited, ThalNova (Pvt) Limited NEPRA determined tariff. Fig.3 shows the circular
and Thar Energy Limited. High IRR were offered to debt from Jan 2009-July 2015.
make investment in Thar well-paid and to utilize the
indigenous coal reserves for energy procurement.
Similarly, for amassing higher share of RE in the total
energy mix, overly generous upfront tariffs were
announced. The tariffs in the case of RE and local coal
plants does show that the project has not been
negotiated prudently resulting in slightly higher and

8 The standard IRR rate for power plants in Pakistan lies in the range of 15-20%.
9 Husain, Ishrat. “Financing Burden of CPEC”, Dawn. Feb 11, 2017.
10 Yousafzai, Fawad. "Nepra Cuts Upfront Tariff for Thar Coal Project." The Nation. July 27, 2017. https://nation.com.pk/28-Jul-2017/nepra-cuts-upfront-

tariff-for-thar-coal-project.
11
"Govt Scraps Upfront Tariffs for Renewable Energy." The Express Tribune. December 14, 2017. https://tribune.com.pk/story/1583513/2-govt-scraps-
upfront-tariffs-renewable-energy/.
12 Lodhi, Abid. “NEPRA guidelines for Determination of Consumer End Tariff”, 2015.
13 State of Industry Report, NEPRA (2017).
14 Asad, Malik. "Circular Debt Has Risen to Rs1.4tr, PAC Told." DAWN.COM. January 02, 2019. https://www.dawn.com/news/1455026.

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 Fig. 3 Gap between Gov. notified and NEPRA
determined tariff
Source: World Bank, 2018.
Few favorable regulatory provisions have also been
guaranteed to the CPEC project which includes:
induction of security cost for the power plant sites.
Keeping in view the internal and external security
threats, government of Pakistan has taken the
responsibility of ensuring security to CPEC project. In
this regard, a 1% Surcharge will be passed on to power
consumers for generating security cost of CPEC. 15
Likewise, Chinese investors have been ensured regular
payments and protection from the structural cash-flow
problem. Hence, GoP will cover any defaults on
payments to these power producers.16 Apart from these
regulations, no deviations exist in CPEC and non-
CPEC regulatory regime as standard procedures have
been followed for tariff allocation and availing of
generation licenses.
IV. CONCLUSION
Apart from the tremendous promises that CPEC
project holds for an energy strapped country like
Pakistan, concerns have been raised over the debt
liabilities, tariff regime and regulatory procedures of
the project. However, above analysis reveals that the
apprehensions based on debt entrapment of Pakistan as
15NEPRA. “Decision of the Authority in the Matter of Induction of Security Cost for the CPEC Projects in the Power Tariff to Ensure Security Sustainability”.
August 3, 2017.
http://www.aedb.org/images/Decision_of_the_authority_in_the_matter_of_motions_for_leave_for_review_filed_against_decision_of_the_authority_
in_the_matter_of_induction_of_security_of_cost_for_CPEC_projects_in_the_power.pdf
16 "ECC Approves Treaty to Protect Chinese Investors." The Express Tribune. February 19, 2016. Accessed January 09, 2019.
https://tribune.com.pk/story/1050158/ecc-approves-treaty-to-protect-chinese-investors/.
a result of CPEC investment are largely misplaced.
Out of the total commitment of CPEC project, 64% of
the investment is made in energy sector, where all
investment would be coming in the form of FDI. Also,
all costs of power procurement (whether capital
charges, fuel charges or use of system charges) are
transferred to the end-users which settles that the cost
of investment in the power sector is retrieved from
power customers and hence does not contribute to the
national debt of the country directly. Nonetheless, the
impact of CPEC power projects on national debt
liabilities is not totally out of the equation owing to the
subsidized provision of energy in the country and the
inter linked problem of circular debt. The ongoing
investment made in power sector will adequately
increase the generation cost of power due to rising
capacity payments. Higher cost of power means higher
circular debt. So the question of debt liability will itself
depend on the eventual government intervention for
resolving liquidity problems in the energy supply
chain. Likewise, in the allocation of tariff parameters
and awarding of licensing, established NEPRA IPP
policy has been applied to these projects and special
treatment to CPEC projects has been granted only in
terms of induction of security grants and seamless
payments.
CPEC has come at a time when Pakistan was facing
serious energy supply insecurity challenges. Now that
huge Chinese investments has been poured into the
energy sector, understating the benefits of the project
and raising doubts will end up in unintended
consequences and trust deficit. Objective evaluation of
the economic viability of any project needs to be done
within the framework of cost-benefit analysis.
Calculating net benefits of CPEC which is spread over
a long horizon of time is beset with a range of
complications and measurement difficulties.
However, it remains that improved power supply will
ease the crippling power shortages hence enhancing
business competitiveness, catalyzing exports and
reinvigorating the economy.
The profitability of the project being stated, there is
room for improvements. While inking any power
No. NEPRA/TRF- SCCPECPP-2017/13566-13568.
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deals, safeguarding power customers’ interest should
remain the top priority of the government. NEPRA
should maintain its autonomy by considering revised
petitions for tariff readjustment in accordance with
market shifts. Also, as increasing the level of energy
sold is the most critical parameter for deciding the cost
of power generation, the expansion in the power
capacity if matched by equal expansion in the
transmission and distribution, will sufficiently
diminish the capacity cost per unit sold. Therefore, all
possible means should be explored in this respect. Also
efforts should be made for sustained improvements in
bridging the perennial problem of circular debt.

Prepared by:
Naila Saleh
Junior Research Officer
Institute of Policy Studies (IPS), Islamabad.

For queries:
Syed Nadeem Farhat
Senior Research Officer
nadeem@ips.net.pk | www.ips.org.pk

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