Karachi: The National Electric Power Regulatory Authority (NEPRA) has approved a new generation tariff for K-Electric Ltd. (KEL), featuring a series of financial and operational adjustments aimed at enhancing efficiency and fairness in electricity generation and consumption costs.

According to AKD Securities Limited, the approved tariff includes a 14% USD-based return on equity (ROE) for KEL’s generation fleet, slightly below the previous 15% set in the earlier Multi-Year Tariff (MYT). This adjustment aligns KEL’s ROE with the indexed returns of other Independent Power Producers (IPPs) during the control period of the tariff. Additionally, a ‘Take or Pay’ tariff model has been approved for all KEL power plants, including those operating on High-Speed Diesel (HSD), with KEL responsible for fuel arrangements.

In a notable decision, NEPRA has maintained a 70:30 debt-to-equity ratio, reflecting the ratios approved under the 2015 MYT, despite KEL’s actual FY23 ratio of 46:54. Any equity over 30% is treated as debt and adjustments in this ratio are allowed in BQPS-III for unhedged debt.

The control period for the new tariff is set for 7 years or the remaining useful life as of July 2023, whichever is shorter, for all plants except for BQPS-III. BQPS-III will have an 11-year control period to cover the completion of its debt servicing. NEPRA anticipates that with new grids and renewable projects coming online, reliance on existing plants like BQPS Unit-1 and 2 may decrease.

Additionally, NEPRA approved a clawback mechanism for fuel and operations and maintenance (O and M) cost savings, assigning a 60:40 savings share between consumers and power producers, respectively, except for BQPS-I which will have a 50:50 O and M savings sharing ratio.

K-Electric’s request to pass the tax on interest payments to foreign lenders through to tariffs was also approved. The authority, however, set caps and conditions on other financial aspects such as Standby Letter of Credit (SBLC) costs, which are limited to 1% and based on actual amounts, covering up to 60 days of consumption.

Finally, any residual values from asset disposal will be credited to consumers, with quarterly adjustments. For BQPS-III, proceeds from land sales will also be credited back to the consumers.

The adjustments to KEL’s tariff are estimated to have a bottom-line impact of PKR 14.5 billion (EPS: PKR 0.52) per annum, excluding the principal debt payments of BQPS-III. The authority has yet to approve the company’s transmission and distribution tariff.