K-Electric (KEL) has successfully obtained an Independent Power Producers (IPP) type tariff for its power generation segment, transitioning from its previous model. The new Multi-Year Tariff (MYT) for fiscal years 2024-2030 introduces a “take or pay” structure for KEL’s power generation units, with a U.S. dollar-based Return on Equity (ROE) of 14%, slightly below the company’s initial demand of 15%.
According to a report by Topline Securities, the new tariff will be segmented into three distinct categories: Generation, Transmission, and Distribution (network/supply). Previously, KEL operated under a single tariff for all business segments. The National Electric Power Regulatory Authority (NEPRA) has announced a Generation tariff for KEL, applicable for a control period of seven years or the useful life of the plant, whichever is shorter, except for BQS III, which is granted this tariff for 11 years until its debt servicing period concludes.
KEL operates six power generation plants/sites, each assigned separate tariffs by NEPRA, aligning with other IPPs. The NEPRA Act mandates that the federal government publish this determination in an official gazette within 30 days.
The Topline report anticipates that the generation-based business will contribute approximately Rs. 0.51 to the company’s cash earnings, with accounting earnings potentially higher due to debt servicing costs of Rs. 2.4/Kwh for BPQS 3, amounting to over Rs. 15 billion or Rs. 0.6-0.7/share.
Key Risks Identified
RLNG Consumption Nonallowance: If KEL’s energy demand is met through cheaper alternative resources under the merit order formula, the cost of RLNG committed to Pakistan LNG Limited (PLL) will not be passed through as an energy payment. This agreement with PLL expires in December 2025.
Possible Revision of Return Component: Ongoing negotiations with IPPs could lead to changes in KEL’s ROE component or the take or pay model for older plants. NEPRA has indicated that the approved ROE could be adjusted downward if reductions occur for IPPs with agreements with the Government of Pakistan.
Transmission and Distribution Tariff Pending
KEL has requested a 15% U.S. dollar-based ROE for transmission and a 16.67% ROE for the distribution business in the FY24-30 Tariff. Previously, the company received a 15% rupee-based ROE for transmission, similar to the Sindh Transmission and Dispatch Company (STDC), and a 16.67% PKR return for distribution, in line with DISCOs’ operating models.
If NEPRA approves dollar-based returns for transmission and distribution, these segments could add an additional Rs. 0.77/share to earnings, bringing total earnings to Rs. 1.29/share, including generation. Without dollar indexation, these businesses could contribute Rs. 0.40/share, totaling Rs. 0.92/share.
Risks in Distribution Segment
A significant risk in the distribution segment is the allowable recovery ratio, with every 1% contributing approximately Rs. 3-5 billion to KEL. The company has proposed a clawback method for recovery to NEPRA.
