KARACHI ELECTRIC SUPPLY COMPANY LTD.
2" Floor, KESC House, Phase-II, Sunset Boulevard, Defence Housing Authority,
Karachi, Pakistan
Phone: (92 21)38709132(7245) — Facsimile: (92 21) 9920 5192
Ref #
GM(RA)/NEPRA/2013/1175
August 1, 2013
Mr. Syed Safeer
Hussain,
Registrar,
NEPRA,
Islamabad
Sub: Modification of Generation Licence 1.GL/04/20021
KESC was issued
Generation Licence No. GL/04/2002 on November 18, 2002 ("the Generation
Licence") for a period of twenty five years for Generation of Electric
Power under Section 25 of NEPRA Act, 1997. In the past, the Generation Licence
was modified by NEPRA as per the request of KESC dated: March 04, 2008 to the
extent of:
I) Approved addition
of new Generation capacity of 220 MW dated: March 17,2009
II) Decommissioning
of 45 years old Unit # 1 of KTPS dated: May 13,2009
Thereafter, KESC
requested for following modifications, relating to the capacity of different
plants along
with decommissioning
of its depleted units at Korangi and Site Area, Karachi.
• Two GE Bencher
projects of 96 MW each Dated: November 29, 2008.
• Two AGGREKO
Projects of 28 MW each on rental basis Dated: November 29, 2008.
• 560 MW Combined
Cycle Project at Bin Qasim Dated: May 08, 2009
• Decommissioning of
GT-2, 3, 4 at KGTPS Dated: December 11, 2009.
• Decommissioning of
GT-2, 3, 4 &5 at SGTPS Dated: December 11, 2009.
• Decommissioning of
Units # 4 of KTPS Dated: July 03, 2010
Over the past four
years, KESC has added nearly 1,010 MW of new highly efficient power generation
plants and has made expansion and rehabilitation of its T&D system, by
investing of around USD 1 billion. However, to run the newly efficient power
plants, KESC requires a committed supply at adequate pressure of natural gas.
On an annual basis, the supply of gas has ranged between 150-160MMCFD over the
last 2 years which is not even enough to operate the higher efficiency plants
at full load throughout the year. This situation has forced KESC to operate BQPS-I
units more on oil than gas. Given the overall gas availability forecast for the
country, the supply of gas to KESC is not expected to improve going forward for
the reasons beyond KESC's control. Therefore, KESC has for technical and
commercial reasons decided to address the issue of diversification of fuel mix
by converting its existing Units nos. 3 and 4 at BQPS-I, Port Qasim into a 420
(210 X 2) MW coal based power plant ("the Project") . Thus, the
project of converting Units # 3 and Unit # 4 of BQPS to coal was discussed with
Bright Eagle Enterprises Group Limited ("BEEGL"), which, agreed to
develop and finance the Project through its Special Purpose Vehicle (SPV) in
the name of K —Energy (Private) Limited as Independent Power Producer (IPP).
Hence, KESC intends to lease unit no. 3 and 4 of BQPS —I under a Long Term
Lease Agreement ("LTLA") to K — Energy (Private) Limited. It is
anticipated that the power to be generated from this project will be
exclusively sold to KESC under a Power Purchase Agreement ("PPA").
In light of above, it
is submitted that modification in the Generation Licence of KESC for exclusion
of Units # 3 and Unit # 4 of BQPS be allowed, which shall be effective from the
COD (commercial operations date) of the Project. This conditional exclusion of
units 3 and 4 of BQPS I is discussed in detail in Annexure , B and C, which is
prepared and submitted in conformity with the provisions of the National
Electric ower Regulatory Authority Licensing (Application and Modification
Procedure) Regulations, 1999. A ross cheque having #. DAN 0615700 of Habib Bank
Limited in the sum of PKR 617,000 being the licence modification fee calculated
in accordance with the Schedule II to the NEPRA Licensing (Application & Modification
Procedure) Regulations, 1999 is also attached.
Sincerely,
Muhamma. G ziani
Directo —Controlling
& Accounts
Enclosure:
Annex —A, B, C and Cross Cheque #
DAN0615700
___________________________________________________________________________________________
Text
of Proposed Modification:
(Annex-A)
The text of the
proposed license modification is as follows:
The Management of
KESC has decided to convert two of Karachi Electric Supply Company's
("KESC") generation units at the Bin Qasim Power Station from oil/gas
to coal ("Project"). The Project will be undertaken by leasing out
KESC's existing assets, equipment and (if necessary) land to a new IPP i.e K Energy,
established and owned by a third party investor.
The agreement with
K-Energy is based on setting up of a 2 x 210 MW Coal Power Project for which
unit no. 3 and 4 of the BQPS I will be leased on long term lease basis. In
addition to leased assets, new assets including the boilers and all related
ancillaries shall be procured and the plant shall be installed and commissioned
through an EPC arrangement. The boilers will initially use imported coal of
specifications close to Thar Coal, so that it can be replaced with Thar Coal in
future for generation of electricity.
Besides leasing its
unit numbers 3 and 4, KESC shall provide an identified piece of land of BQPS —
I, to K Energy which is required to construct boiler islands, and ancillary
coal and ash handling equipment’s.
The power generated
from the project will be purchased by KESC under Nepra approved Independent
Power Producer ("IPP") structure.
In light of above submissions,
KESC submits following modifications in the Schedule 1 & 11 of its
Generation
License No GL/04/2002
Bin Qasim Power Station for the approval of Authority:
The details about the
expected life for Unit # 3 and Unit # 4 of BOPS as given at Schedule I shall be
replaced as follows:
 |
Indicative figure
only: All the above figures have been based on historic average auxiliary
consumption provided by the
licensee. The net
capacity available for dispatch and other purchasers will be determined through
procedures contained
in the grid code,
applicable documents or the bilateral contracts.
|
At the end, we would like to mention
here that KESC has applied for the exclusion of these assets from its generation
license on the achievement of COD (commercial operations date) of the Project
and any change in the arrangement regarding modification as requested above
shall he communicated to NEPRA in due course of time".
(Annex-B)
Statements of reasons and specification in support of conditional Modification
1) Justification for Conversion from RFO/Gas to Coal
Over the past four years, KESC has
added nearly 1000MW of new high efficient power generation plants, expansion
and rehabilitation of its T&D system, by investing around USD 1 billion.
However, to run the newly efficient power plants, KESC requires a committed
supply of required gas. Additionally, KESC's 1260MW Bin Qasim Thermal Power
Station ("BQPS-I") requires gas.
On an annual basis, the supply of gas
has ranged between 150-160MMCFD over the last 2 years which is not even enough
to operate the higher efficiency plants at full load around the year. This
situation has forced KESC to operate BQPS-I units more on oil than gas. Given
the overall gas availability forecast for the country, the supply of gas to
KESC is not expected to improve going forward for the reasons beyond KESC's control.
The higher usage of 3x expensive
furnace oil at BQPS-I has an adverse affect on the consumer tariff and the Company's
working capital. Therefore, KESC has decided to address the issue of fuel mix
by converting its Unit no. 3 and 4 of BQPS-I to coal ("the Project")
based on technical and commercial reasons.
Once complete, the Unit no. 3 and 4
(i.e., under the new IPP structure) will ascend the Economic Dispatch Order
("EDO") as their cost per unit will reduce substantially from current
levels. The conversion to coal will also facilitate base-load operation of
these units on cheaper fuel with lesser risk associated with fuel supply thus
also achieving the objective of fuel diversity.
2) Justification for
Leasing Units 3 and 4 of BQPS I to IPP
The conversion to
coal project envisages setting up a 2 x 210 MW coal fired thermal power
station. The Project is brown-field in nature where the existing unit no. 3 and
4 of BQPS-I owned by KESC will be converted to coal fired. The project requires
substantial amounts of investment in order to construct newboiler islands,
chimney, coal conveying and crushing equipments, electrostatic precipitators,
ash handlingequipment and silos,
coal yard and handling equipments, ash disposal ponds as well as rehabilitation
of existing turbines,
generators and BOP to ensure a longer term reliable performance.
Since taking over the
management of KESC, Abraaj Capital has injected equity of circa US$ 361 million together with
arrangement of large amounts of multilateral and local debt. The funds received
in KESC were used to pursue an aggressive reforms agenda which included
addition of around 1000MW of generation assets and revamping of transmission
and distribution networks. Due to higher leveraging ofKESC's balance sheet
owed to such aggressive reforms agenda, it is not possible to embark upon the
coal conversion project of such magnitude immediately as the lenders to KESC
are looking towards substantial repayment of their existing loans to create
such space. Besides this, the KESC is currently capitalizing on opportunities
to enhance system efficiencies by closing cycles as well as continue to
strengthen the transmission and distribution network.
Therefore, after
initial consultations with investors and GoP officials, the management of KESC
has decided to do this project under Independent Power Producer ("IPP")
structure. This will facilitate the raising of required funds through equity
and debt in the IPP to complete the project. The KESC shall purchase the power
from such IPP.
The IPP will be
invested and managed by a non-associate of KESC. However, the contribution of
KESC's unit 3 and 4 is fundamental to the success of the project. Since sale of
these units to the IPP would have
substantially
increased the financial requirements, KESC has decided to lease unit 3 and 4 to
the IPP under a Long Term Lease Agreement ("LILA") to the IPP.
Since the units 3 and
4 will become dedicated to the new IPP for the purpose of generation on coal
fuel and upon execution of lease these will no longer be a part of KESC's
existing fleet, there is a need to exclude these units from KESC's generation
portfolio and facilitate the IPP to apply for a new generation license.
(Annex-C)
Statements showing the impact on tariff, quality of service and the performances by KESC of its
obligations under the license
A) Impact on Tariff
KESC Multi Year
Tariff (MYT) was determined in 2002 as reference tariff with a laid down
mechanism forthe monthly and
quarterly fuel and power purchase cost adjustment. Accordingly the monthly
adjustmentin tariff on account
of fuel and power purchase cost variation (increase/decrease) is to be
reflected in theconsumer's bill as
Fuel Surcharge Adjustment (FSA). The rate of monthly FSA is worked out taking
into account the total
fuel cost variation in fuel and power purchase cost (increase/decrease) is divided
by total units sent out, without taking into effect of T&D losses (KESC's
sent out units plus Power purchased units) to determine the rate of monthly FSA
charged to consumers. Whereas, the unrecovered cost of fuel, due to difference
between units sent out and units sold on account of allowed T&D losses and
the O&M cost and capacity charges are adjusted in the quarterly tariff on
units sold basis.
The components of the
base tariff are the cost of fuel, cost of power purchases, depreciation and the
operation and maintenance (O&M) cost for generation, transmission and
distribution. From the date of determination, the monthly adjustment is being
made on the basis of generation fuel and power purchase price variation as
per given heat rates and T&D losses. This target number of allowed T&D
loss in tariff is constantly becoming
stringent and reducing at the rate of 2% per annum from 2009. KESC is not
allowed any return on its
assets in the tariff; therefore carving out two units (i.e. BQPS Unit # 3 &
4) from its generation fleet will have no impact on the tariff. Rather these
converted units will run on a cheaper fuel i.e. coal in future, and will
effectively reduce furnace oil based generation of the IPP's (GuI Ahmed and Tapal
Energy) and from BQPS other oil fired units. This will keep the fuel prices
lower and will not enhance the consumer end tariff because lower price of
generation on coal as compared to furnace oil. Furthermore it will reduce the
burden of high working capital from KESC, and lower the subsidy amount due on
GoP as compared to the high numbers arising from the usage of expensive furnace
oil otherwise.
B) Impact on quality of service and the performances by KESC of its obligations under the license
Keeping in view the
techno-economic comparison of Electricity generated by Fuel Oil and Coal, the proposed
amendment would facilitate the Company in fulfilling its obligations under the
License and other key project
agreements, harmonizing with applicable company law. The quality of service
will not be in any possibility adversely affected as replacing residual fuel
oil (RFO) based boilers with coal fired technology would help KESC in attaining
fuel security by diversifying its existing fuel mix, better utilization of
existing fleet and most importantly aid in reducing cost of power generation
and increasing the availability of electricity to Karachi.
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| Karachi Electric Supply Company Ltd paid the challan amount to NEPR to modify the license to them for Rs. 617,000/- |
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| Confirmation and details of payments made to NEPRA by KESC |
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