ISLAMABAD: Unpaid customs duty and fee forced the government to revise the coal upfront tariff 2013 in June last year, because the Finance Ministry had viewpoint that both were costs and would be passed on to consumers.
The terminology upfront means a fee paid before good is produced or service is performed. The upfront fee is generally a portion of total fee that the buyer must pay while tariff is a tax imposed on imported goods and services. Tariffs are used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.
“In June last year, the government revised the coal tariff of 2013 with an objective to attract more investment,” a source in the Finance Ministry told Customs Today.
He added that these cost items were quantified and added to project cost in 2014 revised tariff.
“These costs will be subject to adjustments based on submission of verifiable authentic documentary evidences at the time when these plants will achieve its commercial operations,” the source said, adding that censure fee can only be claimed if incurred otherwise; it will automatically be deducted from the project cost.
The source said that in 2013 coal upfront tariff, no provision was given to account for European brand boiler in the project cost while in 2014 tariff, an option of European brand to a max of $0.l million/MW was given to independent power producers (IPPs) to further increase the reliability and to help achieve better annual plant availability.
“It was decided that it would automatically be deducted if an IPP doesn’t opt for it,” the source said. He added that efficiency was reduced in 2014 coal upfront tariff keeping in view that there was a tradeoff between efficiency and project cost.
The then government had two choices, either to increase the project cost substantially to achieve the 2013 efficiency benchmark of 42% LHV net or to reduce the efficiency so that coal projects could become viable within the 2013 approved project cost and government adopted the latter option.
However, the source said that government was cognizant about the possibilities of achieving better efficiency with the same cost bracket and in order to address that, it provided a sharing mechanism in case efficiencies were hit beyond the approved minimum benchmark.
“This sharing mechanism proved beneficial for both the power buyer and power producer as it incentivised the IPPs to better negotiate with EPC contractors to bring efficient plant with the same cost bracket,” he said.
He also said that it introduced an upward efficiency sharing mechanism for power consumer that was not incorporated in the last determination.
The source added that in contrary to 2013 coal upfront tariff, the government included return on equity during construction or ROEDC in 2014 upfront tariff which was noted that the government had in past accounted for construction periods return (ROEDC) to all IPPs.
Therefore, the source said the government included ROEDC in the decision of 2014 to remain consistent with the previous decisions as earlier, the government while determining the upfront tariff in 2013 upfront followed the international practice regarding returns and accordingly allowed 17% RoE for imported coal and 20% RoE for local coal.
“Unfortunately, no one opted for 2013 upfront tariff that prompted the GOP to revisit the upfront tariff numbers/assumptions,” the source said, saying that a provision of $9.46 per tonne was added as coal offloading/ handling cost or jetty whose provision was although given in 2013 determination but the associated cost not included in tariff.
The source said that this cost was added to the total fuel cost in 2014 coal tariff which was be subjected to adjustment at the time of the plants’ commercial operation based on the submission of verifiable authentic documentary evidence.
The source added that under the upfront coal tariff regime, investors had the complete freedom to procure power plants from whatever country of origin they prefer as long as it met the minimum efficiency benchmark and the cost fall within the approved cost bracket.
