Tariff under the 2002 Power Policy of Government of Pakistan has two basic components – Energy Purchase Price (Variable Component) and Capacity Purchase Price (Fixed Component).
Two-Part Tariff Structure
Capacity Purchase Price
The CPP is the payment made for components that are independent of the amount of electricity generated; in essence, this component of the tariff is paid for "being there" and is irrespective of dispatch. The CPP is paid monthly by WAPDA as long as the plant availability is in line with the established Dependable Capacity (required and checked by WAPDA). The CPP has two fundamental components: the escalable portion and the inescalable portion.
Non Escalable Component
This component is the driver of IPP profitability and includes expenses that are indexed to inflation and PKR/USD parity. The escalable component is adjusted for inflation (linked to US CPI) and for changes in the exchange rate. Included under this component are fixed operation and maintenance ("O&M") costs, insurance costs and the ROE component.
Energy Purchase Price
This component covers debt servicing charges, including interest payments, principal repayment and any other lender fees. The debt servicing component is not
The EPP is the component of the tariff which is based on the actual dispatch of the plant, with fuel costs being the main component (for thermal plants), and includes variable O&M costs which are indexed to inflation (linked to US CPI) and adjusted for PKR/USD exchange rate movements. Any increases in the fuel costs are directly translated into a higher tariff.
As reflected by the structure of the EPP, fuel cost is essentially a pass-through item and the entire impact of the increase/decrease is passed on. The insensitivity to volatile oil and gas prices is one of the biggest advantages the two-tiered tariff provides to IPPs in Pakistan.