NEPRA overhauls imported coal pricing mechanism; Mandates tenders and new index rules

KARACHI: Pakistan’s National Electric Power Regulatory Authority (NEPRA) has issued comprehensive guidelines for the procurement of imported coal, overhauling a pricing mechanism that has governed the country’s coal-fired power sector since 2016.

The decision requires that all coal procurement including spot, medium and long-term, be conducted through competitive tendering. Buyers must advertise to both local and international suppliers with at least seven days’ notice and document every stage of the bidding process.

The authority reserves the right to conduct post-facto reviews of bidding processes and may impose penalties or void coal supply agreements found to be in violation of the guidelines.

Spot purchases from the international market are capped at levels permitted under existing power purchase agreements, with prior approval required for quantities exceeding 10%.

New Price Indices

The guidelines establish coal-origin and calorific-value-specific price benchmarks:

For South African coal, the API-4 index will serve as the benchmark across all grades, with published price differentials applied when the net calorific value falls below 5,850 kcal/kg. No premium will be permitted above the benchmark index price.

For Indonesian coal, the applicable index will vary by calorific value: ICI-2 for coal at 5,500 kcal/kg, ICI-3 for coal above 4,200 kcal/kg, ICI-4 for coal below 4,200 kcal/kg, and ICI-5 for lignite coal at 3,000 kcal/kg.

For Australian coal, the globalCOAL NEWC index applies for coal with a net calorific value at or above 5,850 kcal/kg, while the API-5 index governs lower-grade coal down to 5,300 kcal/kg, with published differentials applied below that threshold.

Exchange Rate and LC Charges Revised

In a significant departure from past practice, NEPRA will now allow the actual exchange rate prevailing at the time of Letter of Credit retirement, rather than the monthly average rate tied to the Bill of Lading date. The new rule caps eligibility at 35 days from the Bill of Lading date; payments made after that window will use the exchange rate prevailing on the 35th day as published by the National Bank of Pakistan.

The change addresses years of complaints from independent power producers, who argued that rupee devaluation had caused substantial unrecovered losses under the previous mechanism. China Power Hub Generation Company Private Limited reported losses of approximately 7 billion Pakistani rupees attributable to the exchange rate gap.

Letter of credit charges, previously fixed at a flat $0.10 per ton, will now be capped at 0.1% of the CFR value of each shipment, reflecting banking industry practice and recent volatility in coal prices, which surpassed $300 per ton during 2022-2023.

Background

The review was initiated in 2019, following a mandate in the authority’s September 2016 decision requiring the mechanism to be revisited every three years. NEPRA engaged Argus Media as a consultant in 2018 and later retained Sierra Vista Resources, funded through the Asian Development Bank, in August 2020.

Public hearings were held in February 2022 and September 2023, drawing participation from power producers, index providers IHS Markit and Argus Media, the Central Power Purchasing Agency Guarantee Limited, and the Pakistan Power Information Board, among others.

The new guidelines partially modify the authority’s June 26, 2014 upfront coal tariff determination. In any conflict between the two decisions, the current order prevails.

NEPRA reiterated its recommendation that the Federal Government establish a dedicated imported coal pricing agency modeled on international best practices. Until such a body is created, the revised mechanism will remain in effect.