Lahore School of Economics

FINANCIAL STATEMENT ANALYSIS

WEEK 3 SUBMISSION
COMPETITIVE ANALYSIS

Submitted By:
Anam Sohail

Submitted to:
Dr. Kumail Rizvi

Submission Date:
23/05/16

a. Rivalry Among Existing Competitors

The power sector of Pakistan is a mix of Thermal (65%), hydropower (31.5%), nuclear (3%) &
wind and solar (0.5%). Out of this the public sector contributes 58.5% and the private sector
(41.5%). Within the private sector the IPPs contribute 40% from thermal power. There are four
major producers-WAPDA, KESC, IPPs and PAEC (Pakistan Atomic Energy Commission).
When it comes to the IPPs they all have a sole purchaser-WAPDA. Under the law the IPPs
cannot sell to any other purchaser. The earnings of all the IPPs comprises of a capacity charge
component and energy charge component. The former constitutes a minimum tariff guaranteed to
the company and covers the fixed operations & maintenance (O&M) costs, insurance charges,
debt and working capital funding costs and return on equity. The latter is a function of electricity
actually dispatched and covers fuel and variable O&M expenses. LPPL has a generation tariff
(levelized tariff for years 1 to 30 as stated in the PPA) of $5.7 cents/Kilowatt hour (KWh),
approved by National Electric Power Regulatory Authority (NEPRA).
Under the 1994 Power Policy WAPDA guarantees to take 60% of the capacity of the IPPs,
however, WAPDA favors the larger IPPs due to the economies of scale they enjoy and hence the
cheaper tariffs. Currently there are about 40 such IPPs in Pakistan and their gross capacity
comparison can be seen below:

The gross capacity for LLPL is 362 MW it does not come under the top 3 IPPs in Pakistan. (Kot
Addu Power 1638 MW, Hub with 1292 MW, Uch Power Limited 586 MW). Hub Power Project
being the major player is guaranteed an off take of 64.6% of its capacity unlike the 60% for the
rest of the IPPs.
b. Bargaining Power of Customers
IPPs in Pakistan face a sole supplier. LLPL (like other IPPs) negotiate a tariff with the regulatory
authority, NEPRA, under a transparent competitive bidding process. The contract signed with
WAPDA is the Power Purchase Agreement (PPA). LPPL has completed 15 years out of 30 years
tenor under standard power purchase agreement (PPA) contract with WAPDA. The plant would
remain the property of its shareholders after the conclusion of PPA. Currently WAPDA remains
unable to meet its obligations under the PPA. As of March 31st 2016 an amount of Rs 6.99 billion
was outstanding against WAPDA. This situation has resulted in an irregular supply of fuel which
has affected their plant operations. Hence the presence of a sole purchaser and that too one that is
strapped for cash has meant that the bargaining power of the customer is high.
Furthermore the guaranteed purchase of a given capacity has not helped as WAPDA is unable to
pay for the purchases. While nigger IPPs like Kot Addu and Hub may have some power over
WAPDA, smaller IPPs like LLPL stand no chance and hence are burdened by their receivables
problem and the resulting operational inefficiencies.

c. Threat of Substitutes
The government of Pakistan, for the years 2015-2018 plans on adding 10,400 MW by LNG
(Liquefied Natural Gas), coal fire, wind, solar and hydroelectric power projects. As per the
governments new energy mix 52% energy would come from renewable sources (solar, wind and
hydropower) and 48% from thermal (LNG, coal and nuclear) by the year 2018. These alternative
sources of energy are a threat to the IPPs.
Pakistan Metrological Department plans on increasing 11000 MW power generation by using a
wind corridor they have identified in Sindh. This corridor, with an area of 9700 square
kilometers. Furthermore . Pakistan Council of Renewable Energy Technologies (PCRET) has
been focusing its attention on a micro hydropower technology (MHP) where they create micro

hydro power plants in the neglected areas of the country. Their main aim is to create and
disseminate renewable energy technology in Pakistan.
Hence the thought process at the moment is to transition to more renewable sources of energy
which poses a threat to many of the IPPs.

d. Bargaining Power of Suppliers

Pakistan State Oil (PSO), the largest oil-marketing company in Pakistan, is the fuel supplier for
LPPL and many other IPPs. PSO, under the Fuel Supply Agreement (FSA), delivers residual fuel
power (RFO) to the company through pipeline. However LLPL faces two problems (also faced
by other IPPs). One, the company acquires fuel from PSO on advance payment basis. This poses
to be a major problem since their own payments are on hold by WAPDA. Hence being the sole
supplier of fuel, PSOs bargaining power is sufficiently large.
Secondly, LPPL is required to maintain a fuel inventory of 30 days by law which poses to the
cash flow problems of the company. The efficiency of the supplier is also restricted due to
problems at their end, the fuel distribution system has certain infrastructure bottle necks which
cause inefficiencies. The silver lining in this scenario is that for one the government of Pakistan
guarantees fuel supply to IPPs and hence they are prioritized customers. Secondly as per law
when LLPL is unable to meet its obligation to WAPDA and the non-performance was a result of
lack of fuel supply from PSO, LPPL is at liberty to recover the penalties from fuel supplier-PSO.
Since March 2001 Automatic Tariff Adjustment (ATA) mechanism for fuel cost variations has
been adopted and applied every 3 months. Under this they adjust consumer end tariff of the
distribution companies in order to account for variations in the price of fuel. The idea is to
capture the volatility of fuel price variations faced by PSO.

e. Threat of New Entrants

The high initial costs associated with setting up an IPP acts as a barrier to entry and substantially
reduces the threat of new entrants. However when it comes to thermal power generation these
costs are declining.

For hydro power the development period of minimum 3 to 5 years also creates a barrier to entry
making it difficult for new entrants. The current energy crisis is a deterrent as well. After the
1994 Power Policy many IPPs came into existence and the systems over capacity is likely to
discourage more people from coming in.
As per ex Member Power, WAPDA, the high country risk, and project finance cost, the cost of
production of wind and solar projects is very high in Pakistan. The price per unit for solar energy
is calculated over PKR 21 per unit and wind energy PKR 15.5 per unit. Due to 20 percent losses,
this would not remain feasible.
Furthermore the government is encouraging more IPPs and have reiterated the commitment to
increase private sector participation in the power sector. Under the 2015 power policy of the
Ministry of Water & Power it is stated that the Government is aware of the need for a transparent
framework for providing private investors with a safe environment for investment and hence
their new power policy has offered enhanced incentives such as an exemption from income tax to
new IPPs and for any expansion of projects by IPPs already in operation. Hence the relaxed
policies of the government might encourage more IPPs to be set up.