Satiana Road Rental Power Project

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In December 2009, the rental services contract (RSC) between the state-owned Northern Power Generation Company (GENCO-III) and Young Gen Power Ltd. for the installation, and operation for a three-year term of a 200 MW, residual fuel oil-fired rental power plant (RPP) at 237 RB Satiana Road, Faisalabad, became effective. Three conditions were required for rental contract effectiveness: (i) advance payment guarantee by sponsor, (ii) down payment by the state-owned power purchaser, and (iii) issuance of a sovereign guarantee by the Government of Pakistan (GoP). The Government of Pakistan (GoP) chose rental power projects as its major strategic tool for closing Pakistan’s electricity demand-supply gap in the short term. In March 2008, PEPCO published a tender notice for invitation of proposals for a 200 MW RPP to be located at Satiana Road, Faisalabad. The evaluation criterion was the lowest total tariff in US cents per kWh, inclusive of rental charges and fuel cost component. Young Gen Power Ltd., which submitted a bid dated May 31, 2008, was deemed the winning bidder. On Sep. 6, 2008, Pakistan Electric Power Company (PEPCO) issued a Letter of Award to Young Gen Power Ltd., which proceeded to sign the RSC with the designated state-owned power purchaser, Northern Power Generation Company (GENCO-III), on Nov. 8, 2008. Under the RSC, GENCO-III was to pay a rental charge of US$111 million, payable in arrears in 36 monthly installments to the sponsor, and to pay the sponsor’s fuel costs at a rate of Rs. 7.48 per kWh based on a reference fuel price of 33,250 per metric ton. The RSC set out three steps which had to take place in order for the contract to become effective. First, the project sponsor was obliged to obtain a bank guarantee equal to 7% of the RSC’s value. Second, within 10 days of receiving the sponsor’s bank guarantee, Northern Power Generation Company (GENCO-III) was required to make a down payment to sponsor equal to 7% of the RSC’s value. Lastly, within 30 days of the RSC’s signing, GENCO-III was to deliver Letter of Credit (LC) to the sponsor equal to the sum of GENCO-III's 36 monthly rental payments, guaranteeing GENCO-III's payment obligations. The implementation process encountered a significant delay due to the inability of GENCO-III to obtain a Letter of Credit from a commercial bank at an acceptable cost. As a result, the Government of Pakistan (GoP) revised the process. Under the revised process, after GENCO-III had furnished its down payment to the sponsor, the GoP was to issue a sovereign guarantee covering GENCO-III’s rental payments in lieu of an LC. These steps were completed by Dec. 2009, at which point the RSC became effective. The sponsor’s estimated investment was US$47.3 million. To calculate this estimated investment, first the investment's present value (PV) was assumed by multiplying an assumed investment per kilowatt (US$600) by the plant’s installed capacity. The PV was then used to find an annuity payment, assuming 15 years as the expected asset life and a discount rate of 10%. This annuity payment was then multiplied by the term of the rental contract in years, giving the sponsor’s total estimated investment. The project became operational in August 2010.