Analyzing Pure Energy Limited’s IPO Approval: A Deep Dive into Financial Viability and SEBON’s Decision

In a surprising move, Pure Energy Limited, a solar project with a total installed capacity of 20 MW, has recently received IPO approval from the Securities Board of Nepal (SEBON). This decision comes at a time when SEBON has been hesitant to approve IPOs for numerous hydropower projects in the pipeline. This raises an important question: On what grounds did Pure Energy Limited secure IPO approval, especially when SEBON has been cautious about protecting general investors from potential profitability risks?

 

To better understand this decision, let’s break down the financial and operational aspects of Pure Energy Limited and evaluate whether the project’s revenue can sustain its debt obligations and provide returns to shareholders.

 

Project Cost and Capital Structure

According to Care Ratings Nepal, the total project cost for Pure Energy Limited stands at NPR 2,426 billion, translating to a project cost of NPR 12.13 crore per MW. The capital structure of the project is as follows:

Particulars	NPR	%
Debt	1,746,720,000	72%
Equity	679,280,000	28%
Total	2,426,000,000	100%

The project is heavily reliant on debt financing, with 72% of its capital structure composed of debt. This raises concerns about the company’s ability to service its debt obligations, especially in a sector as nascent as solar energy in Nepal.

 

Revenue Generation and Debt Servicing

While detailed information about the actual contracted energy is scarce, based on past experience, the annual energy generation is estimated to be around 35 GWh, assuming a Plant Load Factor (PLF) of 20% (which is already on the higher side for solar projects). At a Power Purchase Agreement (PPA) rate of NPR 7.30 per kWh, the annual revenue is projected to be approximately NPR 25.58 crore.

 

The critical question is: Is this revenue sufficient to service the debt liability? Let’s break it down:

• Debt Servicing Liability: Assuming a 9% interest rate and a 12-year repayment schedule, the annual debt service liability (including principal and interest) amounts to NPR 24.39 crore.
• Surplus After Debt Servicing: After accounting for debt servicing, the project is left with a surplus of NPR 1.18 crore.

 

However, this surplus does not account for Operation & Maintenance (O&M) costs. Additionally, while solar projects currently do not pay royalties, this could change in the future as the new Electricity Act (Draft) proposes introducing royalties for solar projects as well.

 

Operational Challenges

The project consists of two blocks: Block 1 (10 MW) and Block 2 (10 MW). According to Care Ratings Nepal, these blocks have been generating only 86% and 89% of their total contracted energy, respectively. This underperformance further complicates the financial viability of the project.

 

Moreover, the project’s interest rate is based on a floating rate regime, which introduces additional financial risk. Any increase in interest rates could significantly impact the project’s debt servicing capacity.

 

Key Questions and Concerns

1. Debt Servicing Capacity: With a narrow surplus of NPR 1.18 crore after debt servicing, and without accounting for O&M costs, the project’s ability to meet its financial obligations is questionable.
2. Shareholder Returns: Given the minimal surplus, it is unlikely that the project will be able to distribute significant dividends to its shareholders in the near term.
3. SEBON’s Motivation: Is SEBON prioritizing diversification by approving IPOs for projects in newer industries like solar energy, even if their financial viability is uncertain? This raises concerns about whether SEBON is adequately protecting general investors.

 

Conclusion

While the approval of Pure Energy Limited’s IPO marks a significant step toward diversifying Nepal’s energy sector, it also raises important questions about the project’s financial sustainability and SEBON’s decision-making process. The project’s heavy reliance on debt, coupled with its underperformance in energy generation, poses significant risks to both debt servicing and shareholder returns.

 

Investors should carefully evaluate these factors before considering an investment in Pure Energy Limited. Meanwhile, SEBON must ensure that its approval process prioritizes the financial viability of projects to safeguard the interests of general investors. As the solar energy sector in Nepal is still in its infancy, it is crucial to strike a balance between encouraging innovation and ensuring sustainable growth.

 

Source: https://www.careratingsnepal.com/upload/CompanyFiles/PR/202409110958_Pure_Energy_Limited_-_Issuer_Rating_and_Bank_Facilities_Ratings_Reaffirmed.pdf

 

Price Discrimination in Nepal’s Energy Sector: Challenges and Opportunities

 

The Government of Nepal has set an ambitious target to generate 28,500 MW of electricity by 2035, aiming to boost both domestic consumption and export capacity. This strategic initiative reflects Nepal's commitment to harnessing its hydropower potential, promoting sustainable energy development, and fostering economic growth through regional energy cooperation.

Key Aspects of the 2035 Energy Target

• Domestic Consumption: Approximately 13,000 MW is intended for domestic use, aiming to meet the growing energy needs of the country.
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• Export Capacity: Around 15,000 MW is planned for export, primarily to neighboring countries like India, to enhance foreign currency earnings and support regional energy integration.
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To achieve this target, the Department of Electricity Development (DOED) has already issued licenses for 30,000 MW of hydropower projects and 704 MW of solar projects. However, the current reliance on Run-of-River (RoR) hydropower projects raises significant challenges.

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The Problem with Run-of-River (RoR) Projects

Most of the licensed hydropower projects in Nepal are RoR projects, which generate electricity based on river flow without the ability to store water for later use. While these projects are cost-effective and easier to construct, they come with inherent limitations:

1. Seasonal Variability: RoR projects generate electricity based on river flow, which is highly variable. During the dry season, these projects often produce only 30-40% of their installed capacity, and in some cases, as low as 10%.
2. Mismatch Between Supply and Demand: During the wet season, Nepal often has surplus electricity, while the dry season sees a significant shortfall. This creates a mismatch that complicates grid management and energy planning.
3. Climate Change Impact: Lower-than-normal rainfall and reduced snowfall have further exacerbated the problem, leading to decreased hydropower production and raising concerns about the long-term sustainability of RoR projects.

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The Need for Storage Projects

To address these challenges, Nepal must prioritize the development of storage-based hydropower projects. These projects offer several advantages over RoR projects:

1. Flexibility and Dispatchability: Storage projects, such as reservoir-based systems, can store water and release it when needed, making them more flexible and dispatchable compared to RoR projects.
2. Grid Stability and Reliability: Storage projects can provide power during peak demand periods or when needed, adding significant value to grid stability, reliability, and balancing.
3. Firm Energy Guarantee: Storage projects can be designed to produce 100% firm energy, meaning they can guarantee their full generation capacity at any time, regardless of weather conditions or seasonal variations. In contrast, RoR projects typically provide only 30-40% firm energy.

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Price Discrimination in Power Purchase Agreements (PPAs)

Despite the clear advantages of storage projects, there is a significant disparity in the Power Purchase Agreement (PPA) rates between RoR and storage projects:

• RoR Projects: The Nepal Electricity Authority (NEA) pays NPR 5.88 per kWh (annual average) for RoR projects, which provide only 30-40% firm energy.
• Storage Projects: Storage projects with 100% firm energy receive NPR 9.75 per kWh (annual average).

This raises an important question: Is this pricing structure fair?

• RoR Projects: While RoR projects can technically be designed to generate 100% firm energy, their installed capacity would be reduced to one-tenth of the original, making it economically unviable.
• Storage Projects: Despite their superior reliability and grid benefits, storage projects are not adequately compensated compared to RoR projects. For example, RoR projects charge NPR 8.40 per kWh for dry season energy, even though they contribute only 30% of their capacity during this period while those storage projects designed to produce 100% dry season energy receive NPR 12.40 per kWh.

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Proposed Solutions

1. Align PPA Rates for Storage Projects: To encourage investment in storage projects, their PPA rates should be at least on par with RoR projects. This is especially important given the critical role storage projects play in ensuring grid stability and addressing seasonal variability. And this is possible because solar project PPA rates are on par with RoR projects. I never understood the logic of why solar has to be on par with RoR, as solar only produces energy during daylight hours. It cannot be compared directly. That said, I’m not against solar. In fact, I believe hydropower is also solar-powered—the sun evaporates the sea, forms clouds, the clouds hit the mountains, rain pours into the rivers, and hydropower is generated!

 

Conclusion

Nepal’s energy sector stands at a critical juncture. While the country has made significant progress in harnessing its hydropower potential, the over-reliance on RoR projects poses serious challenges for the future. Storage-based hydropower projects offer a viable solution to address seasonal variability, ensure grid stability, and meet the growing energy demand. However, the current PPA pricing structure does not adequately reflect the value of storage projects, creating a disincentive for their development.

To achieve its 2035 energy target, Nepal must adopt a more equitable pricing mechanism and prioritize storage projects.