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.

Upper Trishuli 1 Dollar Exchange Risk Explained

While Nepal government is all set to organize another investment summit, Nepal Water and Electricity Development Company (Korean) has threatened to pull out from Nepal after the government asked it to contribute a hefty sum to a hedge fund to be used as a cushion against exchange risk. According to newspaper, the Korean company is ready to contribute only USD 5 million. I was curious if it is sufficient to cover the exchange risk.

Blunders : one after another

The tendency of our Nepali experts introducing new policies without analyzing the impact and crunching numbers is something I have never understood. I wonder if they ever do analysis beforehand (most probably, they don’t).

HIDCL’s right share proposal

Hydroelectricity Investment and Development Limited (HIDCL) has notified Nepal Stock Exchange (NEPSE) regarding the issuance of its 100% right share.

Upper Tamakoshi – a reality check for much hyped hydropower?

After long delays due to various reasons, Upper Tamakoshi is now all set to float its local shares. According to its invitation letter, the projected cost is estimated to be Rs. 66.08 billion. This makes per MW cost of Rs. 14.49 crore. Although the per MW seems to be at the lower side compared to recent market trend (above Rs. 20 crore), the project, however, will not able to keep up its hype due to its lower PPA rate which is at Rs. 4.06 per kWh (average) for the first year.

Compensation clause for 30% dry energy.

With new guidelines effective from this year, there is an option of 30% dry energy for RoR projects. In this option, hydropower projects will receive NRs. 8.40 per kWh for six months (Mangsir 16 – Jestha 15) and NRs. 4.80 for the remaining 6 months (Jestha-16 to Mangsir 15). However, the total dry energy should be more than 30% of the total energy supplied. Any projects suppling dry energy below 30% will be penalized. The formula for such compensation to NEA will be the following

Vicious Cycle and ways to overcome it

It is needless to say that we have not been able to harness 2% of the total hydro potential. With a stable government on the horizon, I think it is the right time to debate on how to exploit our resources.

Financing capacities of Nepali banks

The total loan and advance of Nepalese commercial banks stood at NRs. 1,801.567 billion at the end of Ashwin 2074 or mid October, 2017 (source: NRB). With 5% minimum lending requirement in hydropower sector as provisioned by Central Bank of Nepal, the total loan available is NRs. 90.078 billion. On the other hand, hydropower projects with install capacity of 2,043.6 MW have done the financial closure while 910.31 MW are in the process of securing debt (NEA’s Annual Report 2017). Assuming NRs. 180 million per MW as the construction cost, and 70:30 as Debt equity ratio, the total loan requirement is NRs. 372.19 billion. Even at the 10% as minimum lending requirement (assuming that Central bank will increase the provision), the total funds available will be around NRs. 180.157 billion.

West Seti Hydropower in limbo

It looks like another company is going to pack its bag. China Three Gorges International Corporation, the potential builder of West Seti Hydropower Project (750 MW), showed dissatisfaction over the Power Purchase Rate Policy proposed by Nepal Government. Storage project like West Seti is entitled to receive NRs. 12.40 per kWh and NRs. 7.10 per kWh during dry and wet season respectively.

Budhigandaki vs Upper Karnali vs Arun 3

In a country like Nepal where financial resource is scarce, we have no other option than use it wisely to get optimum benefits. However, things are not applied in Nepal as learned in economic class during our uni days.

Election Manifesto

Having a huge hydropower potential, all politicians, policy makers and experts have come to a common understanding that hydropower development is a key determinant of the growth potential of Nepali economy. As such, all major political parties have declared to exploit the hydro resources in their election manifestos.

Rates for Peaking Run of River

Developers of peaking run of river hydropower project can enjoy better rates. Developer will be entitled to receive Rs. 8.50 to Rs. 10.55 per unit.

Take or Pay PPA

NEA has recently changed the “Take and Pay PPA” to “Take or Pay PPA” All projects including those which have "Take and Pay PPA" are entitled for the amendment provided their Commercial Operation Date (COD) is before mid-July 2026 AD.

PPA IN DOLLAR Too Little Too Late

At a time when the government has announced an ambitious plan to generate 20,000 MW of electricity within a decade, there is the need of a huge foreign investment to fulfill the objective. To lure foreign investment, there is the need to sign the PPA in dollars.

Paradigm Shift

Nepal’s hydro is predominately RoR schemes and almost all pipeline hydropower projects are also RoR.

Foreign Investment Climate

All of a sudden Nepal has been bombarded by summits. In the past few months, different organizers have held several investment/infrastructure summits so hastily. The objective of those summits was to attract foreign investment in the country but the outcomes were not that satisfactory. However, ‘Investment Summit 2017’ organized by Investment Board, Nepal last week did draw world’s attention. Investors pledged a jaw-dropping FDI commitment of US $ 13.51 billion.

Govt plans to consider six months as dry season

Government plans to increase dry season period to six months from four months. This certainly is a good news for IPPs as the RoR projects will be entitled to get dry season rate (Rs. 8.40 per kWh) for six months (December to May). However, it comes with a clause which to me is useless and is not in the favor of project and the country as a whole.

Solar through my lens!

It might be considered as a sin to talk about solar energy in Nepal. The country, rich in hydro resources, is inclined to be blatantly loud and assertive in self-defense. It is not everyone's cup of tea due to its expensive LCOE (levelized cost of electricity). Name-calling is expected when you try to explore the solar opportunity in this country. 

Kulman Ghising: sheer luck or calculated risk?

All these years we thought that there is a huge mismatch between demand and supply of electricity. Load shedding for 12 to 16 hours a day during dry season was quite common and we were prepared for the same thing this year too.