Risk Allocation Tool Deliverable 1 - Interim Risk Allocation Tool and Scenarios

The project seeks to increase project performance and reduce final costs by recognizing and managing risks, and allocating them to the party best able to bear them. The analysis focuses on quantifying the Value for Money (VfM) of various options for the delivery of variable renewable energy projects (solar and wind) and power transmission projects. The SEP team conducted 11 meetings and attended two consultative workshops with stakeholders in Islamabad, Karachi, and Lahore in March 2020. The meetings generated interest among the stakeholders in the use of a quantitative tool for risk allocation for energy projects. The Ministry of Energy (MoE) and provincial energy departments, National Electric Power Regulatory Authority (NEPRA), Alternative Energy Development Board (AEDB), Private Power and Infrastructure Board (PPIB), Central Power Purchasing Agency-Guarantee (CPPA-G), and National Transmission and Despatch Company (NTDC) found the tool to be particularly useful. The SEP team updated the risk matrix for the Risk Allocation Tool for generation and transmission projects. The team also developed draft financial models based on NEPRA's tariff appropriations and quantified risks in the baseline and alternative scenarios. The report summarizes the updated elements of the analysis, including conceptual assumptions, risk matrix, and financial analysis. The analysis estimated the costs and benefits to two parties: the government and the private sector. In the case of RE projects, the main party on behalf of the government is CPPA-G, and for transmission projects is NTDC. For simplicity purposes, risks that may be ultimately transferred to the consumer (impacting the consumer tariff), are still accounted under the government. The analysis uses a constructed benchmark to assess the VfM of one delivery mechanism (e.g. public finance scheme) in comparison with an alternative mechanism (e.g. privately financed scheme) for delivering a service. In Pakistan, transmission and VRE have historically been delivered through different mechanisms. As a result, the benchmarks used are specific to the type of project. The benchmark for VRE generation projects is all Category 3 projects: projects holding a letter of intent that qualify for the upcoming competitive tender. The alternate scenario for VRE generation projects is future competitive procurements, where the auctioneer introduces competition among a pre-selected group of investors. The awarded independent power producer (IPP) implements and operates the project, and charges a tariff established in the Power Purchase Agreement (PPA). The study defines a benchmark for transmission projects whereby the National Transmission & Dispatch Co. (NTDC) engages an engineering, procurement and construction (EPC) company in a turnkey arrangement. NTDC owns and operates the project. The study also assesses an alternate scenario, consistent with the 2015 policy: a firm to operate the project upon commissioning in a build own operate and transfer structure (BOOT). The analysis developed initial quantification of risks (probability of occurrence and impacts), developed the capital and operating cost profiles of typical RE projects in Pakistan, and financial models to estimate the impact of appropriate reallocation of risks from the baseline to the alternate scenario situation. The report also delineates next steps for validation, training, and transfer of the tool.