Why rental power plants?

Senior economists, portrayed in May this year, a highly depressing picture of the decline in the productivity of Pakistan's industrial sector caused mainly by power loadshedding, asserting that overall loss of industrial production had been as high as Rs 210 billion during 2008 and that accounted for about 2 per cent of the country's Gross Domestic Product (GDP).
This colossal damage to the national industry was afforded by one and the only reason that the country was and continues facing electricity shortage and that the industrial sector, that consumes 28 percent of total power use, has been the main loser in this situation. It was estimated that the country's industrial sector lost more than four and half hours a day and the power outages accounted for no less than 1,379 operational hours and displaced some 400,000 industrial workers during the year.
Economists of eminence like Shahid Javed Burki (who later wrote articles in newspapers), Sartaj Aziz, Dr Akmal Husain, Aisha Ghaus Pasha, Dr Pervez Hasan and Shahid Kardar were of a unanimous view, at a seminar that a good wheat crop prevented some damage in the agricultural sector, otherwise the loss to the national economy could have risen as high as Rs 400 billion as rice, sugarcane and cotton production fell although varying in the degree of yield. The textile sector suffered the major damage losing Rs 25 billion that adversely affected Pakistan's exports that declined to a value of $1 billion.
This scenario had an overall adverse impact on the balance of trade, which was badly disturbed in view of imports that mounted beyond precedent, weakening the overall performance of the national economy.
Their observation that life in all spheres has reached a critical stage; it is like a dying person in an oxygen tent, who must be administered a life-saving injection for recovery, is not unrealistic because power shortages have really assumed such a serious proportion that immediate and effective steps have to be taken for national life to be restored within weeks.
The situation suggests that power shortage has and continues to take a heavy toll of the national life particularly targeting the national economy whose restoration guarantees quality life. But at the same time, there are clear indications that the country cannot wait for power for months, what to talk of years; the remedy has to be done in days, if not hours. This is really a question of saving the country.
The only answer to this major treatment of power shortage ills is the induction of rental power plants that have the potential of making up the gap between power generation and supply within weeks. For all practical purposes, RPPs will be a temporary but the quickest remedy till the time the country has enough hydroelectric and thermal power generation to meet the requirements of industrial, commercial and agricultural activity and ensure sufficient domestic power supplies.
The situation emerging envisages that the people cannot wait for multi-purpose dams for irrigation water and power generation because such projects usually take eight to 10 years to complete. Similarly, coal and furnace oil-fired independent power plants consume two to three years before they are able to produce electricity. Seen in the background of a colossal industrial and agricultural loss, particularly during the year 2008, the pragmatic national approach should be to go for sources that ensure the "Quick Fix" in power production not extending beyond a few weeks.
Typically this term is mainly used in the United States which means costing the buyer (here the Pakistani government) "an arm and a leg", a euphemism akin to taking some one to the dry cleaners. Will the so-called "high-cost project" be more expensive than what the people of Pakistan have lost in terms of industrial loss of Rs 210 billion in one year or a trade deficit of $one billion in 2008 alone? The answer will be a big "NO". Besides, the government has committed that it will apply a closure to power outages beyond 2009.
This was the PPP government initiative in the nineties that brought forward the private generation through Independent Power Producers (IPPs). This was followed by scathing reaction that was aimed at letting the people believe that all investment in this context would be detrimental for the country. Today after a decade plus, the IPPs have established credibility and have become successful partners to the government in power generation.
The IPPs not only brought billions of dollars, but also proved their professional expertise over and above the government system. The PPP government is now opening a new chapter of the Rental Power Projects (RPPs) as, once again, the only choice for the immediate, short-term solution to meet the crises of power shortages. In fact, many countries of the world have successfully been implementing RPPs to meet their emergent power needs. China, Bangladesh, India, Sri Lanka and UAE have already brought in the RPPs according to their economic currents. Similarly, Egypt, USA, UK, Puerto Rico, Guatemala, Mexico and the West Indian islands are also using RPPs to supplement their power generation needs.
Even in Pakistan these plants are not new. The first of them was planned at Piran Ghaib, Multan, with a capacity of 150 MW in 2006 during the Shaukat Aziz government. During the caretaker government of Muhammadmian Soomro, four RPPs were approved in February 2008, by the ECC with 200 to 300MW in the private sector at Sahiwal, Gakhar, Kot Lakhpat, Sialkot, Shikarpur, Jamshoro, Eminabad and Shaikupura.
The ECC approved, in September 2008, 1000MW projects for IPPs and 500 MW projects for RPPs induction and advised an issuance of Letters of Award to the Karachi-based Karkey Rental Project and Walters Power International.
The cabinet, in its decision of August 26 this year, endorsed the ECC decision for additional generation capacity of 750MW, bringing the total to 2250MW, to fulfil the promises of ending load shedding by December 2009.
TOTAL RPPS:
The government plans to install 17 rental power plants across the country to start generation of electricity by November and December this year. Total generation capacity has been estimated at a little less than 3,000MW. The plants are to be installed at Sumandari Road Faisalabad (150MW), Guddu (110MW), Sahuwala, near Sialkot (150MW), Satiana Road Faisalabad (200MW), Piranghaib near Multan (192MW), Ludewala near Sargodha (200MW), two at Eminabad near Gujranwala (127 and 81MW), two at Gojra (221MW each), two at Resham, near Raiwind, Lahore (each having a capacity of 201MW), Naudero (51MW) and four at Karachi with a capacity of 205, 201, 249 and 230MW. Besides, other RPPs approved by the ECC and the cabinet in previous governments at Sahuwal, Kot Lakhpat, Shikarpur and Sheikhupura will also be put in the pipeline for induction.
Total investment on these plants comes to around Rs 200 billion but the government is not making this payment from its exchequer as the investment obligation goes to the investor, who obtains finances from market sources and personal assets mobilisation. The government only pays for the services which is based on the investment size of RPPs companies, which take into consideration the net generation capacity (MW) and the type of machinery (new or second-hand) in addition to the plant's size and location.
A recent study says that RPPs are more efficient in the utilisation of capital because they do not require having to outlay or allocate capital for those assets that can be rented; they do not require storage and also save cost on testing and maintenance facilities; and human employment for operating, maintenance and repairs is not needed. Still they are the most efficient and are equipped with the newest equipment.
The rental power business has been around for decades, but it has gained larger publicity in the midst and aftermath of the power shortages and transmission problems that plagued California in USA and other places, the Asian and African areas, including India and Pakistan from 2002 onwards. Utilities, scrambled for supplemental power will compensate for inadequate power, generation and transmission capacity as well as provide during severe weather conditions.
Why Pakistan needs rental power plants is because they meet short term and emergency requirements of power generation, within four to six months based on available technology. The existing power shortage is needed to be addressed within weeks and the government is left with the only quick-fix option of RPPs, which earlier had been successfully commissioned in the US, UK, India, Bangladesh, Kuwait, Sri Lanka, Turkey, UAE and Saudi Arabia.
RPPS AND IPPS:
The situation does not warrant any fair comparison between RPPs and IPPs, because there cannot be an apple-to-apple comparison between these two different sets of power projects. IPPs take two to five years to start producing, whereas RPPs can start delivering in a few months. The assertion that the cost of electricity from IPPs is Rs 1.77 per kilowatt hours, while that from RPPs is Rs 14.65 per KWH, is apparently a misnomer because the latter actually cost less in tariff for the first 10 years. It is also incorrect that IPPs are mostly financed by foreign financial entities. Out of the 12 IPPs signed under GOP power policy of 2002, only one has foreign financing.
It is worth mentioning that RPPs, being short-term solutions to meet system energy shortfalls, are generally based on used machinery, as the lead time for the purchase of new machinery may be anything up to two years. Thus, in order to ensure the availability and performance of RPPs, companies are required to furnish guarantees. Then, the efficiency of rental power plants, being based on used equipment may not be compared with the state-of-the-art IPP plants, based on a combined cycle technology. The government has categorically repudiated certain claims that it is extracting Rs 214 billion from Pakistani DFIs to finance RPPs.
Similarly, financial closure is not required in RPPs for the same reason and that is why submission of project costs in case of RPPs is not mandatory. It has wrongly been calculated that the annual fuel payment for a typical 200MW RPP is $211 million. Actual calculations show the figure is about $100 million per year, which is less than the fuel payments of $ 174 million for a typical IPP as falsely quoted. Finally, the speculative calculation of an annual fuel cost for 1900MW to RPP plants is $1.3 billion and not $2 billion.
As for the awarding of contract to 15 additional rental power plants to be set up in Pakistan, it has been decided by the Pakistan Electric Power Company and the Private Power Infrastructure Board, through an international competition bidding process, publicly and transparently. Originally, a 7% mobilisation advance was envisaged with a supporting and confirmed SBLC. This mobilisation advance, secured against sovereign bank guarantees, binds the rental sponsors to certain operational discipline. Such an advance is a normal practice of lending banks as collateral to ensure project compliance.
This advance is recoverable out of rental payments, which would become due the moment the plant is commissioned. For all practical purposes, bank guarantees secure the government money and in case of a plant offends the agreement, the government will get compendsated against these sovereign guarantees. Rental projects are usually funded on an 80:20 debt-equity ratio, with banks demanding 20 percent cash up-front. Valuation of the plant and machinery is done by independent auditors appointed by an authorised forum and who report directly to the lending bank.
Tariff: Finally, the moot point of rental plants is tariff. This is different from some IPPs that is based on capacity, return on capital, interest on loans and repayments, operation and maintenance and other variable cost components. RPPs are simple cycle plants, having a different fuel consumption pattern and can be converted to combined cycle over a period of time. The government guarantees to cover rental sponsors in the event of a default and the entire performance risk is assumed by the rental sponsors.
Gas - based RPPs require 92 percent availability guarantee and this is 85 per cent in furnace oil-fired RPPs. Compared with the IPPs, the rental power generation costs between 12 and 13 cents per KWh, and IPPs power generation costs ranges up to 12 cents per KWh - hence a negligible gap in tariff in the event of the ongoing power crisis that has to be put to an end by providing uninterrupted power supply to every sector of our national life.
(The writer is a free lance journalist.)