Govt-IPPs agreement

ARTICLE: IPP issue has been dangling for a long time now. Negotiations were going on for the last few months after the famous IPP Report which laid bare facts and background, underscoring need for correcting the high electricity tariff issue. A few days ago, an MoU was signed between government committee and a section of IPP representatives. There may be those who support and those who oppose the MoU, but the agreement has been hailed by a large section of people rekindling hopes for an amicable settlement leading to a reduction in electricity tariff. The agreed MoU will pass through a ratification process by the respective set of stakeholders of the two sides. It is hoped that sanity would prevail and every effort would be made to conclude the agreement.

Two separate MoUs have been signed; one with wind power plants and the other with oil/gas power plants. First, let us examine the major clauses of the agreement with wind IPPs: debt tenor to be extended by 5 years and the LIBOR spread to be reduced by 50-75 points and KIBOR spread by 100-125 points; O&M expenses to be reduced by 20-25%; insurance premium to be reduced in the operational years; delayed payment interest rate to be reduced from KIBOR +4.5% to KIBOR + 2% for the first two months and remains LIBOR+4.5% for further delays;5.RoEDC(Return on Equity during Construction) to be reduced to 13%; there is some confusion about reduced RoE on total investment to 12% on foreign equity and 17% local equity; for oil and gas plants, verification of thermal efficiency/heat rate is to be done and any saving would be shared according to a formula.

One of the main areas of contention has been in the area of financing, i.e., RoE and interest rates. All costs are translated into these two financial parameters. RoE of 12 % for foreign investments and 17% for local currency component/projects has been negotiated. It is not clear if this would apply prospectively to existing WPPs or it would be a general policy. Existing RoE policy rate is 17% for Renewables and 15% for all others. There is no distinction of local or foreign currency. All get indexation in USD. Local currency projects/component has lost indexation with USD which was really unreasonable but get a higher RoE, which compensates for rupee depreciation. The government has offered two main concessions: measures to settle IPP receivables; and lifting of more energy from WPPs which is otherwise wasted by NTDC transmission congestion issues.

Let us give you a breakdown of a typical wind power tariff on existing plants; April-June 2020, total tariff is Rs 26.39/kWh; out of which O&M is Rs 3.0875, RoE is Rs. 8.5049, debt repayment and interest is Rs 14.00. One would be surprised to learn that the wind power tariff is around Rs 25-26 per unit for the already installed WPPs under the 2013 tariff as against Rs 6 for new power plants under the new tariff. Admittedly, wind power cost and tariff were high internationally and have come down only recently and the new and old tariff is not comparable. On the other hand, the wind tariff under 2013 prices was unreasonably high; 60-100 % higher than international prices then. Knowledgeable circles, including this writer kept protesting against such an excessive tariff but no notice was taken by Nepra and other relevant authorities. Nepra awarded wind power levelised tariff in 2013 was 13.52 USc as against 7.3 USc in Turkey, 7.78 in the US, 8 USc India, 6.235 USc in South American countries. Similarly, Nepra CAPEX based on which the tariff was calculated was unreasonably high; 2.4 Mn USD per mw as against 1 million USD per MW elsewhere including India and the US while in Europe it was slightly higher, i.e., 1 million Euro per MW. In China, it was even under 1 million USD per MW.

Whose fault is there in such excessive tariff? Obviously, Nepra is the regulator who did it despite the advice to the contrary. Nepra even did not bother to engage third-party consultants or simply browse the internet and get the data from regional countries, Europe and the US.

Some oversight is due on regulatory agencies against exercise of arbitrary powers or incorrect decisions hurting public interest as is evidenced by high tariff that it has been awarding. Appellate tribunal is provided in the electricity legislation, which has not been implemented yet and should be implemented without further loss of time. Now that there is a combined Ministry of Energy, Appellate Tribunal may be extended to oil and gas sector. We have seen how KE has been playing with the legal system and obtaining stay orders against Nepra decisions. Courts take almost infinite time to hear and adjudicate cases.

A lot of regulatory reforms are required to be implemented: public hearings have to be made more representative and meaningful. Normally, investors are well represented and consumer interest is not adequately represented. Fortunately, internet meetings have been held by Nepra which managed to gather points of views from a diverse section of population. This should continue beyond the prevalence of Covid-19.

Fortunately, the volume of Wind power purchase is small - 1000MW or so. Had it been a large volume, the level of destruction could have been much higher. Imagine Rs 26.34 per unit plus losses plus transmission and distribution cost, while average tariff is Rs.16.00 .Thus the scope of causing destruction and damage in an unrestricted authority of the regulator is very high and thus the overriding rationale for a reasonable oversight. New leadership at Nepra had no role in the past policies and actions and should think about the needed reforms with an open and positive mindset.

While Nepra has been at the fore-front, in the shadow, PPIB has been guiding (or even misguiding) Nepra. Major reforms are also due in this organization. It has often been headed by the minister and literally no debate or discussion has been taking place in its board. Behind the door collusive decisions have often been rubber-stamped by the PPIB board under the presiding minister. Instead of a minister, an independent professional of repute should be made chairman of the PPIB board. This should be the part of the present government's reform agenda.

Concluding, a competitive market is the solution for all future energy investments, which is easier said than done. A voluntary electricity exchange (a la India, where two such exchanges are operating which are planned to be extended in market share) could gradually bring the electricity sector under competition. The proposed CTBCM does not, however, offer a good competitive footprint. The issue should be deliberated upon by the policymakers carefully. Competition can be introduced in many forms for new projects. Rules are already in the books for solicited projects which means price competition in awarding generation projects. Reverse Auction is being talked about by Nepra and AEDB for a long time now, but Nepra is continuing with its routine process. Somehow, there has been dislike or fear for competition. Also, some preliminary hard work has to be done for defining project parameters.

It would not be easy to convert existing projects to competitive market. For projects, which have paid off their debt, their prevailing tariff would be lower than the expected market prices and the power purchaser would stand to lose, as the latter would have paid a big share of project cost already. The Committee should think through this issue before agreeing to any concrete terms on this issue.

Although, the IPP agreement will cover only about 5 % of power capacity, this template can be used for negotiations with other projects, especially the CPEC ones. No doubt, the present government is committed to reducing the energy tariff wherever it is feasible. It would be in the interest of IPPs to accept the agreed terms and follow it through with their side of the stake-holders. Otherwise, there are a lot of illegalities that have been allegedly by committed by IPPs and a frustrated government would be predisposed to take a harsher approach that may not be in their own interest. The terms are mild and reasonable. Let all the parties get it through.

(The writer is former Member Energy, Planning Commission)

Copyright Business Recorder, 2020