Premature termination of 11 oil-fired power plants: Power Division forms body to make recommendations

ISLAMABAD: The Power Division has constituted a nine-member cross functional committee to prepare recommendations for premature termination of 11 oil-fired power plants of 3,300 MW installed under various policies, amid fears of NAB investigation as in a few other cases, well-informed sources told Business Recorder.

Headed by Additional Secretary-II of Power Division, the committee will comprise of Managing Director PPIB, Director Legal, PPIB, General Manager, NPCC, General Manager( Power System Planning), NTDC, Chief Financial Officer, CPPA-G, Chief Legal Officer, CPPA-G, Chief Technical Officer, CPPA-G and Manager, Policy and Planning, CPPA-G.

The committee will conduct legal, technical and commercial due diligence of plants and propose future course of action after conducting detailed analysis within the parameters of Implementation Agreement (IA) and Power Purchase Agreements.

"The committee negotiated with 11 oil-fired power plants and submitted its report to Secretary Power Division. It will also submit periodic status/ action report on monthly

basis," the sources added.

According to Special Assistant to Prime Minister, Power and Petroleum, Tabish Gauhar, the government has also informed World Bank that the government was working on early termination/buyout of 11 oil-fired power plants at a discounted value, estimated at $ 1 billion. World Bank is considering this proposal and may extend financial support for it.

"If this solution is not adopted these projects would have to be paid Rs 450 billion in aggregate capacity changes over the remaining average seven years of their contracts," the sources said adding that with disposal of 11 oil-fired plants, a benefit of Paisa 60 per unit can be passed on to the consumers or at least the projected increase can be done away with.

The sources said, the government will buy all the 11 oil-fired power plants and shut them down.

"Early termination/buyout of these plants at discounted value estimated at Rs 150-200 billion to be paid via PIBs, Sukuks, etc will be a good deal for the government,” the sources continued.

Initially, Tabish Gauhar, in his concept note proposed Hubco (1,200MW) which is an almost-idle IPP asset with around 1% dispatch factor. Its PPA is expiring in 2027. Even with the recently negotiated (MoU) tariff decrease, GoP has to pay almost Rs. 260 billion to Hubco in take-or-pay capacity charges until 2027 (without almost any need for their power now or envisaged) which adds to the overall power sector's cost of generation and circular debt.

Gauhar argued that one possible option for resolving this issue is an early buy-out/termination of Hubco which is also envisaged under their contract and for the GoP to take over this oil-fired power plant. The payable upfront amount is calculated to be roughly Rs. 65 billion.

However, there would be little to no use for GoP of this oil-fired plant that ranks very low on the economic/dispatch merit order. An alternative option he proposed was that GoP agrees to pay Rs.65 billion to Hubco (in lieu of the Rs. 260 billion PPA payments referred to above) if this money is explicitly earmarked/ring fenced by Hubco for: (i) financing the conversion of 600 MW of their oil-fired units to Thar Coal and selling that power to K-Electric under a private-to- private PPA with no GoP involvement. That will partially reduce GoP's liability/responsibility toward continued support for KE's growing future power needs; and (ii) financing the conversion of their remaining 300-600MW power units to produce up to 300 million gallons per day of desalinated water for supply to Karachi under a Water Purchase Agreement with GoP & GoS on mutually agreed terms & conditions (including any "at-source" deduction between GoP & GoS for the water charges).

A preliminary pre-feasibility study (including costing) has been done by Hubco on this project. Both these above initiatives may be financed under the Karachi Transformation Plan.

According to Tabish Gauhar, another advantage of this proposal for GoP is the potential release of a $12.5 million annual payment liability toward Asia Petroleum Limited APL pipeline (that was set up to supply furnace oil to Hubco but is also now lying idle) and passing that on to a neighboring oil refinery for their future usage to reverse pump their diesel and petrol products across Pakistan in lieu of the current practice of tank lorries / road transportation. The proposal suggests that transportation of incremental Thar coal to Hubco (and also Jamshoro, Lucky Power, etc.) via the Thar Rail Link proposal should be an integral part of the Pakistan Railways revival plan and would also help in reducing the overall cost per ton of Thar coal (due to economies of scale) for the overall benefit of Pakistan's power sector (lower tariff, circular debt, etc).

The sources, however, argue that deals with 11 oil-fired plants will not be an easy decision as officials are already frightened due to inquires being conducted by NAB on IPPs' contracts, revision in tariff of Port Qasim coal power plant and Sitara Power Plant, Faisalabad.

Copyright Business Recorder, 2021