The second part of this story is the perceived cooperation from our Chinese brothers and friends. As per information, there has not been any rescheduling or re-profiling of loan due on this account, no deferment of capacity charges payable in USD, repatriation of dividend payable to the shareholder or the reduction of IRR.

The end of the story is that it is a commercial transaction done like any other person in a seller- dominated market.

The challenge of IPPs—III

In the light of aforesaid position, there is a need to identify the following:

a. The projects where the input is cheaper;

b. The project which are wholly owned by the Government of Pakistan or the Government of Punjab;

c. The project where there is no foreign currency loan.

Merit Order based EPP as per Fuel Price

In the energy industry, the term ‘merit order’ describes the sequence in which power plants are designated to deliver power with the aim of economically optimising the electricity supply.

The merit order is based on the lowest marginal costs. As per the latest merit order dated July 16, 2024, the lowest price is by UCH Power of Rs 3.15 per KWH whereas the most expensive is Saif Power with Rs 59 per unit. This variation is essentially on account of fuel cost.

The challenge of IPPs–II

The best plant in order based on RLNG is Rs 23 per unit. It is even more expensive than Sahiwal Coal, which is Rs18 per unit. This means that there is a big question mark on all RLNG plants installed by the Government of Pakistan, which now constitute over 50% of the installed capacity of IPPs. There are three unanswered questions:

a. Firstly, the need for the plant; and

b. The use of RLNG;

c. Location of the plant

Lack of Transmission Capacity

The transmission and distribution capacity is approximately 22,000MW. The maximum total demand stemming from residential and industrial estates stands at nearly 25,000MW (there are seasonal fluctuations, of course). This leads to a deficit of about 3,000MW when the demand peaks and hence there is a need to shed the ‘extra’ load.

The challenge of IPPs-I

The additional 3,000MW required cannot be transmitted to where it is needed even though it can be generated. After power is generated in powerhouses, the voltage is stepped up to be transmitted via primary transmission lines to 500/220 kilovolt grid stations.

In these grid stations, the voltage is converted to 132kv and then transmitted via secondary transmission lines to 132kv grid stations. From here, they are transmitted to distribution lines and delivered to consumers.

The capacity of all these units — primary transmission lines, secondary transmission lines, grid stations, distribution lines, distribution transformers — has failed to keep pace with the increase in generation capacity. Due to this reason despite having expensive electricity there is load shedding for the consumers. India has done as under:

Country’s Transmission Network consists of about 4,81,326ckm of transmission lines and 12,25,260 MVA of transformation capacity as on 31.01.2024. Besides, our inter-regional capacity has increased by a whopping 224% to 1,16,540 MW since 2014.

The IMF report on the matter states as under:

The installed electricity generation capacity had increased to 41,557 MW as of 2022. To effectively evacuate electric power from power generation facilities, the national grid and distribution networks of the National Transmission & Despatch Company Limited (NTDC) and distribution companies have grown regarding the length of transmission lines over the last 5 years (Table 1).

However, the transmission and distribution system has not kept pace with the capacity of nearly 15,000 MW added during 2017–2021.

Despite investments carried out for capacity enhancements in the transmission and distribution networks, the transmission and distribution losses averaged about 18.0% in the last 5 years compared with the 15.3% target of the National Electric Power Regulatory Authority (NEPRA).

More than one-fourth of electricity generated is lost because of poor transmission and distribution infrastructure, theft, faulty metering, and inadequate energy accounting.

In the light of these facts whatever has been done in 2013-2018 is not less than an economic crime in the energy sector.

RLNG Fiasco

2- In this connection it would be essential to discuss the issue of input being RLNG. NPPMCL (the company owning Haveli Bahadur Shah and Balloki) has signed a 15-year Gas Supply Agreement with Sui Northern Gas Pipelines Limited (SNGPL) for its Balloki and HBS Plant for ~200 MMCFD each, which may be extended for another 15 years at the discretion of NPPMCL. The tariff approval by NEPRA states:

According to the Petitioner, a gas supply agreement with Sui Northern Gas Pipelines Limited (“SNGPL”) for the continuous supply of RLNG to the site of the power plant to ensure its base load operations is at an advanced stage.

The Gas Determination of the Authority in the Matter Tariff Petition filed by NPPMCL Case No. NEPRA/TRF-358/NPPMCL-2016 Supply Agreement has been approved by the board of directors of SNGPL and NPPMCL, as well as the Oil and Gas Regulatory Authority (OGRA).

The RLNG shall be imported by Pakistan State Oil (PSO) under a sale and purchase agreement with international supplier(s) (including Government of Qatar) approved by the competent forum. Following re-gasification of RLNG, transportation of the RLNG will be done through Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited.

This example has been shown to demonstrate that the purchase of LNG and RLNG contracts on a long-term basis were done to make available the gas if the plants using RLNG would have been operating with full capacity of 45,000MW.

Actual consumption is much less than half; therefore, the country is bearing the cost of fixed charges, which are payable for regasification and other such facilities.

This is a double whammy for the country. Everything is ultimately borne by the consumers. Who is responsible for the same? This newspaper carried an article in 2022. This writer of this article stated, among other things, the following:

LAHORE: The federal government is paying Fixed Capacity Charges (FCC) on about 50 percent of unutilised capacity of Independent Power Producers (IPPs), said sources…….

The clauses related to Forced Majeure of all such agreements are altogether surprising ones. “It is not only confined to IPPs but extends to LNG terminals, oil and gas exploration etc,” they added. They have mentioned the Reko Diq dispute as an example of this phenomenon.

Today, they said, if the biggest oil and gas exploration company, having assets worth at $5 billion on historical cost basis, is priced on market capitalization basis at about $1 billion only tells us a lot about the current effects of these agreements on the country and the economy.

They said the country had embarked on this path of self-destruction a long time back in the mid-90s and we are facing the adverse effects of such agreements today. It does not include the historical inefficiencies which crept into the transmission and distribution system in the early to mid-80s, they added.

Over-invoicing of Costs

In this article this writer has intentionally avoided any discussion on the issue of over-invoicing and commissions and kickbacks.

There can never be an exact calculation of any transfer pricing done in the case of supply of plant and machinery. This writer has spent over 30 years on matters relating to tax on transfer pricing and has come out clearly that even the western companies are heavily involved in this activity. Unfortunately, however, the reputation of Chinese companies in this regard is not very commendable either.

It is a fact that out of the total installed capacity of IPPs of 20,000 MW about 85% plus has been imported from China with Chinese EPC contractors. In the example as referred above even the supply of raw material is from an associated company of the plant supplier. Furthermore, it is wrongly perceived that NEPRA undertakes transfer pricing into account whilst approving such tariffs.

In the case of the Haveli Bahadur Shah project the total cost of the project is around USD 700,000 per MW. As per international survey, the capital cost of an NGCC plant larger than 200 MW ranges from $450,000 to $650,000 per MW. Thus if the cost is taken $550,000 per MW then the price of HBS is higher by around 150,000—being around 20% of the price.

This leads to many unanswered questions. The usual game is very simple. Inflate the price by 20% at least. Out of the same a portion is placed as equity and the remaining is paid as commission and kickbacks. The inflated value of the plant is financed by the Chinese loan, which the Government of Pakistan repays through tariff structure by way of capacity charges.

IPP in Pakistan is the best business anyone can conceive in this country. The availability of the customer is guaranteed; the inflated sale price is guaranteed and the initial outlay is effectively repaid by way of commission and kickbacks. This is a separate subject, which will be discussed later in a separate article.

(To be continued)

Copyright Business Recorder, 2024

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