The challenge of IPPs—V

There is no reason to treat the government-owned IPPs in the similar manner. The case in example is Haveli Bahadur Shah; Balloki and other projects. These are wholly-owned by the Government of Pakistan and as per the latest financial statements there is no foreign currency loan. The priority of use is low on account of input being expensive RLNG.

The answer to the problem is that these projects are differentiated and their accounting system be changed. There is no reason for such companies to earn profit.

The actual cost of producing energy to be billed to NTDC and a new kind of tariff determination will be made. It is important to note that this company has earned a paper profit of Rs 45 billion during the year 2023, which has effectively been billed to the consumers.

The challenge of IPPs—IV

The case of the Bhikki project is even more interesting. It is a company owned by the Government of Punjab. There is no major liability; however, the merit rating is substantially low on account of input being RLNG. There is a substantial profit earned by the company going to the pockets of the Government of Punjab.

In short, if it is decided there is a genuine excess capacity and a relief has to be provided to consumers then there is no reason to classify and treat the government-owned IPPs in a manner similar to what has been accorded to other IPPs. In this case unless there is a loan liability in foreign currency, there is no case for a Capacity Charge. Furthermore accounting for the cost of energy is to be based on cost to cost so that the ‘Return on Equity’ component is transferred to consumers.

Chinese IPPs

With respect to the Chinese IPP the primary question is whether or not there is any possibility for the Government of Pakistan to restrict the period of 30 years to a shorter period.

At present, the country is paying an IRR of over 25% and a capacity charge on a capacity which is not required by the country.

The challenge of IPPs—III

There is ample capacity in the government-owned plants with a lower cost of generating and supplying energy.

The simple proposition by the Government of Pakistan should be the annulment of the agreement and converting the amount due by a Chinese Company into a loan from the owner to be repaid over a period of time. The total value of such a loan will not exceed USD 2 to 3 billion. This can be subsequently sold to Pakistanis.

It is therefore better for the government to take over the plants and get rid of the earlier agreements if the same are acceptable to the Chinese.

It is interesting to note that total energy debt to China is reported to be around 12 billion. This means that the remaining debt is parked in IPPs and other projects which are not owned by the Chinese.

Pakistani IPPs

There are two groups of Pakistani owned IPPs. Firstly, there are IPPs owned by Pakistanis working on local coal from Thar. Their input is substantially cheap; therefore, they should not be mixed up with other IPPs. Furthermore these are new; therefore, they have substantial loan liabilities. There is no need to change their structure.

The challenge of IPPs–II

The second case is non-Thar Coal locally-owned IPPs. In this case the primary problem is fuel cost. The volume will not exceed 4000 to 5000MW.

For example, for a gas-based IPP the tariff in 2006 when the plant was installed was Rs 4 per unit. Now only the variable energy charge is Rs 27.9265. This is for the reason that local gas is not available and the plant has to be run on RLNG.

In another case where debt is still there the position as at 2024 is as under:

Decision of the authority in the matter of quarterly indexation/adjustment of tariff for April to June 2024 quarter for China Power Hub Generation Company Private Limited. I. Pursuant to the decision of the Authority dated February 12, 2016 in the matter of application of China Power 1-lub Generation Company Private Limited (hereafter “CPHGCL”) for unconditional acceptance of upfront coal tariff for 2x660 MW coal power plant, the decision of the Authority dated July 28, 2017 in the matter of application by CPHGCL for approval of cost of dedicated jetty along with Coal Transshipment Service and the decision of the Authority dated March 10, 2021 notified vide S.R.O. No. 1041(1)12023 on August 09, 2023 in the matter of change of base year 2007-2008 to base year 2015-16 for Consumer Price Index (CPI) for indexation of fixed and variable O&M (Local) components, the relevant tariff components are required to be adjusted on account of US CPI, US ED, N-CPI, KIBOR, LIBOR, Exchange Rate, Coal Price(s) and Coal Calorific Value(s) variation.

The challenge of IPPs-I

The approved sum was Rs 12.4753. The initial charge was Rs 4 per unit.

Conclusion

On the basis of this detailed analysis the subject can be concluded as under:

a. The Power Purchase Agreements initiated by the Government of Pakistan are intrinsically flawed for the reason that all risks have been absorbed by the Government of Pakistan itself. This may have been a necessity at that time as others were not ready to take the risk. Nevertheless, this is not sustainable. There was no sense to commit a mistake, which was earlier made during 2013-218;

b. It is not advisable to default on this account. The answer is an amicable resolution;

c. Pakistan has added generation capacity with fixed capacity charges for approximately 15000MW, which is more than its demand even in the peak season. All this has been done in 2013-2018;

d. Increase in generation capacity was only politically motivated as it was not supported by any common economic sense;

e. There is load-shedding despite such a huge excess capacity on account of insufficient and flawed transmission systems. Transmission has never crossed the 23,000MW mark;

f. It is strange that out of around 15000MW excess capacity over 7500MW has been installed by the Government of Pakistan and Government of Punjab. These plants were supposed to be sold out; however, there is no movement on that account as plants are not economically viable;

g. Almost all such plants are on RLNG or imported coal, which is the most expensive fuel and the Government of Pakistan is also committed to purchasing RLNG from the suppliers. It is an integrated flaw;

h. Almost all these new plants on RLNG are at lower end of merit list for acquiring energy;

i. The capital cost of the plants is approximately 20% higher than the international benchmark;

j. Immediate solution:

i. No capacity charges on Government-owned IPPs. Cost-to-cost accounting for such plants;

ii. Renegotiation of debts by Chinese for their IPPs and loans lent by them to IPPs;

iii. Closure of RLNG plants where possible;

iv. Investment in transmission lines on an immediate basis;

v. Renegotiation with the IPPs owned by the Pakistanis;

vi. Further development of Thar Coal Project.

1. Pakistan is suffering from serious intellectual corruption and incompetence in economic matters. Politicians for their small vested interests have brought the country to the verge of default on this account. The solution is not rocket science. The policymakers have to admit their mistakes and start thinking in the broader interest of the state. Otherwise, the state will fail economically.

2. All the conclusions are based on discussion as made in aforesaid paragraphs. In case of further information the source document identified can be reviewed.

(Concluded)

(This was the fifth and last part of a series of articles by this writer. The views expressed in these articles are not necessarily those of the newspaper)

Copyright Business Recorder, 2024