The formation of the Energy Task Force on Independent Power Producers (IPPs) appears to be a distraction from the real issues plaguing the energy sector.
The focus on old IPPs, particularly those established under the 1994 and 2002 policies might score political points, but it offers little in terms of substantive savings without addressing the challenges posed by the most recent IPP policy of 2015 and tackling critical issues such as transmission, distribution, and other elements of the energy value chain.
There is little doubt that IPP contracts from 1994, 2002, and 2015 have inflated power costs. Anecdotal evidence suggests that with the older IPPs, there were cases of over-invoicing and fuel theft due to better-than-stated fuel efficiency in the cost-plus tariff structures.
However, these contracts have already been renegotiated twice, and the savings have been realized. There is no significant relief left to offer consumers by revisiting these agreements.
The formation of this task force, along with the appointment of ex-caretaker energy minister Muhammad Ali, seems to reflect the influence of certain power brokers over the PML-N government, which had earlier resisted his appointment. Currently, agencies are gathering data from nearly all IPPs, and some speculate that another round of negotiations might be on the horizon.
However, it is crucial to understand that consumers have already borne the brunt of the high costs associated with old IPPs over the past two decades. The legacy cost of circular debt, partially reflected in current bills, is largely due to these contracts. Yet, renegotiating them now would result in negligible tariff reductions.
For instance, even if the capacity payments of all 1994 IPPs were reduced to zero, the savings would amount to just Rs0.54 per unit based on FY25 reference pricing, and Rs0.85 per unit for the 2002 policy IPPs. This totals only Rs1.39 per unit in pre-tax bill savings. If the government were to retire six IPPs today, as some reports suggest, the savings would be mere pennies.
Focusing on the old IPPs is a red herring. The government is unlikely to recover the hundreds of billions of rupees lost since the 1990s. While consumers may demand a forensic audit to hold culprits accountable, it is unlikely to yield any substantive benefit. Any report might simply conclude that the plants were expensive, but documentary evidence would be almost impossible to obtain.
Most of these plants were purchased from outside Pakistan, with payments made through international channels. Heat rates have already been tested, and excess payments have been negotiated. At best, all it could achieve is some naming and shaming of sponsors, further dampening investor confidence.
To achieve any meaningful savings, the focus should be on new IPPs. For context, the capacity payment for a single Sahiwal Coal power plant exceeds that of all the 2002 IPPs combined. The capacity payment on government plants (nuclear, hydel, and RLNG) is five times that of all old IPPs combined. The real gains lie in renegotiating these newer contracts.
Not much would be saved even if the government decided to forgo its return on equity from government-owned IPPs. The key lies in negotiating with lenders, to whom 70-80 percent of the capacity payments on new IPPs are directed. Among these, Chinese lenders hold the lion’s share, whether for government IPPs or CPEC projects.
Thus, to lower capacity charges, the focus should be on negotiating with Chinese lenders, while the rest is merely noise to fill airtime on prime time TV and distract consumers from more pressing issues—the inefficiencies, bad governance, and poor decision-making plaguing the energy sector. Remember, many of the ill-conceived decisions regarding new IPPs were made during the PML-N’s 2013-18 tenure.
The real question is why were so many projects added in such a short span? The capacity payment was Rs384 billion in FY17, but after the addition of new IPPs, it now stands at Rs2.2 trillion. Currency depreciation and high interest rates aren’t the only culprits; the incompetence of the then government (and IPP owners) in assuming a stable PKR/USD exchange rate is also to blame.
Someone should ask the incumbent government (which was in power from 2013-18) why RLNG plants were added when imported coal plants were already under development.
Today, the variable cost of imported coal is much lower than that of RLNG-based plants, yet the merit order is bypassed to run RLNG plants due to contractual obligations to buy LNG from Qatar. Correcting the merit order would generate more savings than the elimination of the capacity payments from all old IPPs.
Further savings can be found by addressing other issues in the value chain, which have been covered innumerable times by this author over the past decade.
“I am convinced it’s a conspiracy by the bureaucracy to distract from the real issues,” lamented a senior executive of one IPP. Whatever the case, the IPP saga should focus on new IPPs, and other ill-conceived decisions made after 2015. The sector needs to be urgently deregulated if the government is serious about providing long-term, substantive relief to consumers.
Copyright Business Recorder, 2024
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar
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