Capacity payment issue: 10 IPPs seek PM’s intervention

ISLAMABAD: Annoyed with the government’s approach towards private sector power generators, 10 Independent Power Producers (IPPs) established under Generation Policy 2002 have approached Prime Minister Shehbaz Sharif, setting conditions to terminate their sovereign contracts, well informed sources told Business Recorder.

In a joint letter to the Prime Minister, 10 IPPs; i.e., M/s Pakgen Power, M/s Nishat Power, M/s Nishat Chunian, M/s Sapphire, M/s Hubco Narowal, M/s Kohinoor Energy, M/s Liberty FSD, M/s Halmore, M/s Laraib and M/s Orient Power, have stated that over the last year, various government bodies, as well as media outlets have been claiming that capacity payments to private IPPs have made consumer tariff unaffordable.

The letter to the Prime Minister was written a day before summoning of IPPs of Power Policy 2002 for final negotiations to convert their PPAs from take or pay to take and pay mode.

Contracts with 8 more IPPs renegotiated, NA told

Muhammad Ali, Prime Minister’s Special Assistant on Power and co-chair of Task Force on Energy, which negotiated with the IPPs, told this scribe that talks with IPPs of 2002 Policy are commencing from Monday (today).

The IPPs, agree that the current consumer tariff is high, but attributing the primary cause to capacity payments is not only misleading but a gross understatement of a complicated issue.

Suffice it to say that

(i) the average generation tariff is Rs 27/kwh, while the average consumer tariff is over Rs 60/kwh; this increase of over 100% is on account of heavy taxes, Transmission & Distribution costs and losses/ theft;

(ii) the capacity payments of all IPPs is Rs 17/kwh of the generation tariff, out of which more than half goes to government owned IPPs;

(iii) the demand for power dropped over 22% in the last two years resulting in the capacity tariff having increased by about PKR 5/kwh; and

(iv) the exchange rate devalued by more than half in the last 3 years caused over 40% increase in capacity payment. Recently, when posed the question at a recent energy forum as to whether the IPPs have destroyed the economy, the former Prime Minister Shahid Khaqan Abbasi answered by saying that it was in fact the weak economy that has destroyed the IPP sector.

According to sources, the Task Force on Power Reforms headed by the Minister for Power, Sardar Awais Khan Leghari intends to terminate the “Take or Pay” contracts of 2002 Policy IPPs and sign new “Take and Pay” agreements.

The generators are being asked to fund all the fixed costs, running into billions per year, for maintaining a power plant to keep it available for operation year-round, yet there is no commitment for purchase by the Single Buyer (the GoP) while the generator is legally barred from selling its power to other buyers.

“Such an agreement does not exist anywhere in the world, is financially unviable and would bankrupt a generator within months.

Therefore, this preposition is completely unworkable. It appears that the Task Force does not have the requisite industry expertise, or is being advised improperly, as to the possible solutions and their respective impacts on the consumer tariffs. While all this is happening, the GoP has just issued a new tariff that is not only indexed to $ at 14% return, but also has Take or Pay mechanism. Clearly, this is a discriminatory approach which is not justifiable,“ said the IPPs in their letter.

Ten IPPs further stated that eliminating the entire capacity payment of the 2002 IPPs (2400 MW) would only have an impact of [Rs 0.5/kwh] on the generation tariff of 10 IPPs put up under the 2002 Power Policy which are ready to terminate their sovereign contracts as per the terms thereof, subject to the following:

(i) all past due amounts be paid at the time of termination, either in cash or T-Bills;

(ii) all “Take or Pay” contracts be terminated to eliminate the Capacity Payments, whether GoP owned, under CPEC umbrella, or privately owned;

(iii) generators be allowed to sell their power to private buyers, wheeling it on the existing T&D system at a reasonable cost, with no obligation on the part of the GoP to purchase; and

(iv) SNGPL continues to supply LNG to those IPPs who run on this fuel, until private import using existing infrastructure is allowed, since the LNG supply is still a monopoly of the GoP.

IPPs argue that this is now the fourth time sovereign power contracts are being renegotiated forcibly or being terminated. This will have irreversible damage to the privatisation process, they said adding that they believe that any meaningful reduction in consumer tariff can only come from:

(i) increase in power sales,

(ii) long outstanding reforms in T&D system, and

(iii) reduction in crushing taxation burden.

It appears that the policy makers continue to focus on short term gains, with complete disregard to the massive damage it is doing to investor confidence (both local and foreign), while delaying the tough reforms that are necessary to make the sector viable.

“Regardless, IPPs are prepared to sacrifice and play their part as long as all generators are treated the same way without discrimination. We humbly request your good office (PM) should immediate convene a meeting of all stakeholders to thoroughly review this ill-planned strategy being implemented and consider proposed actions outlined in the letter,” the IPPs requested the Prime Minister.

Copyright Business Recorder, 2024