Renegotiating or terminating contracts with IPPs: up to Rs300bn annual saving expected

ISLAMABAD: The federal government anticipates savings of up to Rs 300 billion annually from renegotiating or terminating contracts with Independent Power Producers (IPPs), projected to result in a reduction of Rs 2-3 per unit in electricity tariffs.

This was revealed by the Special Assistant to the Prime Minister on Power and co-chair of the Energy Task Force, Muhammad Ali, during a briefing to the Senate Standing Committee on Power, chaired by Senator Mohsin Aziz.

The Senator described the original agreements as a “form of dacoity” by influential parties reluctant to return excess profits.

“We expect savings of Rs 200-300 billion per year as a result of the ongoing negotiations with IPPs. The impact on tariffs will be approximately Rs 2-3 per unit,” Ali stated, adding that the entire process of revising agreements would be completed within three months.

Remaining 18 IPPs: Row over figures main hurdle to talks

Ali dismissed concerns about the treatment of IPP representatives during the negotiations in Rawalpindi, explaining that talks are being held in a “very conducive atmosphere.” The CEO of the Central Power Purchasing Agency (CPPA-G), Rihan Akhtar, who is also part of the Energy Task Force, echoed this sentiment.

The committee was informed that the contracts with five IPPs had been prematurely terminated, expected to result in savings of over Rs 400 billion. Additionally, agreements with eight bagasse-based IPPs have been revised by delinking their tariffs from international coal prices and the U.S. dollar. The Power Division has submitted a summary to the federal cabinet for approval.

Ali also mentioned that talks with 18 IPPs under the Power Policies of 1994 and 2002 are ongoing. After this phase, negotiations will move on to government-owned power plants, followed by wind and solar IPPs.

Chairman Aziz referred to a report by Muhammad Ali, which identified various wrongdoings by IPPs, leading to renegotiations under the Imran Khan government. The key issue, according to Ali, is excess profit of Rs 55 billion made by IPPs under the 2002 policy, which the producers are unwilling to return.

Ali emphasized that the Pakistani public has already borne the financial burden of these projects, especially in the form of debt repayments.

He further revealed that overpayments made to IPPs in the past are also being recovered. “The tariffs granted to IPPs through the cost-plus mechanism were legitimate, but any profit exceeding the agreed-upon return must be returned to consumers,” Ali said, reiterating the stance of both his report and the Energy Task Force.

Ali pointed out that the National Electric Power Regulatory Authority (Nepra) had failed to conduct efficiency audits of these plants, which was a major flaw in the system. Although Nepra had attempted to audit the IPPs’ efficiency in 2002, a court stay prevented it.

Ali explained that many IPPs were operating with higher efficiency than the benchmark used to determine their tariff, meaning they required less fuel to generate electricity. This higher efficiency resulted in additional profits. He also noted issues such as failure to meet inventory requirements and suboptimal operations and maintenance (O&M) practices.

During the Imran Khan government’s tenure, it was agreed that NEPRA would decide the excess profits of IPPs. However, the subsequent cabinet decision allowed for international arbitration instead.

“We want to convert these plants from a ‘take-or-pay’ model to a ‘take-and-pay’ model, ensuring that plants are not shut down and that investors receive a fair return on excessive profits. We also advocate for the establishment of an electricity market in Pakistan, as the current single-buyer model i.e. the government is not sustainable in the long term,” Ali stated.

Muhammad Ali also expressed concern over the reliance on task forces or committees to address these issues. He suggested that Pakistan should develop stronger, more independent institutions for such inquiries, similar to those in other countries.

According to a press release, the Senate Committee deliberated on Muhammad Ali’s report on IPPs issued in the year 2020. Senator Mohsin Aziz argued as per report, the investment made by IPPs in the installation of power plants was earned back in two to four years.

However, in the case of coal power plants, the investment was redeemed in two years. SAPM on Power, Muhammad Ali, stated that in Pakistan, approximately 13 to 17 percent returns were given, which was twice the returns offered in any other country.

Muhammad Ali opined that the government should step back from the power business and focus on developing power markets, as practiced in other countries.

The Chairman of the Committee stated that the dollar-based regime should be changed into rupees to provide immediate relief to the general public.

SAPM on Power informed that the task force is negotiating with the IPPs, and recently, five power plants have been terminated by the task force on the recommendation of NTDC, which resulted in benefit the country Rs. 60 billion annually for the country. He highlighted that the task force has negotiated with the IPPs for the payment of the saved amount which should be paid back to the Government of Pakistan.

Furthermore, the Committee deliberated on the issue raised by Senator Aimal Wali Khan regarding the inclusion of IPP fees in the electricity bills by Pesco in Khyber Pakhtunkhwa, despite not a single unit of electricity being produced by IPPs in the province.

Special Secretary Arshad Majeed Mohmand apprised the Committee that the price of electricity is determined by the Federal Government and that the rate of the tariff is uniform across the country. The Committee was of the view that Provinces should be given the benefit of indigenous resources.

Senator Taj Haider proposed introducing separate and attractive tariffs for areas rich in national resources, such as gas.

In attendance were Senators Taj Haider, Syed Kazim Ali Shah, Rahat Jamali, Haji Hidayatullah Khan, SAPM on Power Muhammad Ali, Special Secretary for Power Arshad Majeed Mohmand and other Senior Officials from the concerned departments.

Copyright Business Recorder, 2024