Cut in IPPs' capacity charges: MoF told to design structure for synthetic financing

The Cabinet Committee on Energy (CCoE) has directed the Finance Ministry to design a master structure for synthetic financing to reduce capacity charges of IPPs, well-informed sources told Business Recorder.

"We have placed a comprehensive proposal to the Asad Umar-led committee suggesting measures to reduce the gigantic capacity charges," the sources added.

Power Division, the sources said briefed the CCoE on April 2, 2020 on synthetic financing to reduce capacity charges, suggesting that where a plant has a remaining term loan of more than five years, capacity payment can be reduced by extending tenure of loan to lower upfront tariff. This can be negotiated with various IPPs.

However, all IPPs under the 1994 Power Policy have already paid off their debt. Further the repayment of debt of IPPs under 2002 Power Policy will be completed by mid 2021. In addition, since CPEC projects are financed through special financing arrangement, they cannot be considered under this arrangement. Therefore, in the case of projects installed between 2002 Power Policy and before CPEC, the debt repayment can be restructured for extended period, if their lenders agree.

It was pointed out that the financial cost will be on higher side due to spread of repayment over extended period. Mostly renewable projects would fall under this criterion.

According to sources, the CCoE took note of the presentation made by Power Division regarding synthetic financing to reduce capacity charges and decided that Finance Division will design a master structure for synthetic financing to reduce capacity charges in consultation with Power Division and Nepra, and submit the same to ECC for approval before the end of April, 2020.

Earlier, a proposal came under consideration that the government constitute a committee under the chairmanship of Minister for Power, Omar Ayub Khan to negotiate with Independent Power Producers (IPPs) for waiver of capacity charges of CPPA-G voluntarily to lower cost of generation.

The Central Power Purchasing Agency -Guaranteed- the electricity buyer, pays approximately Rs 45 billion per month(Rs 550 billion per annum ) to the IPPs which are ultimately passed on the consumers. It is one of the components of circular debt besides mismanagement and poor performance of power sector.

In July last year, National Electric Power Regulatory Authority (Nepra) had proposed the constitution of a high level Commission on matters relating to Residual Fuel Oil (RFO), capacity payment and indexation given to Independent Power Producers (IPPs).

Nepra had suggested that the commission consist of experts from international financial institutions, legal and engineering consultants, in addition to officials from National Accountability Bureau (NAB), Finance, SECP, and Ministry of Energy.

At a recent meeting of Cabinet, Prime Minister Imran Khan maintained that status of power sector is a major challenge for the government and was the area of prime focus; he further stated that the complexity of power sector required disaggregation of various issues for the purpose of presenting them before the cabinet. He cited the subsidy given to the tube-wells in Balochistan was one such issue which required detailed deliberations. While referring to the seemingly intractable problem of circular debt he gave the example of Turkey which had resolved this issue.

Some of the cabinet members were of the view that the response of Power Division on high cost of electricity with special reference to variance in guaranteed rate of return to IPPs was evasive as it shifted the onus on the report by the Commission constituted under Muhammad Ali, former Chairman SECP.

Power Division assured the cabinet that the report of the committee working under the chairmanship of former Chairman SECP is near completion and if the findings of the committee identified any wrongdoings, Power Division would proceed against the delinquents, accordingly.

However, one of the senior officials of Power Division told Business Recorder that if the value of dollar was equal to Rs 50 at the time of agreement it is now Rs 166 against one US dollar adding that this issue can be discussed with the IPPs amicably to convince them to review their agreements in the best national interest as they have already earned what they spent.