IPP body for shifting from US$ to PKR-based tariff

The IPPs committee headed by former Chairman SECP, Muhammad Ali has recommended the government to shift from US dollar to PKR based-tariff and do away with take or pay arrangements with the IPPs.

The payment to IPPs under the existing arrangement versus payment required in case the shift is made to rupees based IRR at USD-PKR parity of first year after COD for all plants except 1994 Policy (13,154) leading to savings in excess of Rs 4.7 trillion over the project life of these IPPs. On an annual basis, this can lead to saving of at least Rs 150 billion which will reduce power tariff by Rs 1/kWh.

The committee, in its recommendations has asked the government to incorporate change in generation policy within three months for both actions. Power Division is going through the report which will be submitted to the Cabinet Committee on Energy (CCoE) for guidance.

The committee has also recommended to establish a Commission for forensic evaluation (forensic and legal audit of all IPPs) and review set up costs of IPPs and Lahore-Matiari HVDC transmission line. Risks highlighted in the report should also be reviewed.

The sources said, committee has recommended that Nepra Act should be amended to recover excess profits made from fuel, O&M, excess set cost, etc and rectify IRR and debt payment frequency mismatch within three months. It has been calculated at 6 per cent each for both.

Other recommendations of the committee are as follows ;(i) review of Interest During Construction (IDC) and other setup costs of coal IPPs to recalculate RoE;(ii) review plant capacity benchmarks in renewable IPPs for a more prudent tariff sharing method and recover excess payments made;(iii) introduction of reasonable claw back mechanism in all tariffs( where required);(iv) verification of fuel inventories of thermal IPPs and adjust outstanding payments against actual levels ;(v) recovery of excess profits made by generation beyond capacity benchmarks from renewable IPPs in three months and ;(vi) consideration of retirement of Gencos by generation as well IPPs established under the 1994 and 2002 Policy.

According to the report, next year capacity purchase payment projection by CPPA-G is in excess of Rs 900 billion. With the current excess capacity of 30 per cent in the country, moving to TaP and accounting for demand in growth, the country can easily save at least Rs 150-200 billion which can lead to further reduction of Rs 1/ kWh in power tariff..

The report recommended the government to incentivize industry to switch from captive from the NTDC grid instead of setting up their own 900 MW RLNG based and 700 MW coal-fired plants. In order to achieve this investment required in NTDC's transmission system will be much lower than the cost of setting up additional plants of 1,600 MW.

On Net Hydel Profit (NHP), as per existing practices adopted by Nepra still remains unresolved. For example as per existing practice adopted by Nepra, NHP for FY 2020 would be Rs 38.75 billion at Rs 1.15 per unit, while using KP's version of the 1986 Kazi Committee's Mythology, NHP figure works out to be more than Rs 400 billion. Therefore, there is an urgent need to review the situation in light of experience and practices or other countries with significant hydel generation (, Barzi, Canada, China and India etc) and arriving at a consensus among stakeholders on a sustainable NHP formula which the consumers and the power sector economy can afford.

The financing cost of the outstanding circular debt stock feeds back into an even higher stock of circular debt. Assuming a mark-up rate of 15 per cent, the annual financial cost of the outstanding stock of Rs 1.8 trillion at December 2019 should work out to nearly Rs 270 billion ( around Rs 2.7/ kWh based on total units billed in the CPPA-G record during FY 2019.

The report further says that with a total Power Purchase Price (PPP) of Rs 1.344 trillion, the total cost of the units lost worked out to around Rs 30 billion whereas Rs 120 billion is lost due to under-recoveries.

A bigger issue with Discos is under-collection of amounts billed to customers which averaged 91 per cent over the past 7 years (FY 2013 to FY 2019 leading to cumulative shortfall of Rs 633 billion.

The receivables of Discos from private sector defaulters amounted to Rs 628 billion at end of December 2019, comprising Rs 525 billion due from running defaulters and Rs 103 billion recoverable from disconnected (permanent) defaulters.