Renegotiating with IPPs

According to a Business Recorder exclusive, the cabinet's earlier decision to launch an inquiry into Independent Power Producers (IPPs) has been put on hold with the objective of using this as a bargaining chip for a better deal on power tariff. Negotiations between the government and the IPPs were reportedly near completion last year, however, the IPPs deferred concluding the negotiations pending the resolution of a dispute with Rausch Power. A committee under the chairmanship of Hammad Azhar was set up but to-date there has been no meeting of the committee and the matter remains pending. The dispute erupted after the Power Division maintained that Rausch was unable to make available its capacity due to disconnection by the SNGPL for non-payment while Rausch maintains that this was due to non-payment by the power purchaser NTDC (now CPPA-G).

A World Bank-sponsored study 2005, authored by Jamal Saghir, states that while the 1999 power policy was "hugely successful in attracting the private sector...Hubco, 20 IPPs with a total installed capacity of about 4500MW reached financial close...total investment was about US$5.3 billion, of which 25 percent was financed by foreign equity. An estimated US$ 3 billion was financed with foreign exchange debt with an average maturity of 10 years." Saghir, however, notes that the selection criteria under the policy enabled the implementation of many subprojects that were not consistent with least cost expansion programme in terms of "(i) capacity and location (too small given the system size and requirements and not suitably located to system requirements; (ii) fuel selection (excessive reliance on imported fuel oil; and (iii) technology (too many diesel sets and steam turbines as opposed to efficient combined cycle plants)." The study argues that if the government had followed the Bank's advice of limiting to 2000MW then Wapda may have been better able to absorb the capacity charges under the long-term power purchase agreements "despite the fact that demand for power increased at a slower pace than anticipated resulting in excess capacity for several years."

And as has been the hallmark of many public sector projects in Pakistan, Saghir maintains that "the basis on which projects were selected and accorded approval was not transparent and subject to political influence which led to perceptions of corruption by successive governments." The policy did not proceed through competitive bidding from private power Pakistan and instead set a tariff ceiling in an effort to accelerate the private power programme...the ceiling price set in the 1994 policy (US cents 6.1/kWH for the first 10 years and US cents 5.5 over the life of the project on a levelized basis) was competitive with levelized prices in other developing countries at the time including Indonesia, the Philippines and India."

Those that set up plants as per the 1994 policy have repaid loans and equity, and are no longer required to produce electricity. IPPs that have been operating for 10 years and have repaid their loans and equity yet are still required to produce electricity of more than 40 percent of annual capacity may, through negotiations with the government, agree to forego a quarter of the 50 billion rupee capacity charges by revisiting pegging with the dollar rate and the sponsors' high rates of return.

And finally, those IPPs set up during the PML-N government after 2013 - coal and RLNG-based - have the highest capacity charges as their tariffs are front loaded implying they must pay off all loans and shareholders equity during the first 10 years. These contracts too need to be reviewed with the banks convinced to stretch repayments with other charges given the current economic situation. In addition, if the government can ensure prompt payment of IPP dues, current and past, then the IPPs would have an incentive to renegotiate.

Analysts argue that capacity charges of around 50 to 200 billion rupees can be brought down if the government successfully renegotiates with the IPPs. However circular energy debt, defined as CPPAs cash shortfall disabling it from clearing IPPs dues, is rising and has reached 1.9 to 2 trillion rupees. This is due to high cost of producing electricity (sourced to massive inefficiencies in the power sector including high transmission and distribution losses, as well as high taxes) that are not recovered from consumers (including theft and delayed or non-payment of subsidies and delayed determination and notification of tariffs).

There is, therefore, a need to resolve the matter of high tariffs (with sector experts arguing that consumers should not be forced to pay for the hydel profits as these should be paid by Wapda instead but needless to add Wapda's operating cost structure was transformed by increasing purchases from the IPPs) through mutual accommodation between the government and the IPPs.