The Finance Ministry has blocked a proposal of Ministry of Water and Power regarding signing of 'side agreement' with Independent Power Producers (IPPs), saying that it will have additional financial implications and has the potential for an increase in the subsidy in case Nepra does not allow the additional financial impact to be passed on to the consumers.
IPPs are seeking an amount of Rs 750 million from the NTDC due to delay in capacity payment. As per the executed Power Purchase Agreements (PPAs), the IPPs are being compensated for delayed payments through delayed payment interest (Kibor + 4.5%). Furthermore, on the request of IPPs, PPIB provided its no-objection for a significantly enhanced working capital limit for RFO-based IPPs (without any increase in the working capital cost component of the tariff) in order to facilitate them for arrangement of extra working capital needed to arrange for fuel.
Although the delayed payment interest and enhancement of working capital should have helped the IPPs for arrangement of additional fuel required to make their plants available for dispatch in case of non-payment by the power purchaser, these measures have not solved the problem, as banks are not willing to lend additional working capital to the IPPs in the present scenario of circular debt, escalating fuel prices and sectoral restrictions.
The IPPs are agitating that they are incurring financial losses in terms of loss of capacity payments as they are not able to make their plants available for dispatch due to non-availability of fuel, solely caused by delay in payments by the power purchaser. Four (4) gas/HSD based IPPs also averred that as gas availability from SNGPL is not firm beyond November 2011, they would operate on HSD in case of non-availability of gas. Therefore, keeping in view the price of HSD, gas-based IPPs also need to have a mechanism similar to RFO based IPPs for compensation of payments.
According to the Finance Ministry, IPPs under Power Policy 2002 are required to maintain fuel stock for 30 days and cost of maintaining the stock has been allowed by Nepra in their tariff. The fuel stock presently is not being maintained by IPPs. Therefore, if Finance Ministry takes in to account the contractual obligation of IPPs, they are liable to Liquidated Damages (LDs) ie they are not entitled to capacity payments as they have to generate the electricity for 30 days. In addition, CPPA has 60 days margin for payment before the sovereign guarantee are encashed (30 days for processing/payment of invoices and if the default continues, the IPPs will send a 20-day notice for conveying their intention to encash the guarantee).
If the default continues the IPPs are entitled to call the guarantee. In that case government has 10 days as cure period, within which it has to make the payment. This implies that if CPPA makes payment within 60 days from the date of issuance of invoices, IPPs cannot encash the guarantee.
In other words the government's contingent liability is staggered over a period of 90 days as per PPA. In case, IPPs are allowed to maintain fuel stock for 90 days instead of 30 days, Nepra will have to allow the cost of additional working capital for maintaining the stock. This will increase the cost of power purchase by CPPA and correspondingly, would increase the cost of power purchase by Discos.
"If the notified tariff is not increased, the proposal is likely to increase the subsidy," the sources quoted Secretary Finance as saying in his comments. Finance Ministry further argued that treating the non-generation of electricity by these IPPs as additional forced outage hours due to non-payment by the CPPA/NTDC.
Finance Ministry maintains that this will entitle the IPPs to demand capacity payment for this period and CPPA/NTDC will not be able to impose LDs. This arrangement will be outside the existing PPA and may create a precedent which will be claimed by other IPPs and future investors. Therefore, Ministry of Water and Power should find a solution within the existing legal framework. Finance Ministry further observed that financial benefits proposed by the Ministry of Water and Power needs to be worked out independently by Nepra and impact of foregone LD should also be taken into account.
Working capital is provided for purchase of fuel cost and routine repair and maintenance with the capacity payment taking care of debt servicing and return and assets as well as to meet O&M expanses. Therefore, the proposal has been supported to the extent of increase in working capital excluding capacity payments. If capacity payments also include the tariff it is likely to increase substantially. Moreover, the existing storage capacity of IPPs to maintain fuel stock is only up to 30 days for RFO-based plants, whereas the proposed increase in working capital will include fuel cost for 90 days, therefore, the proposal needs to be reconsidered.
Finance Ministry has proposed that instead of revising the existing PPAs through sideline agreements, working capital requirements of the IPPs may be increased in consultation with Nepra. Finance Ministry said that Pepco should be advised to increase the payment of these IPPs to clear their backlog as their revenues will substantially increase in the coming months.