Be it a newspaper, X (formerly Twitter) or any WhatsApp group, one would find a barrage of criticism on the GoP for the rising capacity charges with a strong push for renegotiating agreements with Independent Power Producers (IPPs). While the debate on the other side of the fence is centering around the justification of capacity payments and their construction.
However, before delving into specifics, it is crucial to address a fundamental issue: if the government itself is taking dollar-based returns from its own power plants, how can it negotiate different terms with private investors who risked investing at a time when the entire country was reeling with 8 – 12 hours of daily load shedding and rolling blackouts?
The government owns several power plants, including the older GENCOs: Jamshoro Power Company Limited (JPCL), Central Power Generation Company Limited (CPGCL), Northern Power Generation Company Limited (NPGCL), and Lakhra Power Generation Company Limited (LPGCL).
This discussion, however, will first focus on four RLNG-based combined cycle power plants: the 1230 MW Haveli Bahadur Shah (HBS) and the 1223MW Balloki plants, both owned by the Government of Pakistan through National Power Parks Management Company Ltd. (NPPMCL), and the 1263MW Punjab Thermal Power (Pvt) Limited (PTPL) and the 1180MW Quaid-e-Azam Thermal Power (Pvt) Limited (QATPL), also known as the Bhikki Power Project, owned by the Government of Punjab.
Capacity payments primarily consist of debt repayment charges, return on equity (ROE), insurance, and fixed operations and maintenance (O&M) costs. While reprofiling debt for a longer period might be one approach, focusing on converting dollar-based returns to rupee-based returns is more critical. This involves locking in the dollar value at a certain point.
At the inception of these projects, the ROE component of the tariff was calculated based on a 16% internal rate of return (IRR) on equity investment, with dollar indexation for all four RLNG plants. A question arises: why does the government itself require dollar-based returns& if it does, then why expect private investors to accept rupee-based remuneration?
In 2021, the reduction of the ROE component was initiated following the CCoE decision No. CCE/46/13/2020 dated August 27, 2020, ratified by the Cabinet in case No. 648/35/2020 dated September 8, 2020. This decision, conveyed by the Ministry of Energy (Power Division) via letter No. IPPs-10(18)/2020 dated October 6, 2020, to reduce the ROE of government-owned power projects (RLNG IPPs) from 16% IRR with dollar indexation to 12% IRR with dollar indexation. Power regulator NEPRA has revised this to 12% IRR, but dollar indexation remains.
As a first step, the government should remove dollar indexation from all government-owned power plants. A 12% return seems reasonable but should be rupee-based. This move will set a precedent for negotiating similar terms with private investors, fostering a more sustainable and equitable energy sector.
Regarding the older power plants known as GENCOs, NEPRA provided the fol lowing details in its State of Industry Report 2023:
Jamshoro Power Company Limited (GENCO-I) consists of four units, with only Unit-1 supplying nominal electricity during FY 2022-23. The remaining three units drew electricity from the National Grid without contributing any power. Unit-1 operates on RFO with notably low efficiency, resulting in a plant utilization factor of just 2.7% for FY 2022-23. The average Energy Purchase Price (EPP) per unit from Unit-1 during this period was Rs54.62/kWh.
Central Power Generation Company Limited (GENCO-II) is unique among public sector companies for its access to cost-effective dedicated gas but faced significant performance challenges during FY 2022-23.
Three out of four steam turbines, designed to work in conjunction with gas turbines, were out of operation, with the fourth steam turbine underperforming. Gas turbines either couldn’t operate or had to run in open cycle mode, leading to substantial financial losses for electricity consumers. Utilization factors for its units were 41.08% (Units 5-10), 0.56% (Units 11-13), and 40.63% (Units 14-16).
Northern Power Generation Company Limited (GENCO-III) has also exhibited poor performance, further straining the power sector. Plant utilization factors were 2.96% for TPS Muzaffargarh and 28.86% for Nandipur. The average EPP per unit from Muzaffargarh and Nandipur during FY 2022-23 were Rs50.01/kWh and Rs28.86/kWh, respectively.
Lakhra Power Generation Company Limited (GENCO-IV) has been shut down for the past few years.
The low efficiencies of the older GENCO power plants result in inefficient fuel consumption, leading to increased generation costs. Operating these inefficient power plants continues to burden the country’s power sector. Maintaining these outdated and inefficient facilities, despite having sufficient capacity for more efficient alternatives, is not advisable.
These plants should be retired, with manpower adjusted to NTDC and DISCOs. Grid station assets can also be transferred to the relevant DISCO or NTDC, depending on the voltage levels. Furthermore, NTDC has already initiated a study to utilize some older turbines for reactive power stability within the transmission network.
Before entering into negotiations with the IPPs, the government should as the first step strategically phase out outdated and inefficient generation facilities in the public sector to minimize the burden of capacity payments and ensure the operation of only efficient plants.
Additionally, dollar indexations should be removed from government-owned plants and no agreements must be renewed with IPPs established under the 1994 and 2002 policies. The complete solution lies in establishing an open electricity market for direct/bilateral trading of electricity promoting fair competition and if generation is required at certain points to alleviate transmission network congestion, an independent open auction through a functional market operator, in conjunction with an independent auction agency such as PPIB, should be conducted.
Negotiations with the IPPs will require exhaustive legal, technical and financial deliberations among the experts to ascertain the actual space available for toning down the agreed terms. Hasty and haphazard maneuvers can easily backfire and spiral into another Reko Diq-like catastrophe.
Copyright Business Recorder, 2024