ISLAMABAD: As the investigation into Independent Power Producers (IPPs) enters into its final stage, nearly half a dozen owners from these companies have been summoned to Islamabad on Monday (Sept 2) for what is described as courteous questioning and to provide evidence regarding alleged undue profits, sources informed Business Recorder.
The government led by Prime Minister Shahbaz Sharif has opted to employ the same influential-driven methods used by the Imran Khan administration in 2021 to exert pressure on IPPs. Initially, teams from these influential circles visited various plants to gather records and data. Following this, senior IPP executives were called for questioning in different cities and now they are being summoned to Islamabad for further discussions.
The sources said this exercise is meant to convince the owners of IPPs that the country needs their support at this juncture as current level of electricity prices are unbearable for industry and other consumers.
Rs1trn capacity payment made to 26 IPPs in 10 years
IPP owners are being urged to agree to revised contract terms, citing substantial amounts of money received, both legally and otherwise. In the first phase of this process, IPPs established under the 1994, 2002, and 2006 policies have been presented with alleged ‘missing links’ in their documentation and the substantial profits they have garnered. This approach has reportedly unsettled many IPP owners.
Energy sector investors are concerned that the government’s ‘tactics’ will be at the expense of investment. They argue that the handling of capacity payments is “unfortunate,” and this approach could discourage foreign investment for years. Addressing a technical issue with coercion carries risks that undermine investor confidence.
Minister for Power Awais Leghari reported to a parliamentary panel that approximately 50-60 experts are thoroughly reviewing all aspects of the power plant agreements to determine the government’s next steps. The politicization of this issue, which places blame on investors who made critical investments during a time of need, is likely to deter future investments.
Power Division, has also gave an in-camera briefing on current investigation on IPPs to the Senate Standing Committee on Power, in its last meeting of August 6, 2024 but details were not shared with media.
Although Minister Leghari has assured that the government will not unilaterally alter IPP contracts, concerns remain about the use of pressure tactics to compel IPP owners to accept the negotiators’ terms. This issue was highlighted in discussions with leading power sector investors in Pakistan.
A senior executive in the sector remarked, “the issue of capacity charges boils down to Rs. 18 per unit. Out of this Rs. 18, approximately Rs. 12 per unit is allocated to payments for government-sponsored generation units, including RLNG-fired plants, nuclear, hydel, wind, and baggasse-based plants. Of the remaining Rs. 4.60 per unit, approximately Rs. 4.60 is directed to capacity payments for Thar Coal-based and CPEC coal-based plants installed by Chinese investors. The share of IPPs in capacity payments amounts to Rs. 1.39 per unit. Even if all capacity payments to plants under the 1994 policy were removed, the impact would only be Rs. 0.54 per unit, and an additional Rs. 0.85 per unit for the 12 plants under the 2002 policy.”
This analysis suggests that even if the government manages to shut down all IPPs from the 1994 and 2002 policies, the potential savings would be minimal. However, such actions could significantly damage investor confidence and erode trust in policies, making future investments unlikely in a country where sovereign guarantees seem unreliable. Inefficiencies in the transmission and distribution system (T&D losses) and under-recovery by DISCOs are major factors driving up energy costs. During the first half of 2023-24, electricity distribution experienced losses and inefficiencies amounting to Rs. 77 billion, compared to Rs. 62 billion during the same period in 2022-23.
Private sector power generators argue that the government’s push to renegotiate IPP contracts, last updated in 2021, appears to be more about catering to specific interest groups and enhancing the government’s image rather than providing tangible benefits to the public. This approach, they say, could severely damage the country’s reputation as an investment destination.
The government’s team is hopeful that it may succeed in extracting some monetary concessions from the IPPs that it can then claim as a significant success.
Copyright Business Recorder, 2024