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Revised PPAs inked with about one dozen IPPs
Published November 30, 2024
ISLAMABAD: The government’s energy task force has reportedly signed revised Power Purchase Agreements (PPAs) with about a dozen Independent Power Producers (IPPs) established under Power Policies of 1994 and 2002, well-informed sources told Business Recorder.
The task force headed by the Minister for Power, Sardar Awais Khan Leghari and comprising SAPM on Power, Muhammad Ali, National Coordinator, Lt. General, Muhammad Zafar Iqbal, Chairman NEPRA, CEO CPPA-G, Managing Director, PPIB, and experts from NEPRA, CPPA-G and SECP, is engaged in ‘hard talks’ with the IPPs of 1994 and 2002, some of them are still resisting on the proposed cut in their profits, financial gains of the past and interest on late payment.
However, when the representatives of IPPs are shown ‘files of evidence’ of their wrongdoings and new offers are brought at the table for agreements, the IPPs show some resistance but later agree on those proposals after seeing evidence of illegal financial gains, the sources added.
New IPP deals: PM tasks Fatemi to address Siemens’ grievances
“Things are going well. Meetings being held every day. MashaAllah 8 signed, rest will InshaAllah be signed in next 2 weeks and we will be over with 1994 and 2002 plants, and then look at govt and 2006 policy plants,” said one of the officials. However, two or three more IPPs have signed the deals.
According to official documents, Senate Standing Committee on Power, reviewed Muhammad Ali’s report which detailed the substantial profits earned by IPPs under the 1994 Powel Policy Out of 17 IPPs, 16 invested a combined capital of Rs. 518 billion, generating profits exceeding Rs. 415 billion and distributing dividends over Rs 310 billion. Many IPPs achieved payback on their investments within 2-4 years with profit multiples as high as 18.26 times and dividends up to 22 times the original investment,
The committee outlined three main issues regarding IPP projects. First, it questioned the actual project costs, the extent of over-billing and over-invoicing and the returns which included a 17 % rate and possible kickbacks. Second, the tariffs set at that time, comparing them to those in other developing countries - India, Bangladesh, South Africa, Sri Lanka, and Egypt to assess the fair cost of foreign-sourced engines with a capacity of 210 MW and third, the heat rate guaranteed by the engine manufacturers.
The report indicates that certain coal projects, like Jamshoro, recovered their costs within two years. The government has also set up a taskforce to review agreements with IPPS and has shut down five power plants without renegotiating their terms.
The Committee seeks information on the status of the remaining plants, as well as an estimate of the timeline and extent of consumer benefits from these actions.
SAPM on Power apprised the Committee that Pakistan has the highest electricity consumption rate in the region, prompting a study in August 2019 with findings published in March 2020. In India, IPPs had a return of 16%, in local currency (Indian Rupees), unlike Pakistan’s dollar-based returns. Other countries with similar credit ratings to Pakistan in that era, like Mexico and Argentina, offered a 10% return in dollars.
In the 1990s, Pakistan introduced its first IPP regime and implemented an upfront tariff based on World Bank advice.
Starting in 2002, Pakistan offered high returns on IPP investments-13% to 17% in dollars - double the global average at the time. This included returns on equity during construction, raising total returns to 20%-27% or more. Under this cost-plus policy, the Government covered all costs, while consumers bore the debt.
The Government generates 50% of power, with IPPs producing the other half. However, non-payment issues, transmission constraints, and rising circular debt have strained the sector.
The report recommended establishing a competitive power market in Pakistan and suggested the Government exit power generation and tariff setting to better address these systemic issues.
Power markets exist worldwide where generators sell electricity, suppliers and retailers distribute it to industries and households. While IPPs in Pakistan were established 10-20 years ago, efforts to assess the actual setup costs by comparing with other countries using similar technology were hindered due to lack of budget for global consultancy.
NEPRA determines tariffs based on plant efficiency, but did not adjust for efficiency variations, such as when plants exceed 45% efficiency. These plants were more efficient than 45%, using less fuel to generate electricity, resulting in profits for IPPs due to lower fuel costs. However, when NEPRA conducted an audit, the court issued a stay order to halt the process.
The Committee was of the view that in the cost-plus tariff regime, where the Government bears the full cost of electricity, the agreed returns should be paid, and any excess profits should benefit consumers. The Committee recommended switching from dollar-based payments to Pak Rupees and adopting a “take and pay” system, where the government only pays for consumed power.
The Committee also questioned the actions taken since the report published regarding IPPs in March 2020, asking about the progress and recovery. In response, it was apprised that the Government formed a negotiation committee and signed a MoU with IPPs. The dispute over excess dues will eventually be referred to NEPRA for a final decision.
On the issue of negotiation with IPPs into a final agreement a Committee was formed. Following the establishment of the Task Force, negotiations are ongoing to recover excess payments made to IPPs in the past.
The Committee showed concerns that NEPRA has not determined the exact excess payments despite comprehensive reports, and the Auditor General’s report highlight these overpayments. The Government has failed to recover the amount and the public continues to suffer. The Committee asked how long it would take for the Task Force to recover the money.
In reply, Ali Muhammad responded that the excess payments would be recovered through future payments while agreements with five unused plants have been terminated. There is no longer make future payments, resulting in a benefit of Rs. 400 billion and saving Rs. 60 billion annually.
However, the Task Force’s scope is limited, and NEPRA, as the regulatory authority, should recover the excess payments. The committee asked to provide details of those IPPs which are operating at 25% capacity but still receiving full capacity payments, as well as data on plants operating at 95%-85% capacity that sometimes receive full or partial capacity payments. The Committee also asked for a provision of list of plants that are not producing any electricity but are still receiving capacity payments.
SAPM on Power further apprised that the Government would provide details of capacity payments for each plant, including the plant factor. He reiterated the importance of the Government exiting the power sector and handing over control to the private sector. The Task Force is actively negotiating with IPPs to recover savings and pass the benefits to consumers.
Regarding baggasse, Ali Muhammad, SAPM on Power told that in other parts of the world, baggasse is not linked to international coal prices. He apprised the Committee that through negotiations with IPPs, the Task Force successfully delinked baggasse from the coal price and shifted to a rupee-based pricing system. A summary of this change has been submitted to the Cabinet for approval.
He further stated that the task force is negotiating with 17 IPPS from the period of 1994 and 2002 agreements, as well as with Government Power Plants, to recover saved amounts. These negotiations are expected to be completed within the next three to six months.
- Government’s energy task force engaged in ‘hard talks’ with IPPs of 1994 and 2002, who are still resisting on the proposed cut in their profits, financial gains of the past and interest on late payment
Published November 30, 2024
ISLAMABAD: The government’s energy task force has reportedly signed revised Power Purchase Agreements (PPAs) with about a dozen Independent Power Producers (IPPs) established under Power Policies of 1994 and 2002, well-informed sources told Business Recorder.
The task force headed by the Minister for Power, Sardar Awais Khan Leghari and comprising SAPM on Power, Muhammad Ali, National Coordinator, Lt. General, Muhammad Zafar Iqbal, Chairman NEPRA, CEO CPPA-G, Managing Director, PPIB, and experts from NEPRA, CPPA-G and SECP, is engaged in ‘hard talks’ with the IPPs of 1994 and 2002, some of them are still resisting on the proposed cut in their profits, financial gains of the past and interest on late payment.
However, when the representatives of IPPs are shown ‘files of evidence’ of their wrongdoings and new offers are brought at the table for agreements, the IPPs show some resistance but later agree on those proposals after seeing evidence of illegal financial gains, the sources added.
New IPP deals: PM tasks Fatemi to address Siemens’ grievances
“Things are going well. Meetings being held every day. MashaAllah 8 signed, rest will InshaAllah be signed in next 2 weeks and we will be over with 1994 and 2002 plants, and then look at govt and 2006 policy plants,” said one of the officials. However, two or three more IPPs have signed the deals.
According to official documents, Senate Standing Committee on Power, reviewed Muhammad Ali’s report which detailed the substantial profits earned by IPPs under the 1994 Powel Policy Out of 17 IPPs, 16 invested a combined capital of Rs. 518 billion, generating profits exceeding Rs. 415 billion and distributing dividends over Rs 310 billion. Many IPPs achieved payback on their investments within 2-4 years with profit multiples as high as 18.26 times and dividends up to 22 times the original investment,
The committee outlined three main issues regarding IPP projects. First, it questioned the actual project costs, the extent of over-billing and over-invoicing and the returns which included a 17 % rate and possible kickbacks. Second, the tariffs set at that time, comparing them to those in other developing countries - India, Bangladesh, South Africa, Sri Lanka, and Egypt to assess the fair cost of foreign-sourced engines with a capacity of 210 MW and third, the heat rate guaranteed by the engine manufacturers.
The report indicates that certain coal projects, like Jamshoro, recovered their costs within two years. The government has also set up a taskforce to review agreements with IPPS and has shut down five power plants without renegotiating their terms.
The Committee seeks information on the status of the remaining plants, as well as an estimate of the timeline and extent of consumer benefits from these actions.
SAPM on Power apprised the Committee that Pakistan has the highest electricity consumption rate in the region, prompting a study in August 2019 with findings published in March 2020. In India, IPPs had a return of 16%, in local currency (Indian Rupees), unlike Pakistan’s dollar-based returns. Other countries with similar credit ratings to Pakistan in that era, like Mexico and Argentina, offered a 10% return in dollars.
In the 1990s, Pakistan introduced its first IPP regime and implemented an upfront tariff based on World Bank advice.
Starting in 2002, Pakistan offered high returns on IPP investments-13% to 17% in dollars - double the global average at the time. This included returns on equity during construction, raising total returns to 20%-27% or more. Under this cost-plus policy, the Government covered all costs, while consumers bore the debt.
The Government generates 50% of power, with IPPs producing the other half. However, non-payment issues, transmission constraints, and rising circular debt have strained the sector.
The report recommended establishing a competitive power market in Pakistan and suggested the Government exit power generation and tariff setting to better address these systemic issues.
Power markets exist worldwide where generators sell electricity, suppliers and retailers distribute it to industries and households. While IPPs in Pakistan were established 10-20 years ago, efforts to assess the actual setup costs by comparing with other countries using similar technology were hindered due to lack of budget for global consultancy.
NEPRA determines tariffs based on plant efficiency, but did not adjust for efficiency variations, such as when plants exceed 45% efficiency. These plants were more efficient than 45%, using less fuel to generate electricity, resulting in profits for IPPs due to lower fuel costs. However, when NEPRA conducted an audit, the court issued a stay order to halt the process.
The Committee was of the view that in the cost-plus tariff regime, where the Government bears the full cost of electricity, the agreed returns should be paid, and any excess profits should benefit consumers. The Committee recommended switching from dollar-based payments to Pak Rupees and adopting a “take and pay” system, where the government only pays for consumed power.
The Committee also questioned the actions taken since the report published regarding IPPs in March 2020, asking about the progress and recovery. In response, it was apprised that the Government formed a negotiation committee and signed a MoU with IPPs. The dispute over excess dues will eventually be referred to NEPRA for a final decision.
On the issue of negotiation with IPPs into a final agreement a Committee was formed. Following the establishment of the Task Force, negotiations are ongoing to recover excess payments made to IPPs in the past.
The Committee showed concerns that NEPRA has not determined the exact excess payments despite comprehensive reports, and the Auditor General’s report highlight these overpayments. The Government has failed to recover the amount and the public continues to suffer. The Committee asked how long it would take for the Task Force to recover the money.
In reply, Ali Muhammad responded that the excess payments would be recovered through future payments while agreements with five unused plants have been terminated. There is no longer make future payments, resulting in a benefit of Rs. 400 billion and saving Rs. 60 billion annually.
However, the Task Force’s scope is limited, and NEPRA, as the regulatory authority, should recover the excess payments. The committee asked to provide details of those IPPs which are operating at 25% capacity but still receiving full capacity payments, as well as data on plants operating at 95%-85% capacity that sometimes receive full or partial capacity payments. The Committee also asked for a provision of list of plants that are not producing any electricity but are still receiving capacity payments.
SAPM on Power further apprised that the Government would provide details of capacity payments for each plant, including the plant factor. He reiterated the importance of the Government exiting the power sector and handing over control to the private sector. The Task Force is actively negotiating with IPPs to recover savings and pass the benefits to consumers.
Regarding baggasse, Ali Muhammad, SAPM on Power told that in other parts of the world, baggasse is not linked to international coal prices. He apprised the Committee that through negotiations with IPPs, the Task Force successfully delinked baggasse from the coal price and shifted to a rupee-based pricing system. A summary of this change has been submitted to the Cabinet for approval.
He further stated that the task force is negotiating with 17 IPPS from the period of 1994 and 2002 agreements, as well as with Government Power Plants, to recover saved amounts. These negotiations are expected to be completed within the next three to six months.
Revised PPAs inked with about one dozen IPPs
Government’s energy task force engaged in ‘hard talks’ with IPPs of 1994 and 2002, who are still resisting on the proposed cut in their profits, financial gains of the past and interest on late payment
www.brecorder.com
