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ISLAMABAD: In a crucial development, a government team and two groups of independent power producers (IPPs) and wind power projects (WPPs) reportedly reached an understanding on reduction in the rate of return on equity and late payment surcharge (LPS) and sharing of savings on account of plant efficiencies on Thursday.
A senior government official told Dawn that about half of the 12 IPPs set up under the 2002 power policy and an association representing about two dozen WPPs had already signed memorandums of understanding (MoUs) with a negotiation team led by former federal secretary Babar Yaqoob Fateh Muhammad while others are expected to follow suit within 15 days.
These do not include the IPPs under 1994 policy, China-Pakistan Economic Corridor, public sector plants of generation companies, hydropower and nuclear power projects which claim over 75 per cent of the capacity payments.
Since most of the IPPs remained unutilised for almost nine months last year and are on the last leg of their terms, the total savings would amount to about 5pc of the total energy purchases that last year stood at about Rs775 billion or about Rs35-40bn, the official explained.
All projects will convert their contracts to ‘take and pay basis’
The understanding followed principles from government side that power purchase agreements are sacrosanct, the IPPs would not be subjected to media trial and there would be no investigations or arm twisting. However, evidence was put on the table to suggest that on a case to case basis, investments had been exaggerated, equity overstated and machinery over-invoiced and taxes underpaid and hence mutually agreed changes in existing contractual relationship.
For foreign investors registered with the State Bank of Pakistan, the return on equity (ROE) ‘will be 12pc prospectively’. For local investors, the ROE will be changed to 17pc in rupee terms without dollar indexation. “In recalculating the return, the equity approved by the National Electric and Power Regulatory Authority (Nepra) on commercial operation date in dollar shall be converted into rupee at an exchange rate of Rs145 for prospective calculation”, according to an MoU seen by Dawn.
The two sides have also agreed that any saving in fuel for oil-based projects would be shared on a sliding scale starting from 70:30 in favor the government for the first 0.5pc efficiency improvement above currently determined benchmark by Nepra, followed by 60:40 for next 0.5pc, followed by 50:50 for next 0.5pc, and finally 40:60 for any efficiency above that. The government will not share efficiency losses.
Likewise, any savings in operations and maintenance (O&M) in case of these plants would be shared 50:50 after accounting for any reserves for major overhauling. If the reserve for major overhaul remains unutilised, it will be shared in the ratio of 50:50 by the IPP and the government, which will not share losses in O&M and major overhaul.
For gas projects, the fuel and O&M will be taken as one consolidated line and any net savings will be shared 60:40 by the government and IPP, after accounting for any reserves for major overhaul. The unutilised reserve for overhaul would be shared on 60:40 by the government and IPP. Power purchaser will not share in fuel, O&M and major overhaul losses.
The two sides have also agreed for heat rate test by the government of the IPPs to ensure actual efficiency matched reported accounts.
Moreover, the LPS would be lowered both by the IPPs and WPPs from the current Kibor plus 4.5pc to Kibor plus 2pc but it will be ensured that payments follow the power purchase agreement (PPA) mandated first-in-first-out payment to make this rate effective. Compounding and interest on interest provided for in the PPA, etc. will be adjusted to match the settlement agreement initialed (but never put into effect) by the government and some of the IPPs in 2019.
On ‘miscalculation’ of internal rate of return (IRR) on account of periodicity of payments, no adjustment shall be made for the past as the regulator had expressly allowed this in its decisions. In future, Nepra shall calculate IRR on a monthly basis and shall consider on merit adjustments for costs denied in lieu thereof.
Also, all projects will convert their contracts to take and pay basis, when Competitive Trading Arrangement is implemented and becomes fully operational, as per the terms defined in the license of each IPP. Until then, the existing take or pay will continue.
In order to assess if a company has made any ‘excess profits’, the reconciled financials between the committee and the IPPs would submitted to Nepra to take a decision and provide for a mechanism for recoveries where applicable.
The payment of receivables of the IPPs have been made integral part of the settlement. The two sides will devise a mechanism for repayment of the outstanding receivables with an agreement on payment of receivables within the agreed time period which will be reflected in the final agreement to be signed.
The committee has committed that the National Transmission and Despatch Company/National Power Construction Corporation would not be allowed to curtail their power supply on the premise of transmission constraints and any such rejection or energy lost would be compensated and default interest invoice payment within a month.
The government agencies would open onshore dollar account to enable the WPPs to convert their earnings into dollars on monthly basis. Their agreement would also be extended to 25 years from 20.
In return, the WPPs would secure reduction in O&M fee and relief from lenders in extension of debt term by five years and some reduction in spread to be given to the government. The two sides have also agreed to reduce ROE by up to 3pc provided the ROE remains in dollar.
The government will assist the WPPs in relief in loans since some of the lenders were multilaterals or receptive to government goodwill.
Published in Dawn, August 14th, 2020
https://www.dawn.com/news/1574310/govt-power-producers-agree-to-reduce-project-returns-share-savings
A senior government official told Dawn that about half of the 12 IPPs set up under the 2002 power policy and an association representing about two dozen WPPs had already signed memorandums of understanding (MoUs) with a negotiation team led by former federal secretary Babar Yaqoob Fateh Muhammad while others are expected to follow suit within 15 days.
These do not include the IPPs under 1994 policy, China-Pakistan Economic Corridor, public sector plants of generation companies, hydropower and nuclear power projects which claim over 75 per cent of the capacity payments.
Since most of the IPPs remained unutilised for almost nine months last year and are on the last leg of their terms, the total savings would amount to about 5pc of the total energy purchases that last year stood at about Rs775 billion or about Rs35-40bn, the official explained.
All projects will convert their contracts to ‘take and pay basis’
The understanding followed principles from government side that power purchase agreements are sacrosanct, the IPPs would not be subjected to media trial and there would be no investigations or arm twisting. However, evidence was put on the table to suggest that on a case to case basis, investments had been exaggerated, equity overstated and machinery over-invoiced and taxes underpaid and hence mutually agreed changes in existing contractual relationship.
For foreign investors registered with the State Bank of Pakistan, the return on equity (ROE) ‘will be 12pc prospectively’. For local investors, the ROE will be changed to 17pc in rupee terms without dollar indexation. “In recalculating the return, the equity approved by the National Electric and Power Regulatory Authority (Nepra) on commercial operation date in dollar shall be converted into rupee at an exchange rate of Rs145 for prospective calculation”, according to an MoU seen by Dawn.
The two sides have also agreed that any saving in fuel for oil-based projects would be shared on a sliding scale starting from 70:30 in favor the government for the first 0.5pc efficiency improvement above currently determined benchmark by Nepra, followed by 60:40 for next 0.5pc, followed by 50:50 for next 0.5pc, and finally 40:60 for any efficiency above that. The government will not share efficiency losses.
Likewise, any savings in operations and maintenance (O&M) in case of these plants would be shared 50:50 after accounting for any reserves for major overhauling. If the reserve for major overhaul remains unutilised, it will be shared in the ratio of 50:50 by the IPP and the government, which will not share losses in O&M and major overhaul.
For gas projects, the fuel and O&M will be taken as one consolidated line and any net savings will be shared 60:40 by the government and IPP, after accounting for any reserves for major overhaul. The unutilised reserve for overhaul would be shared on 60:40 by the government and IPP. Power purchaser will not share in fuel, O&M and major overhaul losses.
The two sides have also agreed for heat rate test by the government of the IPPs to ensure actual efficiency matched reported accounts.
Moreover, the LPS would be lowered both by the IPPs and WPPs from the current Kibor plus 4.5pc to Kibor plus 2pc but it will be ensured that payments follow the power purchase agreement (PPA) mandated first-in-first-out payment to make this rate effective. Compounding and interest on interest provided for in the PPA, etc. will be adjusted to match the settlement agreement initialed (but never put into effect) by the government and some of the IPPs in 2019.
On ‘miscalculation’ of internal rate of return (IRR) on account of periodicity of payments, no adjustment shall be made for the past as the regulator had expressly allowed this in its decisions. In future, Nepra shall calculate IRR on a monthly basis and shall consider on merit adjustments for costs denied in lieu thereof.
Also, all projects will convert their contracts to take and pay basis, when Competitive Trading Arrangement is implemented and becomes fully operational, as per the terms defined in the license of each IPP. Until then, the existing take or pay will continue.
In order to assess if a company has made any ‘excess profits’, the reconciled financials between the committee and the IPPs would submitted to Nepra to take a decision and provide for a mechanism for recoveries where applicable.
The payment of receivables of the IPPs have been made integral part of the settlement. The two sides will devise a mechanism for repayment of the outstanding receivables with an agreement on payment of receivables within the agreed time period which will be reflected in the final agreement to be signed.
The committee has committed that the National Transmission and Despatch Company/National Power Construction Corporation would not be allowed to curtail their power supply on the premise of transmission constraints and any such rejection or energy lost would be compensated and default interest invoice payment within a month.
The government agencies would open onshore dollar account to enable the WPPs to convert their earnings into dollars on monthly basis. Their agreement would also be extended to 25 years from 20.
In return, the WPPs would secure reduction in O&M fee and relief from lenders in extension of debt term by five years and some reduction in spread to be given to the government. The two sides have also agreed to reduce ROE by up to 3pc provided the ROE remains in dollar.
The government will assist the WPPs in relief in loans since some of the lenders were multilaterals or receptive to government goodwill.
Published in Dawn, August 14th, 2020
https://www.dawn.com/news/1574310/govt-power-producers-agree-to-reduce-project-returns-share-savings
