Shehbaz government may follow IK administration's lead on IPPs

ISLAMABAD: The Prime Minister Shehbaz Sharif-led government has reportedly opted to follow the same path as the Imran Khan administration in its dealings with independent power producers (IPPs) – by reducing the rate on equity of public sector power plants, closing down five Gencos to get relief of up to Rs 4 per unit and negotiating on existing contracts from take or pay to take and pay mechanism, informed sources told Business Recorder.

However, this time, the prescription regarding undue gains/profits of IPPs is underway in Rawalpindi instead of Islamabad, where the government team and some concerned private experts are finalizing the recommendations. The sources said that some members of the team have already collected data on IPPs, including physical inspections and photographs of power plants and names of shareholders. Senior officials of PPIB, CPPA-G and NEPRA are also part of the team examining the collected documents.

Government takes major step to address IPP challenge

According to sources, some experts who extended their support during the Khan government to renegotiate with the pre-1994 (Hubco), 1994, 2002 and 2013 IPPs are reluctant to offer their services as they argue that witch-hunting the same IPPs again and again will not send a good message to investors who might be interested in participating in the privatisation of Discos or Gencos like Guddu and Nandipur.

The Khan administration, with the visible help of the Faiz Hameed-led ISI, renegotiated with the IPPs established under the pre-1994, 1994, 2002 and 2015 power generation policies, leading to a mere 48 paisa per unit reduction in the tariff.

One of the key members of the Shehbaz Sharif administration team, on condition of anonymity, told this reporter that the Imran Khan government had not dealt properly with the IPPs, adding that the government could have extracted more concessions from the IPPs.

Contracts with independent power producers include energy payments and capacity payments. Capacity payments, independent of actual supply, include debt repayment costs, equity repayments, insurance, and operating and maintenance costs. More than 52% of capacity payments go to government-owned power plants, some of which are extremely inefficient. Their employees regularly receive their salaries even when production is zero.

The Imran Khan government, however, has failed to renegotiate contracts with the Chinese independent power producers and the five US wind projects set up under the aegis of the International Finance Corporation (IFC). The reason given was their refusal to renegotiate (i) the Chinese arguing that if they renegotiated, they would have to offer the same concessions to other projects in other countries but promised assistance elsewhere (China has currently transferred over $5 billion to Pakistan to support the balance of payments) and (ii) the IFC was also unwilling to renegotiate the contracts on Islamabad's terms. No changes have been made to their contracts so far.

There is a growing perception within the government that IPP returns are extremely high and that excessive payments have been made to power producers, either due to misrepresentation by producers or a lack of regulatory oversight. Others point out that IPPs are paid according to contracts signed by the governments in power and that the responsibility therefore lies with the Pakistani authorities.

Recently, the Finance Minister and the Energy Minister visited China and requested that Chinese power loans be readjusted for an additional 8-10 years so that the government can create fiscal space to reduce the sky-high electricity tariffs. It is not clear whether China responded positively to Islamabad's proposal or not. The amount owed for Chinese power plants is currently around Rs 400 billion.

Energy sector insiders told the Business Recorder that it was agreed between the IPPs and the government during Imran Khan’s tenure that both would approach the International Court of Arbitration for a ruling on the terms and references (ToR) to avoid the impression that the government had pressured them to review their pacts, which could have negative repercussions on future contracts/privatisations.

Revised agreements have been signed by the IPPs and the government and the first tranche of 33 per cent has also been settled. However, the issue of revised terms of reference is still unresolved as the government has not signed the terms of reference as it is waiting for the International Court's approval on the revised pacts, said one of the energy sector experts.

According to the IPP, SBP will not authorise payments for dividend disbursement until the terms of reference are signed by all parties concerned. The arbitration hearing in London has been delayed as the signed terms of reference have not been submitted to the court by the Energy Division and the Ministry of Justice since late 2021.

The payment of Rs 8.35 billion to Nishat Chunian Power Limited (NCPL) of Mian Mansha Group was not made due to a case in the National Accountability Bureau (NAB). However, the NAB closed the case a few months ago and the company approached the CPPA-G for the withheld payment.

The Cabinet Committee on Energy (CCoE), headed by then Planning Minister Asad Umar, on the proposal of NAB, had recommended recovery of around Rs52 billion from IPPs, including Rs8.35 billion from NCPL.

However, the NAB withdrew its notice after the involvement of the then prime minister and the ISI, as its senior officials were also members of the team that renegotiated the agreements. Recently, the prime minister constituted a task force headed by Energy Minister Awais Leghari along with the newly appointed SAPM co-chairman Muhammad Ali to review the issue of IPPs and take steps to reduce the cost of electricity.

According to sources, the task force holds secret internal meetings daily and keeps most of the energy division's officials away from these meetings to prevent any information leaks.

Sources said that termination of PPAs of at least five Gencos with a capacity of 2,500 MW and implementation of take and pay mode of some IPPs on CTBM to avoid capacity payment are under discussion. With the closure of five Gencos, the government will save billions of rupees, which will be spent on reducing consumer tariffs, but the actual benefits that would be passed on to consumers are yet to be ascertained.

On August 6, 2024, the Energy Minister testified before the Senate Standing Committee on Energy that Imran Khan’s cabinet had granted favours to 7-8 IPPs by changing the arbitration clause instead of investigating further in light of the Muhammad Ali report on IPPs. When this correspondent tried to find out precisely what favours had been granted by the Khan administration, the officials did not respond.

Muhammad Ali, in the last days of his interim administration, had presented a proposal to the IMF to eliminate the circular debt, but it was rejected on the grounds that it was unsustainable.

All these proposals are being discussed at a secret location in Rawalpindi, one of the energy sector experts said.

The lifespan of a typical power plant is 25 to 30 years, which is why plants built before 1994, 1994 and 2002 were easy to renegotiate. Plants set up under the 2013 energy policy with local fuels and financiers were willing to negotiate under the guidance of the ISI negotiation team. However, the 2015 wind projects set up by the US under the IFC have not yet been willing to renegotiate.

The oil-fired IPPs with 30-year PPAs are: 1,292 MW Hub (COD, March 31, 1997, 30-year life), 362 MW Lalpir (November 6, 1997, 30 years), 365 MW Pak Gen (COD, February 1, 1998), 136 MW Gul Ahmed (COD, November 3, 1997), 120 MW Japan Power (COD, March 4, 2002), 131 MW Kohinoor (COD, June 20, 1997), 134 MW Saba (COD, December 31, 1999), 117 MW Southern Electric (COD, July 12, 1999), 126 MW Tapal (COD, June 20, 1997).

However, the PPA tenure of the following IPPs is 25 years; (i) 165 MW Attock Gen, LSFO (COD, March 17, 2009); (ii) 225 MW Atlas (COD, December 18, 2009); (iii) 200 MW Nishat (COD, June 9, 2010); (iv) 200 MW Nishat Chunian (COD, July 21, 2010); (v) 200 Liberty Power (COD, January 13, 2011); and (vi) 200 MW Hubco Narowal (COD, April 22, 2011).

Copyright Business Recorder, 2024

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