ISLAMABAD, Nov 2: The federal government has decided to reduce the term of agreements for new oil-and gas-based power projects to 15-20 years instead of 25-30 years envisaged under the power policy, Dawn has learnt.
However, the hydel power projects and those based on coal would be given longer-term agreements of 25 and 35 years, respectively, because of their higher risks and more investments.
The decision, informed sources told Dawn, was a major shift from the existing power policy and had been taken to partially accept the position taken by the National Electric Power Regulatory Authority (Nepra) that long-term agreements of over 20 years would defeat the objective of a competitive energy market in the country.
Accordingly, the government has directed Nepra to approve multi-year tariff (MYT) and power purchase agreements (PPAs) for thermal projects for 15-20 years and 25-35 years for hydel-and coal-fired power projects to encourage new investments.
Similarly, Nepra has also been asked to accept guarantees issued to the private power producers by the federal government for honouring the residual agreements, namely implementation agreements, fuel supply agreements and power purchase agreements to provide maximum comfort level to the investors about their long-term investments.
Nepra has also been asked to put in place a comprehensive least cost generation expansion plan (LCGEP) and demand forecast in consultation with various stakeholders of the power sector. However, until the two are in place, Nepra and the National Transmission and Dispatch Company (NTDC) have been asked to provide their clearance for new projects which are approved by the board of directors of Private Power and Infrastructure Board (PPIB).
The government has also asked Nepra to allow the NTDC and the distribution companies (Discos) to construct transmission lines for connecting independent power producers (IPPs) to the national transmission or distribution system.
Now, the NTDC would be allowed to purchase power from the IPPs on the basis of long-term contracts because the poor financial position of Discos does not inspire comfort and confidence in investors regarding future cash flows. Nepra was earlier asking the IPPs to construct their transmission lines to supply power to the distribution system.
In line with the 2002 power policy, Nepra's approval for tariff would now be obtained before the issuance of letter of support (LOS) by PPIB and licence before the start of construction.
Nepra has hence been asked to immediately finalize and provide tariff structure and its components and calculation parameters to be applied consistently to new projects besides the confidence to investors regarding reasonable return on equity according to internationally accepted basis of net present value.
Nepra has also been asked to announce an explicit and binding criteria for tariff re-opening once approved by it so as to remove any element of uncertainty.
A number of sponsors who have been issued letters of intent (LOI) by the government are currently asking the PPIB to provide standard security package agreements, each involving an implementation agreement, a power purchase agreement and a fuel supply agreement.
However, there were major differences between Nepra's proposed market structure - that envisions certain fundamental aspects concerning new investments in power generation such as the shorter period for the MYT, term of the PPA and the GoP guarantees, etc - and the stipulations regarding the same in the 2002 policy.
The PPIB had told the government that deviation from GoP's approved policy, at a stage when eight LOIs have already been issued and several others are under consideration, could have serious implications for the credibility of the GOP's policies. Such deviation will definitely not send the right signals to the private investors, especially when the country has barely restored its credibility due to the aftermath of 1994 power policy, the PPIB had written to the government.
