January 15, 2006	Sunday	Zilhaj 14, 1426

KARACHI, Jan 14: Major Independent Power Producers (IPPs) have expressed their intentions to expand their generation capacity given the growing need for power within the country, analysts say.

They, however point out that any capital expenditure by the IPPs in this regard would have to be accommodated through new Power Purchase Agreements (PPAs) which may not offer project sponsors the same benefits as the existing ones.

Total installed generation capacity of all IPPs combined stood at 5,873-mw during FY04-05 showing a marginal increase of 0.7 per cent compared to 5,835-mw during the earlier year. A report on the IPP sector produced by Taurus Securities stated that the government expects demand for power to grow by 6 per cent annually. It also noted that the expectations were that the country could face a power shortage of 150-mw by 2007. Electricity generation by Wapda (including purchase from IPPs) during July-March 2005 stood at 53,145 million kWh compared to 49,665 million kWh recorded during the same period last year. The number of consumers during this period went up by 5.8 per cent (year-on-year) to 14.9 million.

The Hub Power Company (Hubco) had recently submitted letters of intent (LoIs) to the government for two power plants, one with a capacity of 300-mw and another with 600-mw. Kot Addu Power Company (Kapco) is also understood to have undertaken a feasibility study to enhance power generation.

The analysts highlighted risks associated with IPPs going forward. Those included: cash flow constraints on Wapda and KESC (buyers); international oil prices, which have the propensity to climb steeply up and the construction of ‘Big Reservoirs’, which could lessen dependence on thermal power generation.

But along side the risks stood opportunities. Those included: The government projected increased demand for power by 6 per cent annually till 2009-10. “A power shortage of 150-mw by 2007 is troubling the government which is trying hard to overcome the demand supply gap”, analysts argued. They pointed out that recently, the prime minister had taken a decision to install 1,300-mw power projects on a fast track basis (with a one-time exception from the 2002 power policy) to avoid the looming energy crises.

Analysts contended that the existing IPPs were ideally placed in terms of their existing infrastructure, buildings, and resources to quickly expand their generation capacities. This appeared to be an appropriate time for IPPs to expand power generation capacities as they enjoy a strong bargaining position to negotiate on the Power Policy 2002.

Sector analysts project outlook for CY2006 for major companies (Hubco and Kapco) within the sector to be positive given the growing need for power within the country and the guaranteed return offered to these entities. Both Hubco and Kapco were said to offer investors a hedge against the US CPI and the rupee dollar parity. Those produced attractive dividend yields. However, Kapco’s 10- year tax holiday is scheduled to end in FY2006 and the company would be liable to corporate tax at the end of FY2007.