Capacity payments

April 06, 2020

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A MASSIVE wheel was set in motion last week when the Cabinet Committee on Energy decided to begin the process of renegotiating capacity payments with LNG terminal operators and the independent power producers. Hundreds of billions of rupees are at stake in the process and the move is no doubt going to lead to deep concern among the sponsors of the projects involved. The committee, chaired by Planning Minister Asad Umar, who has only recently taken charge of this crucial committee, made the decision in its last meeting on Thursday to begin the process of this renegotiation which can take up to three months to complete. The reasons given were fairly obvious — to help decrease the burden of power sector payments on the government, rationalise fuel costs and better manage the circular debt. In their initial responses to the idea, the IPPs have said that a contract is a contract, and that they are already so tight regarding liquidity, due to the repeated government failure to abide by its payment terms, that any renegotiation will leave them financially destitute and unable to continue operations.

Over the years, the government of Pakistan has earned a bad name for itself for its failure to abide by the terms of long-term contracts entered into with sponsors of multibillion-dollar projects, but it is not difficult to see that this time it is different. The weeks to come will be some of the most difficult that the country has ever seen, and the question that every Pakistani needs to ask is ‘what can I do to help’. This is not the time to say ‘a contract is a contract’. All the resources of the state are required to shoulder the cost of the struggle ahead, to pay for massive increases in health investment and run social protection programmes for the poor and unemployed that could cost hundreds of billions of rupees every month. Moreover, power consumption has fallen sharply and fuel imports, in price and quantity, have also nosedived, causing capacity payments to climb since they are often indexed on off-take. This is nothing rational or moral about making capacity payments at a time when the state needs its resources for an intense battle against a global pandemic. Without the people, there is no economy, no power consumer, and no payments’ stream. The IPPs and LNG terminal sponsors should understand this.

Published in Dawn, April 6th, 2020