There is no doubt that the current economic situation compels the power purchaser (the Power Ministry) to renegotiate the terms of Power Purchase Agreements (PPAs) of the IPPs (Independent Power Producers). It is necessary for all involved in this to engage in the spirit of accommodation rather than assert a cold-blooded prerogative based on written contracts that are backed by sovereign guarantees.
The basic equation before is the proportion of capacity charges in the total electricity tariff. As we know the electricity payments made to the power producers have two major components: fuel charges and capacity charges. Fuel charges are dependent upon global fuel prices.
Capacity charges include bank loan repayments and other financial costs, the fixed operational costs and IPPs’ profits or IRR as given in the tariff fixed by NEPRA as per the power policy. How much of these capacity charges can be renegotiated and how much will this affect the consumers’ bill?
Back in FY18, the share of capacity charges in generation costs was around one third, but today it has doubled to two thirds for two main reasons: new generation capacity added in the past few years and the net hydel profits being paid to the two provinces (KP and Punjab) by Wapda, a decision taken in 2017 by the Council of Common Interests.
After these are paid, the power generation costs are further loaded with taxes and duties by around 18 per cent, when the bills are prepared for the consumers.
Hence a more comprehensive view would be needed for any substantial improvement in the power tariff. Otherwise the benefit of the low fuel prices today will not be felt by the consumers.
Now coming to the IPPs, there are three categories of these. First which are recently added since 2013. Their capacity charges are the highest as their tariffs are front loaded, meaning that in the first 10 years (out of 30-year contract) they must pay back all their bank loans and pay back the shareholders equity. The second categories are those that have completed ten years of their life, meaning those which have paid back their loans and equity but are still required to produce electricity for substantial part i.e. more than 40pc of the annual capacity.
The third category is those that have repaid loans and equity and are no longer required to produce electricity. They constitute less than 40pc of the annual capacity. Most of the furnace oil based IPPs fall in this third category.
The estimates of power generation for 2019-20 (made before Covid-19 made its appearance) show that the 12 furnace oil-based IPPs would generate 1.2 billion units (KwHs) of electricity (less than 1pc of the expected demand) at a cost of Rs79billion out of which Rs58bn will be capacity charges. These IPPs are 15 to 25 years old.
On the other hand, the new government owned generation plant at Guddu which was installed in 2013 and is still paying back its loans, was estimated to produce six times the electricity expected to be produced by these 12 IPPs combined i.e. 7.1 billion units (KwHs) (around 6pc of the expected demand) but will cost Rs72bn out of which the capacity charges will be only Rs23bn. Hence the consumers would pay Rs35bn more in capacity charges to IPPs as compared to government owned plant, for one sixth of its generation!
Clearly it is time for these 12 plants to go for termination. There is another set of plants (8-10 IPPs) in this category which merit similar disposal.
They are inefficient gas plants which fall very low in the merit generation list and will remain almost non-operational in the coming years. These are charging some Rs40-50bn in capacity charges despite having paid back their loans, equity and have earned great profits all these years.
Next in line are those IPPs which have paid back their bank loans and are still expected to meet electricity demand. With a positive spirit of mutual accommodation at least a quarter of the Rs50bn in capacity charges can be reduced of these 8-10 IPPs simply by looking closely at the punitive interest payments, pegging with dollar rate and above all the high rates of return that their sponsors enjoy.
Now we come to those IPPs which are recent and have not yet paid off their bank loans. These are in two sub-categories: big coal and RLNG based plants (four IPPs) and small wind, solar and hydel plants. Their review would require involving their banks as well. The front loaded tariffs would also need to be revisited and banks be convinced to stretch out the repayment period to say, twenty years. Similarly other components of the capacity charges need to be revisited in view of the current economic conditions.
The high upfront tariffs these projects currently enjoy, and the sharp reductions in the costs of wind and solar power systems in recent years, should be the starting point for negotiations.
The biggest leverage with the government are the unpaid dues of the IPPs, prompt payment of which can be used to incentivize the IPPs to renegotiate their PPA terms. If the government successfully deals with IPPs on the above pattern, the capacity charges can be brought down by Rs150-200bn, a 20pc reduction. But it will bring down the consumer bill by just 10pc.
The decision of loading the electricity consumer with the so-called “net hydel profit” was never justified. It was not the electricity consumer which Article 161 (2) of the Constitution required to pay to the provinces. It was Wapda that was to pay to a province whatever net profits it made out of hydel power generation in that province.
Asking loss-making Wapda to pay an imaginary profit to the two surplus provinces and loading a massive Rs45bn on electricity consumers annually, by Nepra was thoroughly unjustified. It is time to relieve the consumers of this undue burden.
Published in Dawn, April 15th, 2020