‘Strong-arming IPPs will deter future investors’

Published April 16, 2020
Analysts insist that the government should renegotiate with IPPs the high interest payments, dollar indexation and the ROE that their sponsors enjoy under the existing PPAs. — Reuters/File
Analysts insist that the government should renegotiate with IPPs the high interest payments, dollar indexation and the ROE that their sponsors enjoy under the existing PPAs. — Reuters/File

KARACHI: The Independent Power Producers (IPPs) Association said on Wednesday old plants that are receiving capacity payments without generating electricity can be terminated only under the terms specified in their power purchase agreements (PPAs).

Reacting to power-sector analysts calling for the outright termination of the IPPs that have paid back their debt and equity, IPP Association Chairman Khalid Mansoor said the act of termination is governed under the PPAs. “It would be acceptable to IPPs if the amounts of compensation provided under the contracts are paid,” he told Dawn.

The government has moved into high gear to redraw electricity purchase agreements with private investors mainly to control runaway capacity charges, the biggest component of power tariffs. But the IPP Association, a representative body of 39 electricity generators, has taken exception to the government’s plan to revise the “signed and sealed” contracts.

“A sponsor invests in a power project to earn a return over and above its equity investment over the project life. No investor would invest merely to recover his investment without earning returns over the project’s planned life. Since the term of the PPA is 25 years, the equity is paid off over the same period, not 10 years. If the return on equity (ROE) was to be paid off in 10 years, then the ROE component would be much higher,” he said.

Govt to pump Rs300bn in power sector to avert liquidity shortage

PPAs allow the Central Power Purchasing Agency (CPPA), which is the government-owned sole power purchaser in the energy market, to calculate the revenue requirements of electricity producers partly based on capacity charges. These amounted to Rs664 billion in 2018-19, up 60pc from a year ago.

“Suggesting that equity has been paid off since the ROE component payment is more than the initial equity requirement ignores the way the tariff is structured in the PPA, the time value of money and the rupee-dollar parity,” he added.

He suggested that the government should reduce taxes for consumers to bring down the cost of electricity.

In his article published in Dawn on April 15, former water and power secretary Mohammad Younus Dagha had cited the example of the government-owned Guddu power plant, which was expected to produce six times the volume of electricity generated by 12 old IPPs although the latter were to receive Rs35bn more in capacity charges.

“Guddu is being despatched because domestic gas has been allocated to it. If RLNG was being used, its merit order would be much lower. Capacity payments are as per contractual PPAs based on the life of a project and making the plant available.”

Analysts insist that the government should renegotiate with IPPs the high interest payments, dollar indexation and the ROE that their sponsors enjoy under the existing PPAs.

“Although these are part of the contract/policy, the IPPs did give some concessions on interest rates last year. However, the government didn’t get it approved. So it was an opportunity lost. Similarly, the dollar indexation is as per power policies and PPAs. If the government wishes to change it, it should change the future power policies,” he said.

The IPP Association chairman praised the government for taking up the issue of debt restructuring for CPEC-related power projects directly with the Chinese leadership. The consumer tariff will come down significantly if the banks agree to extend the loan repayment periods from 10 to 20 years. “We support the proposal for renegotiating the tenor and pricing of loans,” he said.

Mr Mansoor added that strong-arming IPPs will shatter the confidence of future investors. “This will increase the country risk premium and future investors will demand higher returns on investments.”

He said the government has accepted his association’s request to pump liquidity into the power sector as the economy slows down amidst the coronavirus outbreak. About Rs300bn will be set aside from the prime minister’s relief package of Rs1.24 trillion for the power sector, he said.

The CPPA will get Rs100-150bn from the allocated amount. A three-member committee will decide the exact amount that each company in the power supply chain will receive, he added.

Published in Dawn, April 16th, 2020

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