Govt seeks broad changes in pricing contracts with IPPs

Updated 21 Apr 2020

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The increasing burden of net hydel profit payments to the provinces and reduction of system losses and improving recoveries remain works in progress. — AFP/File
The increasing burden of net hydel profit payments to the provinces and reduction of system losses and improving recoveries remain works in progress. — AFP/File

ISLAMABAD: The government is moving towards reopening of power tariff agreements with older independent power producers (IPPs) and may engage with their lenders as part of efforts to reduce electricity tariff.

The increasing burden of net hydel profit payments to the provinces and reduction of system losses and improving recoveries remain works in progress.

A senior official said the terms of reference (TOR) of the technical committee led by Shahzad Qasim, special assistant to the prime minister on mineral resources, set to the IPPs were very comprehensive and seek to deliberate almost all elements of the tariffs signed under the Power Purchase Agreements. Meanwhile, the government team led by Energy Minister Omar Ayub Khan held separate meetings with sponsors of about 50 renewable energy projects.

The IPPs have been told that the technical committee would also engage with IPPs’ lenders to “examine various elements of the tariff”.

The committee would engage with IPPs and their lenders, if required, to examine the possibility of restructuring and refinancing the debt or deliberate innovative solution to reduce the payment pressure on power purchaser due to front-end loading of the tariff.

One of the options reportedly shared by some leading lenders of the country is to refinance the capacity payments by the banking industry over the longer period of time against a premium that would be spread over 15-20 years. Such a proposal, an official said, has already been shared by leading bankers with the ministry of finance about 6-8 months ago.

The technical committee will review O&M costs of the IPPs, analyse the impact of foreign currency indexation being provided to local investors and explore other options to reduce Power Purchaser’s exposure due to exchange rate fluctuations.

The power division has estimated that its capacity charges for current year had increased by about Rs186bn because of a steep 40 devaluation over the past two years and should involve caps and floors for unseen fluctuations besides separating elements of O&M which had nothing to do with the exchange rate.

The committee will also look into conducting Heat Rate Test of power plants as existing agreements do not cater for heat rates and consider revision of the efficiency benchmarks in the PPAs to link them with actual efficiency audits to see if actual gains were better than the contract efficiency.

The committee will also look at the Return on Equity component of each IPP and recommend a reasonable discount besides engage with IPPs to work out a solution for returns and benefits over and above the returns allowed by the government and the regulator to be passed on to the Power Purchaser – the government.

The technical committee will also review the terms of Delayed Payment Rate (DPR) and accrued delayed payment charges and recommend reasonable reduction besides evaluating the verified outstanding payments of the IPPs under the PPAs and recommend any adjustment or reductions.

On top of that, the body would also examine any other option that may extricate power purchaser from financial burden. The IPPs have been asked to ensure that they share with the government all requisite information and data for deliberations of the committee without prejudice and good faith basis.

Omar also chaired on Monday the third meeting on renewable energy projects of wind, solar and bagasse based projects.

The minister told the sponsors that the body had held meetings with IPPs of 1994, 1995 & 2002 policies regarding vital role of electricity as backbone of the country’s economy, and would also like to have rationalisation of their tariff to promote businesses in the country especially in wake of current difficulties being faced due to Covid-19.

Space for LNG cargoes

The Cabinet Committee on Energy (CCoE) on Monday asked the Petroleum Division to engage with suppliers of liquefied natural gas (LNG) to secure reasonable spacing for import cargoes based on reduced demand for the time being.

Informed sources said the committee was advised by independent advisers to avoid seeking opening or termination of LNG supply contracts and instead engaged with suppliers for amicable solution in the spirit of mutual cooperation for a long term relationship.

Officials said the government had been advised that China and India had tried to open their supply agreements but could not succeed despite their economic muscle.

Published in Dawn, April 21st, 2020