ECC exempts three Punjab power plants from LNG purchase

Published April 15, 2021
The Economic Coordina­tion Committee (ECC) of the Cabinet on Wednesday exempted three Punjab-based power plants of 3,900 megawatts from compulsory purchases of liquefied natural gas (LNG) quantities from January 2022. — Reuters/File
The Economic Coordina­tion Committee (ECC) of the Cabinet on Wednesday exempted three Punjab-based power plants of 3,900 megawatts from compulsory purchases of liquefied natural gas (LNG) quantities from January 2022. — Reuters/File

• SNGPL, Petroleum Division oppose the move
• Customs duty on cotton yarn imports withdrawn
• Kapco removed from privatisation list

ISLAMABAD: The Economic Coordina­tion Committee (ECC) of the Cabinet on Wednesday exempted three Punjab-based power plants of 3,900 megawatts from compulsory purchases of liquefied natural gas (LNG) quantities from January 2022, removed a major power plant from privatisation list and withdrew customs duty on import of cotton yarn.

The meeting presided over by Minister for Finance, Revenue, Industries and Production Muhammad Hammad Azhar also approved a Rs11.7 billion supplementary grant for financing four mother and child hospitals in Punjab.

Already cleared by the Cabinet Committee on Energy (CCoE) in September last year, the Power Division presented a summary regarding waiver of minimum 66pc take-or-pay commitment in Power Purchase Agreements (PPAs) and Gas Supply Agreements (GSAs) of three RLNG-based public sector power plants. Located in Punjab, these plants included Quaid-e-Azam Thermal Power Plant, Balloki Power Plant and Haveli Bahadur Shah Power Plant.

The Sui Northern Gas Pipelines Ltd (SNGPL) and Petroleum Division had been opposing the move because it exposes petroleum sector companies — PSO, PLL and SNGPL — to losses.

These proposed amendments would envisage submission of a monthly production plan (MPP) as a binding on the power purchaser and the power seller (National Transmission and Despatch Company and the power plants) wherein the power purchaser shall be entitled to submit demand requirement as needed, at least 75 days before the start of each such month, which will be finalised by the System Operator and Operating Committee under the PPA.

The concept of a monthly delivery plan (MDP) for deliveries of gas under the GSA, has been paired with the monthly schedule as provided under PPA.

The committee approved the summary and noted that the concept of MPP was a cost-effective solution, enabling the power and gas purchasers to make requisite purchases in line with actual requirements instead of following a fixed arrangement.

The Petroleum Division had earlier put on record that the entire LNG supply chain, including 800 million cubic feet per day (mmfcd) imports from Qatar and open market, regasification terminals, PSO and gas network, had been put in place on the basic premise of GPPs and would become unsustainable in the long term just for short term gains of privatisation proceeds. It said the CCoE had in 2019 decided that 66pc obligation on power plants would remain intact until the first LNG price review ie, 2026.

“Any reduction or waiver of minimum take-or-pay commitments of three GPPs will lead to a cascading default of all the three public sector entities of RLNG supply chain which may include encashment of sovereign guarantees and Standby Letters of Credit (SBLCs),” the Petroleum Division said.

The Petroleum Division said if the CCoE was adamant on ending 66pc take-or-pay clause for the GPPs, then it “insists on Finance Division providing subsidy for the price differential to keep the Petroleum Division companies (Pakistan State Oil, Pakistan LNG Ltd, Sui Southern Gas Company, Pakistan LNG Terminal Ltd and SNGPL) from going bankrupt on account of breaking of contracts by Power Division. This was the reason the summary could not pass through ECC as long as Dr Hafeez Shaikh was the ECC chairman.

The Power Division suggested that due to significant devaluation of currency, transition of generation mix towards cheaper and local resources and addition of efficient and low variable cost fleet of plants were uneconomical. Moreover, “if these trends in prices, as well as the current load forecast remain unchanged, the existing minimum guaranteed offtake of 66pc for three RLNG plants would yield in the loss of approx Rs143bn up to 2023”.

On the other hand, the Petroleum Division said the losses to be faced by the oil and gas companies (about Rs100bn per annum for many years) would be many times higher than savings in the power system. It said the decision to end the GPPs commitments was being taken “while completely ignoring the financial implications on the part of the entire RLNG supply chain considering back-to-back agreements attached with the transaction. Essentially without funding this loss as a budgeted subsidy, we will simply be transferring Circular Debt from Power Division companies to Petroleum Division companies and in fact increasing it,” the Petroleum Division said.

Kapco fiasco

The Power Division also proposed amendment to the Facilitation Agreement and Amendment to the GoP Guarantee Agreement with Kot Addu Power Company (Kapco) and suggested that the project may be withdrawn from the Privatisation Commission and entrusted to Private Power and Infrastructure Board (PPIB).

After due deliberation, the ECC approved the summary, in principle, subject to formal vetting by the Law Division.

The amendments were necessitated by legal challenges arising out of revised tariffs as part of negotiations with independent power producers (IPPs). In September last year, the CCoE had approved the report of the IPPs implementation committee set up to convert the MoUs with IPPs into binding agreements.

The cabinet has ratified the decisions of Cabinet Committee on Energy (CCoE) and Economic Coordination Committee (ECC) of Cabinet in December 2020 along with master agreement and PPA with Kapco.

Kapco had, however, a peculiar situation as it was a public sector project converted into IPP through privatisation in 1990s under the applicable privatisation laws but operated outside the typical power generation policy framework for IPPs.

In February this year, the Privatisation Commission reported that due to certain procedural impediments the proposed amendments could not be prepared and signed by designated official of Privatisation Commi­ssion for tariff reduction being an IPP. It was then concluded that further agreements or amendments to the Facilitation Agreement and GoP Guarantee should be signed by the PPIB as was the case with other IPPs as one-window facilitator subject to vetting by the Law Division.

Cotton yarn

The Ministry of Commerce presented a summary for withdrawal of customs duty on import of cotton yarn under PCT 5205, 5206 and 5207 till June 30, 2021. The committee approved the withdrawal of customs duty to ensure smooth supply of cotton and cotton yarn to the value-added industry, while bridging the gap between domestic production and overall demand for the inputs.

Adviser to the Prime Minister on Commerce Abddul Razak Dawood said the decision will facilitate the value-added exporters. However, he said the formal notification would be issued after its approval by the Federal Cabinet. He said the regulatory duty was already withdrawn in December 2020 and now the value-added manufacturers and exporters can import cotton yarn at zero customs duty.

Published in Dawn, April 15th, 2021

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