No Solution to Pakistan's Load Shedding Without Renegotiating IPP Contracts

[Riaz Haq]

Pakistan's installed generating capacity is about 20,000 MW. It exceeds current demand of 17,000 MW and actual supply of just 10,000 MW. The capacity utilization is only 50% mainly because the producers do not buy sufficient fuel and choose to operate at only 50% of capacity and still enjoy soaring profits. A third of the installed generating capacity is owned by the independent power producers (IPPs). The current IPP contracts guarantee payments and profits with no requirement for fuel efficiency.

Most private investors have built oil-powered inefficient plants because of their low construction costs and short lead times, and the oil price has skyrocketed since these plants were built in 1990s. The result is 18-20 hours of load shedding across most of Pakistan in the scorching summer heat in spite of the fact the taxpayers have shelled out billions of dollars in subsidies to the power sector since 2008.

According to an AP report, the Pakistan's government has assumed $3.6 billion of the power industry's debt. The government-owned power grid owes another $2.5 billion to private-sector generators, even as the government, according to Finance Ministry figures, spent at least $7.4 billion on electricity subsidies during the 2008-2010 period.

Here's Arif Habib Securities investment analysis of the IPPs sector:

All power companies from Arif Habib Limited research coverage witnessed surprising growth (36-58%) in net profitability. HUBC led the flock with 58% YoY jump in profit after tax, attributable to the growing indexation factors and ROE component. On the other hand, lower payables to fuel supplier and resultantly lower penal interest provided major support to KAPCO, pushing the net profitability up by 36% YoY. As far as Nishat group companies are concerned, rising fuel cost magnified the impact of fuel efficiency, which combined with O and M savings further improved the profitability. However, dividend from KAPCO and NPL disappointed the optimistic investors. Arif Habib Limited believes the dividends to rise in 2HFY13 for these companies, providing investor with greater value at the financial year end.

Source: IMF Pakistan

Pakistani government buys electricity from IPPs at a rate of Rs. 12.50 per KWhr while the consumers pay an average of Rs. 9.00, leaving a short-fall of Rs 3.50 per unit which is subsidized by the taxpayers. It adds up to hundreds of billions of rupees a year. Power subsidy target for FY 2012-13 was set at Rs 185 billion, 60 percent lower than the actual subsidy provided during FY12. The subsidy provided year-to-date (YTD) is Rs 311 billion, already having exceeded the target by 68 percent, according to PakTribune.

A significant part of the problem is the IPP contracts which guaranteed a 12 to 15 per cent annual return (indexed in dollars, not rupees), gave tax breaks and paid interest on private funding – more expensive for the government than providing the funding itself.  In addition, there are no incentives for the private power producers to produce power efficiently.

In a blog post published in Financial Times, Dr. Kamal Munir of Cambridge University's Judge Business School blames the IPP contracts signed as part of the power privatization in 1990s.

“The 1994 privatization of the energy sector offered investors generous returns and created pricey overcapacity,” he told Financial Times. “This created an expensive legacy which is the real problem of today’s energy crisis.” Unless that problem is dealt with, he sees no light at the end of the energy tunnel.

He says Pakistan’s government, helped by the World Bank, “sweetened” its energy privatisation with attractive conditions, fearing it wouldn’t be able to attract investors otherwise. It guaranteed a 12 to 15 per cent annual return (indexed in dollars, not rupees), gave tax breaks and paid interest on private funding – more expensive for the government than providing the funding itself. ”The deal was too good to be true for investors,” Munir says.

Munir says the model turned out to be badly constructed in terms of creating value for the government and people of Pakistan. Even in an environment of economic growth and efficient energy generation, it would have been hard for the government to finance the plan. But since both have been absent, it became nearly impossible to pay for privatised energy.

Since there were no incentives to be fuel-efficient, most private investors chose to build  plants using furnance oil as fuel because of their low construction costs and short lead times. This backfired as the oil price has trebled since the 1990s. Variable costs, and therefore prices to consumers, are at unsustainable levels. “No wonder many consumers can’t afford to pay their bills,” Munir says.

To make things worse, the government neglected to step on the brakes when its generous conditions attracted too many investors. Assuming economic growth would continue, it allowed too much capacity to be built and guaranteed the same return on that extra capacity, whether it was used or not.

Munir says the government should develop new power plants using cheaper fuels, and that this shouldn’t be a problem in a country with an abundance of coal, waterways and sun.

But Pakistan must first escape its vicious payment cycle.

“We need to get out of the the current deals,” says Munir. But at what cost, and does this imply default? “Your guess is as good as mine,” the academic admits.

Still, he felt it was time to make his point. “I’m not defending people who don’t pay bills and I’m not promoting government subsidies to keep prices low,” Munir says. “But why isn’t anyone talking about the policy that led to this situation to begin with?”

Fuel Cost per million BTU

The key to solving the problem is to renegotiate the old IPP contracts with new terms that reward lower fuel costs and higher efficiency. In addition to that, Pakistan's incoming government of Prime Minister Nawaz Sharif's has to explore multiple fuel options to meet the nation's growing energy needs. Some of the fuel options are as follows:

1. Developing its shale gas reserves estimated 51 trillion cubic feet near Karachi in southern Sindh province. The US experience has shown that investment in shale gas can increase production quite rapidly and prices brought down from about $12 per mmBTU in 2008 to under $2 per mmBTU recently. Pursuing this option requires US technical expertise and significant foreign investment on an accelerated schedule.

 2. Increasing production of gas from nearly 30 trillion cubic feet of remaining conventional gas reserves. This, too, requires significant investment on an accelerated schedule.

3. Converting some of the idle power generation capacity from oil and gas to imported coal to make electricity more available and affordable.

4. Utilizing Pakistan's vast coal reserves in Sindh's Thar desert.

5. Hydroelectric and other renewables including wind and solar. Several of these projects are funded and underway but it'll take a while to bring them online to make a difference.

In my view, the newly-elected government should pursue all of the above options with options 1, 2 and 3 as a priority for now. Its best interests will be served by developing its own cheap domestic shale gas on an accelerated schedule with Saudi investment and US tech know-how.

Related Links:

Haq's Musings

Comprehensive Energy Policy for Pakistan

IPP Contracts in Pakistan

Pakistan Needs Shale Gas Revolution

US Census Bureau's International Stats 

Pakistan's Vast Shale Gas Reserves

US AID Overview of Pakistan's Power Sector

US Can Help Pakistan Overcome Energy Crisis

Abundant and Cheap Coal Electricity

US Dept of Energy Report on Shale Gas

Pakistan's Twin Energy Crises

Pakistan's Electricity Crisis

Pakistan's Gas Pipeline and Distribution Network

Pakistan's Energy Statistics

US Department of Energy Data

Electrification Rates By Country

CO2 Emissions, Birth, Death Rates By Country

China Signs Power Plant Deals in Pakistan

Pakistan Pursues Hydroelectric Projects

Pakistan Energy Industry Overview

Water Scarcity in Pakistan

Energy from Thorium

Comparing US and Pakistani Tax Evasion

[Riaz Haq]

Privately-held KESC has devised a collective reward and punishment scheme to deal with dead-beats and thieves in Karachi. Areas where there is 90% money recovery see almost zero load shedding, 80% get a couple of hours of power cuts and those with less than 50% endure very long hours of black-outs. http://www.gulf-times.com/pakistan/186/details/358456/pakistan-util...

[Riaz Haq]

Despite raising concerns about the lack of transparency in payments made to IPPs to decrease the circular debt, the Asian Development Bank is planning to offer $2.1 billion in loans for the country’s ailing energy sector.
The investment, planned under the new Country Partnership Strategy (CPS) 2015-19 estimated at $5.1 billion, is expected to be effective from early next year, with 41% of the financing focusing in the energy sector alone, according to finance ministry officials.

With the country facing debilitating energy infrastructure, the new investment will be allocated for transmission, distribution, grid connectivity, hydropower generation and import of gas, according to the draft CPS.
However, Pakistan will be required to take hard decisions aimed at increasing power tariffs, reducing line losses and shifting the energy mix. These conditions to funding are being described as in line with the government’s 2013 National Power Policy.
The multilateral lender hopes that the over $2 billion investment in the power sector in the next three years will allow the government to withdraw electricity subsidies. It is also discussing the condition of reducing line losses and bringing them in line with the benchmark approved by National Electric Power Regulatory Authority (Nepra), according to the draft CPS.
The strategy and the government’s power policy are also aimed at achieving zero load-shedding by 2018, a goal that seems overambitious.
Lack of transparency
While the ADB paints a rosy picture of the country’s power sector five years down the line, it has also highlighted the grave situation faced by the energy sector. The draft document of the CPS states that the private participation in the energy sector has been curtailed because of “chronic concerns about payment to power suppliers, unclear investment policies and lack of transparent payment practices”.
It is the first time that an international lender has highlighted the issue of lack of transparent payment practices in a policy document.
“There were concerns raised on the payments to the IPPs (Independent Power Producers) not being based on merit,” according to the draft CPS. The draft document did not elaborate who raised these concerns.
The issue of favouritism in power payments shot into the limelight in June last year when the government cleared Rs480 billion circular debt. There were allegations that the government made out of turn and excessive payments to a Lahore-based industrialist due to his close proximity with the ruling party.

http://tribune.com.pk/story/779095/benchmark-adb-to-earmark-2-billi...

[Riaz Haq]

AGP finds Rs 980 bn (about US$ 9 billion) irregularities in #Pakistan power sector http://www.dawn.com/news/1208273

The auditor general of Pakistan (AGP) has found embezzlement, misappropriation and irregularities of around Rs980 billion in the accounts of Water and Power Development Authority (Wapda) and other power companies working under the Ministry of Water and Power in the audit year 2013-14 and has asked the president to order investigations into specific cases.

The amount is equal to nearly one-fourth of the Rs4 trillion federal budget for fiscal year 2015-16 and can explain why the government has to inject huge subsidies out of taxpayers’ money every year to clear the circular debt that keep emerging again and again. Over the past five years, the federal government is estimated to have injected more than Rs2 trillion into the power sector, besides increasing consumer tariff by about 200 per cent.

On top of that, the AGP has also made observations over Rs4.2 trillion in an unsettled audit backlog from the past few years.

The audit pertained to Rs414 billion of expenditure and Rs898 billion of revenue for fiscal year 2012-13.

In its report to the president of Pakistan — as mandated under Article 171 of the Constitution — the AGP has put together seven broad categories of findings from an audit of the accounts of Wapda, four generation companies (Gencos), 10 distribution companies (Discos) and the National Transmission and Despatch Company (NTDC).

Wapda’s Directorate General of Audit — a specialised wing empowered to look after power sector accounts — said it had ignored the instances of misappropriation, fraud and other irregularities amounting to less than Rs1 million. In FY2012-13, the directorate said, an audit found 184 cases of irregular expenditures or unjustified payments and rule violations amounting to Rs368.65 billion.

Another 88 cases, worth Rs572.63 billion, pertained to non-recoveries and overpayments; 18 cases to accidents and negligence that cost around Rs19.5 billion; Rs5.8 billion was linked to cases where there were weaknesses in internal control systems; and transactions of around Rs11.8 billion were called into question over non-production of record. Another nine cases, worth around Rs350 million, were related to embezzlement of public money through theft and misuse of funds.

However, at the instance of audit, only Rs31.9 billion could be recovered and the AGP pointed out that it was beyond their capacity to carry out a “100 per cent” audit of these entities.

But the AGP pointed out that the internal control mechanisms in Wapda and its corporate entities did carry out complete audits, which also included consumer service offices, and also carried out physical examinations.

The AGP said that the recurrence of frequent irregularities “cast a shadow of doubt on the effectiveness of this internal control system”. The internal controls, it said, were deteriorating gradually as there had been an increase in cases of unauthorised extension of load, non-implementation of equipment removal orders, theft of material and electricity and violation of procurement rules as well as the Nepra Act.

The audit revealed that power distribution companies could not collect Rs401 billion from various defaulters in FY2012-13, while the procurement of material and consultancy services, provision of PC-1s and contracts involved the violation of procurement rules

“There was poor monitoring of revenue collection, embezzlement of funds, misappropriation and theft of material, misuse of public funds, incorrect billing, non-implementation of commercial procedure and non-adherence to provisions of power policy,” the AGP said.

[Riaz Haq]

GE, Harbin to Provide Large, High-Efficiency Gas Power Plant to Meet Energy Demand in #Pakistan at Bhikki 1.1GW http://www.businesswire.com/news/home/20151014005988/en/GE-Harbin-P... … Bhikki Combined-Cycle Power Plant Marks the First HA Order in the Middle East and North Africa Region and the 20th and 21st HA Orders Worldwide
New Project Furthers GE-Harbin Technical Collaboration in Providing Competitive Power Plant Solutions Worldwide
Punjab Government Creating What is Expected to be the Largest, Most Efficient Power Plant in Pakistan, Helping Area Meet Growing Power Demand
The Bhikki plant will be able to generate the equivalent power needed to supply more than six million Pakistani homes, and is likely to be the largest, most efficient power plant in Pakistan. It is expected to enter commercial operation in 2017. This project marks the first HA orders in the Middle East and North Africa region and the 20th and 21st worldwide. GE’s 9HA is the world’s largest, most efficient gas turbine.

“We are committed to meeting the growing demand for power to drive industrial growth and all-round economic progress as well as to promote the welfare of our people,” said Ahad Khan Cheema, CEO, Quid-e-Azam Thermal Power Limited, on behalf of the government of Punjab. “As part of this, we are not only investing in new plants but also strengthening public-private collaboration to ensure that advanced technologies are deployed to meet the growing demand. GE and Harbin are moving forward with an accelerated time frame to add additional power to the grid.”

Joe Mastrangelo, president and CEO, gas power systems at GE Power & Water added, “The Bhikki project is another testament to the long-term commitment of GE to serve as an active partner in helping to meet Pakistan’s development needs. We have established strong partnerships in the power sector, and the introduction of our HA gas turbines, a significant first for the region, underlines our focus on bringing the latest technologies to enhance the operational efficiency and productivity of power plants.”

“The Bhikki combined-cycle plant is a strong example of technical collaboration between GE and Harbin in providing the most advanced combined-cycle power plant solutions,” said Mr. Guo Yu, chairman of HEI. “Deploying GE’s advanced HA technology is a game changer for the industry as it supports the government’s goal to ensure affordable, reliable and efficient power generation to meet growing demand.”

With the Bhikki plant, 21 HA units have been ordered and 68 HA units have been technically selected1 by customers around the world. GE’s H-class technology has been embraced by customers in Korea, Japan, the United Kingdom, Brazil, the United States, France, Russia, Germany, Turkey, Egypt, Pakistan and Argentina.

GE’s HA gas turbines provide a combination of the most output, highest efficiency and best operational flexibility and lead the industry in total life cycle value. The 9HA.01 offers a net combined-cycle efficiency of more than 61 percent and leads the industry with cleaner, reliable and cost-effective conversion of fuel to electricity.

The 9HA gas turbine completed off-grid, full-speed, full-load validation testing in January 2015 at the world’s largest, most thorough gas turbine test stand located at GE’s manufacturing facility in Greenville, South Carolina. This testing facility has attracted industry visitors from around the world.

Among key agreements in the country, GE has signed a memorandum of understanding with the government to develop Pakistan’s energy resources to meet the projected demand of 54,000 megawatts by the year 2020. GE will assist the government in achieving its goals by engaging in Pakistan's energy, transportation and water sectors and will work to identify potential sources of funding and explore potential investment opportunities in those sectors.

[Riaz Haq]

NAB summons NEPRA over case of unprecedented profits earned by IPPs 

https://profit.pakistantoday.com.pk/2019/02/17/nab-summons-nepra-ov...

Nishat Chunian Power Limited had earned 44.25 per cent profit on equity investments against 14 per cent RoE based on IRR during the financial year 2010-11. Nishat Chunian was asked to explain the reasons for earning additional profits.

Responding to NEPRA, Nishat Chunian power Ltd said that allegations pertaining to submission of fake records during the time of tariff determination were wrong and baseless. However, NEPRA rejected the stance of Nishat Chunian Power Ltd and asked to submit a reply within seven days to avoid action against the company.

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Sources also said that the independent power producers (IPPs) and the owners of power plants which were installed during the tenure of the former government of Pakistan Muslim League-Nawaz have been earning additional profits around $1 billion annually, allegedly because of fake records and collection of additional tariffs.

They said that the owners of thermal, coal, wind and solar power plants will additionally collect $19 billion during the next 25 years while the IPPs which are running on oil and gas including Nishat, Chunian, Liberty, Atlas Power etc have earned additional profits in the range of 20 to 64 per cent other than the fixed limit of profits for them. They said that NEPRA had taken notice over additional profits to IPPs in 2014 but stopped the process of inquiry after the passage of one year.

They added that NAB Lahore has expanded the scope of the investigation against additional profits by IPPs and summoned NEPRA officials while the initial inquiry report of NAB has allegedly made responsible officials of the Punjab government, NEPRA and Alternative Energy development Board (AEDB).

A copy of documents available with Pakistan Today reveal that due to the approval of additional tariffs, owners of coal power plants will earn $14.25 billion, while the owners of solar plants will earn $900 million, wind to earn 1.8 million and fuel oil-run power plants will earn $90 billion during the next 25 years allegedly because of an approval of additional tariffs.

Sources in NAB said that power plants installed under the power policy of 2002 and in the rule of PML-N have become a burden on the national exchequer.

They said that Nishat Chunian Power Limited had earned 44.25 per cent profit on equity investments against 14 per cent RoE based on IRR during the financial year 2010-11. Nishat Chunian was asked to explain the reasons for earning additional profits.

Responding to NEPRA, Nishat Chunian power Ltd said that allegations pertaining to submission of fake records during the time of tariff determination were wrong and baseless. However, NEPRA rejected the stance of Nishat Chunian Power Ltd and asked to submit a reply within seven days to avoid action against the company.

Nishat Chunian was also advised to submit a separate statement within 15 days pertaining to its regulated profit and asked to include the financial impact of all items in the statement. Nishat Chunia Power Ltd was also informed about initiation of a suo motu action in case of no proper response over the said inquiry. However, despite the passing of one year, the inquiry has been closed without taking any final decision regarding billions of rupees worth additional profits by influential owners of power plants, said sources.

[Riaz Haq]

Power consumers to pay Rs650b capacity charges

https://www.thenews.com.pk/print/295875-power-consumers-to-pay-rs65...

The issue of increasing payments of capacity charges will worsen more as the power consumers will have to pay the mammoth amount of Rs650 billion in next financial year 2018-19 as capacity charges, divulges the latest official working also available with The News.


In 2015-16, the end consumers paid the capacity charges, which are fixed cost and included in the tariff, amounting to Rs280 billion and in 2016-17, the consumers paid Rs358 billion in the head of capacity charges which have been projected in 2018-19 at Rs650 billion. About the current fiscal year, the official said that the data is being prepared that is to be finalised by end of the current fiscal.

In next financial year, the Net Hydle Profit, estimated to be soaring up to Rs200 billion to be paid to Punjab and KP, will also be the part of Rs650 billion meaning by that the payment of capacity charges will also continue to haunt the power sector.

On account of the new electricity generation to be added by the incumbent regime will go up to 11,000MW by June 2018, the surplus capacity will be hovering at 4,000MW in winter season and the power consumers will pay their capacity charges.

However, Zargham Eshaq Khan, Joint Secretary (power finance) said that in the last year Rs203 billion has been paid in the form of capacity charges to the power houses excluding the payments of net hydel profit.

Mr Khan said that the government will continue to pay till five years after 2028 as the Power Purchase Agreements (PPAs) with most of the IPPs have been signed for 25-30 years and they will end up by 2028 and capacity charges payments will continue 5 years beyond 2028. He, however, admitted that every year the capacity charges payments to IPPs hovers in the range of Rs150-200 billion.

Secretary Power Division Yousaf Naseem Khokhar while admitting the capacity charges payments a threat to sustainable power sector said that in the past questionable Power Purchase Agreements (PPAs) were done with IPPs which were not in favour of the countrymen. However, the then decision makers are of the view that Pakistan was considered high risk country and no one was ready to invest in power sector. So such kinds of PPAs were inked to ensure the electricity availability in the country. “If one happens to go through such PPAs, one will feel that investors had drafted the PPAs on their own and the state officials had just signed the said agreements. Now many of PPAs of some IPPs are going to expire in 4-5 year and will completely erode by 2027-28.”

“Now after power projects under umbrella of CPEC, there is a line of projects from other economies we have,” he claimed saying that Pakistan now enjoys the luxury to pick up the projects with PPA for 10-15 years at the maximum with no capacity charges in the agreement. In the future, the projects will be entertained with no capacity charges in the agreements.

[Riaz Haq]

#Pakistan cabinet opposes renewal of unfavorable 1994 #IPP #power purchase contracts signed by #Zardari. IPPs to be asked to run/sell #electricity to consumers at discounted rates by operating power plants whose contracts will not be renewed. #corruption https://tribune.com.pk/story/2017225/2-cabinet-opposes-renewal-ipp-...

The cabinet has backed a proposal that opposes the renewal of power purchase agreements with independent power producers (IPPs) having 5,000-megwatt electricity generation capacity, which are expiring in a couple of years.

The proposal was submitted by Special Assistant to Prime Minister on Petroleum Division Nadeem Babar to the cabinet, chaired by Prime Minister Imran Khan.

Now, the task force on energy is working on a policy, which will be submitted to the cabinet for formal approval. “Power purchase agreements with the IPPs including Kapco and Hubco are going to expire in coming years and the government will not renew the agreements,” Babar told The Express Tribune.

This means that the government will not continue to follow the power purchase agreements on a ‘take and pay’ basis, which binds the government to pay capacity charges. However, these power plants will be able to sell electricity to the Central Power Purchasing Agency (CPPA) in the summer season when demand is higher compared to the winter.

The power plants were set up under the Power Policy of 1994 and were based on furnace oil. The only flaw is that the past government had not foreseen the future scenario of prices of different fuels.

At that time, the price of furnace oil stood at Rs2,843 per ton, which was cheaper than the domestically produced gas. However, the price of furnace oil has now jumped up to Rs87,000 per ton, which is many times expensive than the price of indigenous gas.

“However, in the new policy, the government will examine the future scenario of fuel and gas prices,” said Babar. Now, the imported LNG and coal have also become part of the energy basket in addition to furnace oil and domestic gas.

The government will also forecast the future LNG price. At present, Qatar is the major LNG supplier to Pakistan. However, Australia and the United States are going to become potential suppliers in future, which may cause a decline in LNG prices. A senior government official said LNG prices may come down to $2 per million British thermal units (mmbtu) in the next 10 years.

However, according to experts, the LNG suppliers will form a cartel in the global market and control production in order to keep prices at a certain level.

In the case of oil, the US shale oil boom had shaken the global market and had even broken the monopoly of Organisation of Petroleum Exporting Countries (OPEC). Following this, the prices of crude oil touched $35 per barrel and several US and European companies shut down.

However, the oil-producing countries had control over crude oil production and prices again started rising. The same will happen in the case of LNG, say experts.

Pakistan has secured the cheapest LNG supply deals recently in spot purchase contracts. However, officials believe that in short and long-term contracts, Pakistan could have to pay 11-12% of Brent crude despite the lowest LNG contract at around 7% of Brent in spot purchases.

Singapore and South Korea have received contract prices of 11.8% and 11.7%, respectively. So, such scenarios should be kept in mind while framing the new power policy, an official said.

The government is considering offering economic incentives to the consumers. Officials said consumers would be offered discounted rates of electricity from the national grid when the demand stood low to lift electricity from those power plants whose contracts were going to expire.

[Riaz Haq]

#Pakistan Independent #Power Producers (IPP) on new terms that will cut future circular debt: Return on equity (ROE) 12% in US$ terms for foreign investors. For local investors, the ROE will be changed to 17% in rupee terms without dollar indexation. https://www.dawn.com/news/1574310

For foreign investors registered with the State Bank of Pakistan, the return on equity (ROE) ‘will be 12pc prospectively’. For local investors, the ROE will be changed to 17pc in rupee terms without dollar indexation. “In recalculating the return, the equity approved by the National Electric and Power Regulatory Authority (Nepra) on commercial operation date in dollar shall be converted into rupee at an exchange rate of Rs145 for prospective calculation”, according to an MoU seen by Dawn.

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A senior government official told Dawn that about half of the 12 IPPs set up under the 2002 power policy and an association representing about two dozen WPPs had already signed memorandums of understanding (MoUs) with a negotiation team led by former federal secretary Babar Yaqoob Fateh Muhammad while others are expected to follow suit within 15 days.

These do not include the IPPs under 1994 policy, China-Pakistan Economic Corridor, public sector plants of generation companies, hydropower and nuclear power projects which claim over 75 per cent of the capacity payments.

Since most of the IPPs remained unutilised for almost nine months last year and are on the last leg of their terms, the total savings would amount to about 5pc of the total energy purchases that last year stood at about Rs775 billion or about Rs35-40bn, the official explained.

The understanding followed principles from government side that power purchase agreements are sacrosanct, the IPPs would not be subjected to media trial and there would be no investigations or arm twisting. However, evidence was put on the table to suggest that on a case to case basis, investments had been exaggerated, equity overstated and machinery over-invoiced and taxes underpaid and hence mutually agreed changes in existing contractual relationship.

[Riaz Haq]

Before an agreement can even be reached, Clause 10 of the understanding says all outstanding dues owed to them should be settled “within an agreed time period”.

https://www.dawn.com/news/1575402 by Khurram Husain

The amount the government will have to pay for this settlement is estimated by the IPP managements to be above Rs200 billion. The total outstanding owed to power producers is Rs600bn, but not all of those producers are part of these talks. The IPP team tells me they expect a full settlement of all outstanding receivables owed to them before they will consider activating any of the other clauses in the MoU. But the language of Clause 10, where this understanding is written, does not specifically make activation of the terms of the agreement conditional on prior payment of outstanding receivables. The MoU simply says there will be “agreement on payment of receivables within an agreed time period”.

The language of the clause is carefully crafted to leave just enough ambiguity to let the IPPs decide either way, to either press for full payment or activate the terms against an agreed timeline only. They will probably check the temperature at decision time before choosing their course of action on this clause.

The other clauses in the MoU are minor details, even the IPP managements agree. The revised formulae for sharing of efficiency gains or the revision in the Delayed Payment Rate are nothing special. The reduction in the DPR is only for the first 60 days, for example, after which it reverts to an exorbitant Kibor plus 4.5 per cent.

The switch to “take and pay” — a reference to eliminating capacity payments — has been thrown indefinitely into the future since both sides agreed it can only happen after a competitive trading arrangement comes into being, an idea that has languished for more than 20 years already. There is little reason to believe it will happen in the next five years, and even that is being optimistic.

The committee has also agreed to abide by the principle of first in first out when making all future payments, which will prove to be costly for the government. Common practice that helped save the government money was to pay off those bills first that came with the highest interest rates, and FIFO ends that discretion.

The biggest allegation that launched this entire exercise in the first place was the one of “excess profits” that the IPPs were said to have made by misrepresenting their costs or their fuel consumption or their efficiency levels. The government marched into these talks alleging trillions of rupees worth of wrongdoing in “excess profits”. Yet under the MoU, the whole matter has been lobbed into Nepra’s court, which will decide only whether the profits were made in accordance with the 2002 policy, the tariff determinations and the power purchase agreements of the IPPs, based on numbers that were reconciled between government and the IPPs during these talks.

The rupee indexation of returns for local investors sounds good on the surface, until you see that the rupee has been indexed at 148 to a dollar. Given these plants made their equity investments in the year 2002, when the dollar was around a third of this value, the indexation compensates the IPPs very generously in return for losing their dollar-based certainty.

The government has done the right thing to seek these talks, and it has also done the right thing to ensure sovereign guarantees are not violated in the process. But these terms do little for the vaunted goal of tariff reduction. The terms in the MoU are meek and the IPPs have largely escaped the kind of accountability that the government was screaming about when this whole affair was launched. In the meantime, the circular debt, power sector governance and the rising power bills of consumers will remain large challenges for the government.

[Riaz Haq]

#Power sector woes: #Pakistan reins in Rs2.2tr circular #debt .
The poor governance - like low recovery of monthly bills and high power theft - has given birth to the complicated ‘circular debt’. #electricity #industry #economy | The Express Tribune


http://tribune.com.pk/story/2262966/power-sector-woes-pakistan-rein...

The poor governance - like low recovery of monthly bills and high power theft - has given birth to the complicated ‘circular debt’. This has continued to compromise working capital at power production, transmission, distributions and oil and gas supplying firms.

Moreover, the non-stop addition of new production plants despite stagnant demand for years has continued to inflate ‘capacity payment’ to the standby plants. ---
The two capital burdens - circular debt at Rs2.2 trillion and capacity payment at Rs1 trillion in 2020 - have crippled the power sector in the country.

“The high inefficiencies of distribution companies (like Quesco and Pesco) are contributing 60% towards the ever-growing circular debt, which is estimated to reach Rs4 trillion by 2025,” Engro Energy Limited CEO Ahsan Zafar Syed said while talking to The Express Tribune.

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Secondly, their recoveries remain low by up to 40% against the monthly bills. A large number of the consumers are in the habit of not paying their bills despite many of them being capable.

He suggested that provincial governments should be given ownership of the distribution companies in partnership with corporate entities. The governments should be given the task of recovering bills and law enforcement agencies should come into action against those who don’t pay their bills, he said.

At present, distribution companies are a federal subject while law enforcement agencies remain provincial subject, he added.

The federal government may link recovery of monthly bills from consumers with the NFC award through which federal government transfer resources to provincial governments every year, he said.

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The second biggest challenge in the sequence is excess power production capacity. The government should not approve of setting up new production plants. “We still have 7,000MW surplus production capacity in the system as of today. It is estimated to be around 3,500MW in surplus by 2025.”

The third imminent issue is lower demand for power. The demand has remained low over the last decade despite an increase in economic activities. “The demand increased by 4% CAGR (compound annual growth rate) compared to GDP growth at 5.3% CAGR over the decade (2007-2019),” he said.

Surprisingly, the demand for power from households has remained higher than the one from the industrial sector. “This happens nowhere in the world,” he highlighted.

Syed said the GDP grew on back of services sector instead of manufacturing one. “The government should create an enabling environment for industrialisation to increase power demand and reduce capacity payment.” Besides, industries should be offered incentives to use power from the grid instead of producing their 5,000MW through captive power plants.

The fourth challenge is the high cost of power. Pakistan produces the most expensive power in the world. “Our cost of power production is 26% higher for the industrial sector compared to other regional countries like Vietnam, Sri Lanka, Malaysia, Bangladesh, South Korea, Thailand and India. It is 28% costlier for residential areas than the regional countries,” he said.

Pakistan has added 10,000-12,000MW production capacity in recent years and another 10,000 to 12,000MW is in the pipeline. Surplus power production and capacity payment to the standby plants has remained a major cause of producing expensive power.

“The capacity payments are estimated to soar to Rs4 trillion in 2025 due to ill-integrated planning in the sector in the past,” said the company official.