PTI govt to reduce rate of return for state-run power plants

Move may hamper privatisation of state-run power plants

ISLAMABAD: The government has decided to reduce the rate of return for state-owned power plants that have cumulative generation capacity of 22,972 megawatts, a move that may hamper the privatisation of such power plants.

Capacity charges for government-owned power plants constitute 42% of the total capacity payments and as new plants come on line they will further rise to approximately 47%.

The government has also decided that the rate of return for state-owned liquefied natural gas (LNG)-based power plants should be reduced before their privatisation.

Sources pointed out that investors may not show keen interest in acquiring the LNG-based power plants with a lower rate of return. However, the plan would help to reduce electricity rates for power consumers, they added.

The rate of return for government-owned independent power plants (IPPs) ranges from 13.75-17%. The Cabinet Committee on Energy (CCOE) has given the go-ahead for reducing the rate of return to 10%.

The cabinet body has also given its nod for fixing the rate of return in rupees rather than in dollars due to fluctuation in the exchange rate.

An inquiry committee, headed by former Securities and Exchange Commission of Pakistan (SECP) chairman, found that the IPPs had got billions of rupees from the power consumers.

The committee recommended the scrapping of the “take-or-pay” formula in order to remove the burden of capacity payments, which power plants received from the consumers for not generating electricity.

According to the committee, the existing capacity payments have touched the Rs900-billion mark, which will rise to Rs1,500 billion by 2025 with the commissioning of new plants. These payments are being made to the idle power plants for not generating electricity.

Sources told The Express Tribune that the government’s move to cut the rate of return for state-owned power plants would pave the way for reducing the rate of return on IPPs owned by the private sector.

They said the government had formulated a plan under which the power sector would be asked to voluntarily cut the rate of return, which would also help to slash power tariff for the consumers.

At present, the average consumer tariff is Rs18.65 per unit, which includes Rs4 on account of taxes, duties and surcharges. However, several tariff revisions, determined by the regulator, are due to be notified by the government.

If all pending tariff revisions are notified, the electricity price will surge to Rs24.47 per unit. However, the government has decided to freeze the tariff on account of monthly and quarterly adjustments till June 2020, which will cause a financial gap of Rs150 billion.

The government-owned power plants receiving capacity charges include Gencos - based on furnace oil or natural gas, hydroelectric power plants owned by the Water and Power Development Authority (Wapda), LNG-based power plants and nuclear power plants. Total capacity of these plants is 22,972MW.

Officials said the Power Division wanted to reduce the rate of return from 13.75-17% to 5%. It has also proposed that state-owned power plants including Nandipur, Guddu and the government of Punjab’s plants based on LNG may be privatised.

However, prior to their privatisation, the return on equity may be reduced. It has proposed that new power plants of the government like Jamshoro unit-2 may be cancelled or delayed subject to technical study.

The Power Division is now formulating a proposal to reduce the return on equity for government-owned IPPs up to 10% and fix the same in rupee terms rather than in dollars in consultation with the Finance Division. The proposal would be submitted to the CCOE for formal approval.

Published in The Express Tribune, April 15^th, 2020.

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