Govt, IPPs reach accord to ‘slash energy cost'

PM Imran says fixing damaging structure inherited in power sector


Our Correspondent August 15, 2020
Details reveal efficiency and cost take back seat in buying electricity from IPPs PHOTO: REUTERS

LAHORE:

Prime Minister Imran Khan on Friday announced that the government has signed a new agreement with the independent power producers (IPPs) whereby the cost of electricity generation would be brought down and circular debt reduced.

In a series of tweets, Premier Imran said, “I congratulate the nation because we are fixing the damaging structure we inherited in our power sector.”

The IPPs, in the larger national interest under the 1994 and 2002 power policy, have voluntarily agreed to provide concessions, according to an official document available with The Express Tribune.

“After long negotiations we have signed a new agreement with the IPPs, which will bring down the cost of power generation and reduce circular debt,” the prime minister tweeted.

After this, he said, the next reform target “is the power distribution system”.

PM Imran also congratulated the nation at the “upturn in our economy after two years of struggle”.

“Current account and fiscal deficits are down; construction industry and through it job creation is taking off because of our special incentives,” Imran said, adding that the stock market was up, exports and revenues were also up and cement and car sales also increased.

According to the document, the committee for negotiations with the IPPs, notified by the government vide F No IPPs - 1(12)/2019-20 dated June 3, 2020 and representing the 1994 and 2002 power policy projects, agreed in principle with them that nothing contained in this Memorandum of Understanding (MoU) shall be deemed or be construed as an admission of liability, wrong-doing or improper action on the part of the IPPs.

The terms of the MoU are subject to the approval of the federal cabinet and the IPPs’ board of directors and other necessary corporate approvals, it said, adding that for the 1994 policy projects, existing capacity payments and variable operation and maintenance shall be reduced by 11%.

It further said that the dollar exchange rate and US CPI indexations shall be discontinued on 50% of the reduced capacity payment, which shall be fixed at National Bank of Pakistan’s TT/OD selling rupee/dollar exchange rate prevailing as on August 12, 2020 without any local or international currency indexation or inflation adjustment for the future.

In lieu of the tariff reductions, any heat rate sharing by any IPP as per its existing arrangement shall cease to exist.

The dollar exchange rate and the US CPI indexations on reduced variable O&M and 50% of the reduced capacity payment shall continue as per the existing arrangement.

The parties shall look into the possibility of termination of plants considering their commercial and technical viability.

The parties acknowledged that the IPPs predate the creation of the National Electric Power Regulatory Authority (Nepra) regime. The government of Pakistan intends to create competitive power markets. Without prejudice to the terms of its generation licence, the IPP shall actively support and participate in the competitive trading arrangement when it is implemented and becomes fully operational.

The parties recognise that payment of the receivables of the IPPs is an integral part of this MoU as key consideration. The power purchaser and the government shall devise a mechanism for payment of outstanding receivables within the agreed time period which shall be reflected in the final agreement to be signed.

The power purchaser shall ensure adherence to its contractual obligations, and the government and power purchaser shall work towards resolution of the expert’s adjudication for the relevant IPPs.

This MoU or any of its terms shall not be construed as an alteration or amendment to the Power Purchase Agreement (PPA) or Implementation Agreement. Once the federal cabinet and the board of directors of the IPPs approve the terms of this MoU, the committee and the IPPs shall agree and document details and procedures of these understandings, along with IPPs’ project specific issues, preferably within 30 days, after which the same shall be submitted to relevant counterparties, to be followed by legal documentation to amend the tariffs and relevant agreements.

“This MoU is valid for six months from the date hereof and shall stand terminated on signing of the detailed agreements referred to in clauses 8 and 10 above,” the document stated.

For 2002 policy regarding oil-fired projects, any future savings in fuel shall be shared on a sliding scale starting from 70:30 in favour of the power purchaser for the first 0.5% efficiency improvement above the currently Nepra-determined benchmark efficiency, followed by 60:40 for next 0.5%, then 50:50% for next 0.5%, and finally 40:60 for any efficiency above that. The power purchaser shall not share in any efficiency losses.

Further, any future savings in O&M shall be shared 50:50 after accounting for any reserves created, or to be created, for major overhauling, to be reviewed by the power purchaser or Nepra as mutually agreed. If the reserve for major overhaul remains unutilised, it shall be shared in the ratio of 50:50 between the power purchaser and the IPP.

In case the major overhaul expense exceeds the reserves available at the time of major overhaul, the difference shall be carried over to the future years. The power purchaser shall not share in O&M and major overhaul losses.

For gas-fired projects, fuel and O&M shall be taken as one consolidated line item and any future net savings shall be shared 60:40 in favour of the power purchaser and IPP respectively, after accounting for any reserves created, or to be created for major overhaul if the reserve for major overhaul remains unutilised, it shall be shared in the ratio of 60:40 between the power purchaser and the IPP. In case the major overhaul expense exceeds the reserves available at the time of major overhaul, the difference shall be carried over to the future years. However, the power purchaser shall not share fuel, O&M and major overhaul losses.

In order to ensure that the actual efficiency is matching the efficiency reported in the financial statements, the power purchaser shall appoint a reputable international independent consultant to perform a one-time detailed heat rate test for all IPPs, for which the government and the IPPs’ representatives shall agree on the terms of reference, standards and corrections required.

For all future invoices, Delayed Payment Rate (DPR) under the PPA shall be reduced to KIBOR + 2% for the first 60 days after the due date, and thereafter at KIBOR + 4.5% as per the PPA.

For IPPs where Gas Supply Agreement is signed with an entity with significant ownership of the government, same DPR rates shall be payable by the IPP to the gas supplier. Further, for all invoices, the power purchaser shall ensure that payments follow the PPA mandated FIFO payment principle.

In future, for foreign equity investment presently registered with the State Bank of Pakistan, the Return on Equity (RoE), including Return on Equity During Construction (RoEDC), shall be 12% per annum, and for local investors, the RoE, including RoEDC, shall be changed to 17% per annum in rupee terms on Nepra approved equity at CoD calculated at dollar/rupee exchange rate of Rs148 per dollar, with no future USD indexation. The miscalculation of IRR, on account of periodicity of payments, has been addressed through reduction in return component.

The government of Pakistan shall actively support the creation of competitive power markets. All projects shall convert their contracts to Take and Pay basis, without exclusivity, when Competitive Trading Arrangement is implemented and becomes fully operational, as per the terms defined in the licence of each IPP. In the interim period, CPPA (G) shall work towards providing access to the bilateral market at the earliest.

In order to assess if a company has made any excess profits, the reconciled numbers between the committee and the IPPs engaged in this exercise, shall be submitted to Nepra. As a legal body vested with the authority for tariffs, Nepra shall hear and decide this matter in accordance with the 2002 power policy, tariff determination and PPA, and provide for a mechanism for recoveries, where applicable.

Payment of the receivables of the IPPs is an integral part of this MoU. The power purchaser and the government shall devise a mechanism for repayment of the outstanding receivables with agreement on payment of receivables within an agreed time period which shall be reflected in the final agreement to be signed. The power purchaser shall ensure adherence to its contractual obligations.

The parties agree that nothing contained in this MoU shall be deemed or be construed as an admission of liability, wrong doing or improper action on the part of the IPP. Except for the matters provided in this MoU nothing shall prejudice any other rights and remedies available to the parties under the relevant agreements.

This MoU or any of the terms of this MoU shall not be construed as an alteration or amendment to the PPA. Once Nepra, the federal cabinet and board of directors of the IPP approve the terms of this MoU, the parties shall agree and document details and procedures of these understandings preferably within 30 days, after which the same shall be submitted to Nepra and CPPA (G), to be followed by legal documentation to reflect the amendments needed in the relevant agreements.

This MoU is valid for six months from the date hereof and shall stand terminated on signing of the detailed agreement referred to in Clause 12.

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