Govt resolves disputes with KE
In the future, if the government delays subsidy payments, the company can make adjustments after two months against its payments to the government on account of power purchases. photo: file
The interim government on Friday approved the finalisation of four deals with the country’s largest privately-managed power firm, K-Electric (KE), ending years-old disputes over power purchase payments and the supply of electricity. This decision sends a positive signal to foreign investors.
The Economic Coordination Committee of the Cabinet approved the signing of the Power Purchase Agency Agreement (PPAA), Interconnection Agreement (ICA), Tariff Differential Subsidy (TDS) Agreement, and Mediation Agreement. These agreements are expected to improve relations between the entity and federal government authorities, ensuring better services to Karachi and parts of Balochistan.
The ECC decided to approve the proposal of the Power Division for signing the draft PPAA, ICA, TDA & Mediation Agreements between KE and the government of Pakistan entities, according to a statement issued by the Ministry of Finance.
These agreements had been finalised about three years ago, and a couple of committees had also reviewed them. But no government could muster the courage in the past to approve these deals. Energy Minister Mohammad Ali played a role in ensuring these approvals, although another cabinet minister had tried to scuttle them.
The approval and signing of these agreements would also address the concerns of the Saudi Arabian investors who had acquired stakes 18 years ago. The end of the commercial dispute could also facilitate the takeover of KE by Shanghai Electric. Finance Minister Dr Shamshad Akhtar presided over the ECC meeting.
According to the PPAA agreement, the federal government has guaranteed to provide 1,000 megawatts of electricity to KE for ten years, and another 1,000 MW would be provided subject to availability.
KE has also submitted a plan for the generation of over 3,000 MW of electricity. The plan envisages the addition of cumulative base load capacity of 3000 MW as future capacity addition to be undertaken in the next 10 years in IPP mode. But the company thinks that its requirements can be met with an addition of 1,500 MW. The company is also in the process of investing in the 660MW unit one of the Jamshoro Power plant.
The Mediation Agreement would pave the way for the resolution of the dispute over late payment surcharges on delayed payments on account of power purchases by KE to the government. It is expected that former Attorney General for Pakistan Ashtar Ausaf would be engaged as the mediator.
Both sides have already reached an understanding over the payment of principal amounts on account of the cost of electricity by KE and delayed payment of subsidies by the government. The company has not paid about Rs240 billion to the government, and it also claims that the government has not cleared about Rs220 billion subsidies.
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Due to the expiry of the power purchase agreement, the payables and receivables position between KE and the government started to deteriorate because KE stopped paying on the plea that these payments are to be settled against tariff differential subsidy receivable from the government but not being paid to KE.
In the future, if the government delays subsidy payments, the company can make adjustments after two months against its payments to the government on account of power purchases. Similarly, on late payment, the company would also be entitled to late payment surcharges – equalising its status with the government on this count.
The finance ministry stated that the ECC also directed the Power Division to present the matter related to KE’s generation enhancement plan to the Cabinet Committee on Energy, which should focus on reducing the cost of electricity as well as the resultant subsidies.
Despite finalising these pacts a few years ago, the parties could not proceed ahead on agreements due to disagreement on the volume of firm capacity as base load supply from the national grid, non-reconciliation of receivables and payables and interest charges, the way forward on settlement of legal and regulatory issues, and allied matters, the ECC was informed.
A task force under former Prime Minister Shahid Khaqan Abbasi had also decided that the reconciliation of outstanding amounts be carried out between the parties as of June 30, 2022, based on the audited financial statements of respective entities that have been duly reconciled and resultant reconciliation statements have been initialled by the parties.
On the recommendation of the Attorney General’s Office, a draft Mediation Agreement for the settlement of historic dues was also negotiated and initiated by all parties.
KE will invest in private funded IPPs either green field or brownfield conversions. The most important intervention is with regard to the government-owned Jamshoro Coal Power Plant. Unit-l of the plant, which is almost ready for operations on imported coal, and the plan is to convert it to local coal and divert its generation to KE.
Published in The Express Tribune, December 16th, 2023.
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