PSO waives interest for five IPPs
Pakistan State Oil (PSO) has waived its late payment interest charges on overdue fuel supply payments from five Independent Power Plants (IPPs), whose agreements with the government have been terminated. The decision was announced after extensive negotiations between the Power Division, a task force, and the IPPs involved.
The agreements for terminating the Power Purchase Agreements (PPAs) and Implementation Agreements (IAs) of these IPPsHUBCO, Lalpir, Saba Power, ROUSCH, and Atlas Powerwere formalised through Negotiated Settlement Agreements (NSAs). Under the settlements, PSO will receive a principal payment of approximately Rs14.8 billion from the power purchaser, which will offset the accrued late payment interest related to the HUBCO PPA and reverse a previous deduction made under an arbitration award.
One of the key outcomes of these negotiations is the upcoming transfer of the ROUSCH power plant to the government of Pakistan by December 31, 2024. The plant, built under the Build Own Operate and Transfer (BOOT) model, will be handed over at a nominal price of one US dollar, converted to Pakistani rupees at the prevailing exchange rate. The transfer aligns with the termination terms and broader government efforts to restructure the power sector.
Key terms
Under the settlement agreements, the government and the IPPs have agreed on several important points. Notably, no capacity payments will be made beyond October 2024, marking a significant cost-saving for the government. Furthermore, no termination compensation will be paid under the IA, and all past-due capacity payments, energy payments, goods and services tax (GST), insurance, and pass-through items will be paid in full.
A notable concession made by the IPPs is the waiver of past late payment interest, and the parties have agreed that no payments will be made in relation to any expert determinations or arbitration awards in favour of the IPPs. This mutual waiver of rights and claims under the PPAs and IAs is a cornerstone of the settlement, signalling a collaborative effort to avoid lengthy legal disputes.
Each of the five IPPs involved in the settlement has specific conditions tied to their agreement, reflecting the unique circumstances of their operations.
HUBCO
For HUBCO, the negotiated settlement includes a key provision regarding an arbitration award that had previously granted the company Rs17 billion in interest related to the first fill of fuel. Under the new agreement, HUBCO has agreed to waive this interest claim. Additionally, the settlement stipulates that PSO's payables from HUBCO will be assigned to the power purchaser, who will settle the amount by offsetting it against the accrued late payment interest under the PPA and reversing the first fill deduction under the arbitration award. HUBCO will also receive payments for insurance coverage for the first four months of fiscal year 2024-25.
ROUSCH power
As part of the NSA with ROUSCH, the company will transfer its power plant to the government by the end of 2024, in line with its BOOT contract. The government will pay the company Rs5.5 billion for the early termination of the Operation and Maintenance Expenses (OFME) period, as well as Rs2.8 billion for the preservation of the plant until its transfer.
Atlas power
Atlas Power, another IPP involved in the settlement, agreed to forgo Rs4.763 billion in savings from past fuel, operations, maintenance, and inventory gains accumulated up until September 2024. In return, the government will withdraw from arbitration proceedings involving Atlas Power. This agreement came after confirmation from the system operator that the Atlas Power plant was no longer required for power system operations due to its minimal dispatch over time.
The Power Division briefed the Cabinet on the details of the settlements and sought approval for the negotiated agreements with the five IPPs. The Cabinet was also requested to approve the payment of past due capacity and energy charges to the IPPs, as stipulated in the NSAs, and to authorise the Central Power Purchasing Agency (CPPA) and PSO to execute the necessary agreements for assigning PSO's receivables. Furthermore, approval was sought for a technical supplementary grant of Rs308 million to cover the expenses incurred by the task force managing the settlements.
During the Cabinet meeting, the prime minister commended the IPPs for their cooperation in voluntarily agreeing to terminate their contracts, a move that will result in substantial savings for the government. By avoiding future capacity payments and focusing only on actual incurred costs, without any interest obligations, the settlement is expected to decrease electricity rates by approximately 70 paisa per unit.
The government estimates that the termination of these five IPPs will save around Rs411.16 billion in future payments. Moreover, the prime minister revealed that similar settlements are being negotiated with 15 to 20 additional IPPs in a second phase of power sector restructuring. The goal is to further reduce the cost of electricity, which would benefit the economy and stimulate growth.
The power minister echoed these sentiments, highlighting that the settlement with the IPPs is part of a broader strategy to lower electricity costs. This strategy includes measures to curb electricity theft, accelerate the recovery of arrears, and reduce the country's reliance on expensive imported fuels. The Minister emphasised that these efforts, alongside the IPP settlements, will help lower electricity costs for consumers, contributing to economic stability and growth.