Bagasse-based IPPs agree new deals

Under revised agreements, IPPs will cut tariff, leading to savings of Rs238b

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ISLAMABAD:

The cabinet has given the go-ahead for signing revised agreements with eight bagasse-based independent power producers (IPPs), owned by the ruling elite and political barons.

According to the revised agreements, the IPPs will reduce their working capital component of tariff by 50% with effect from October 31, 2024.

These agreements are estimated to lead to savings of Rs238 billion when operated at full load. The IPPs agreed to change their return on equity (ROE) and return on equity during construction (ROEDC) components of tariff to 17% per annum, calculated at the rupee-dollar exchange rate of 168, with no future dollar indexation, effective from October 31, 2024.

The debt servicing component arising due to the shortfall in energy production (actual plant capacity factor of less than 45%) will be paid to the bagasse-based IPPs to the extent of surplus energy output (actual plant capacity factor of more than 45%), by considering and calculating the actual performance over five-year periods.

As per the negotiated settlement agreements, all variable and fixed operation and maintenance cost components of tariff, including foreign, will be indexed with 31% of the Consumer Price Index, whichever is lower.

In a recent meeting, the Power Division informed the cabinet that since 2011, under the new bagasse-based co-generation tariff, the fuel cost component of the tariff had been linked to the price of imported coal.

However, in 2018, the National Electric Power Regulatory Authority (Nepra) initiated suo motu review proceedings to amend the bagasse pricing and adjustment mechanism by linking it to the domestic bagasse prices.

It was applicable to the bagasse-based captive power producers (CPPs) and the IPPs operating under the 2013 revised tariff regime.

The bagasse-based IPPs challenged the Nepra's pricing mechanism by filing writ petitions in the Islamabad High Court. The court suspended Nepra's decision of July 16, 2019, which linked the fuel cost component with the domestic bagasse prices, and sent the case back to the Nepra appellate tribunal.

On February 7, 2024, Nepra re-determined the fuel cost component of bagasse by re-linking it to the price of imported coal, until 2022, when it provided an indexation mechanism of 5% per annum, delinking it from the imported coal for the remaining contract life of the aforesaid eight bagasse-based power plants.

This led to an additional burden of approximately Rs22.97 billion on electricity consumers for the period from financial year 2019 to FY 2024 and also caused a corresponding increase in fuel costs during the remaining contractual life of the IPPs.

The Power Division said that subsequent to negotiations with the IPPs during 2020-21, the Economic Coordination Committee, in its meeting held on February 8, 2021, approved the tariff discounts offered by seven bagasse-based IPPs. These discounts included a reduction in operation and maintenance costs, insurance and return on equity components of tariff.

However, Chiniot Power could not offer discounts due to the energy shortfall below the actual plant capacity factor provided in the negotiated MoUs with the IPPs.

The cabinet was informed that a task force, constituted by the prime minister on August 5, 2024, thoroughly deliberated the tariff issues. As a result, all bagasse-based IPPs agreed to certain reductions in tariff components and adjustments in energy purchase agreements on the following principles:

As of October 1, 2021, the reference price for bagasse was set at Rs4,500 per ton, down from Rs5,612 per ton, with a 5% annual indexation. The calorific value of bagasse was set at 7,000 Btu/kg for calculating the fuel cost component.

The reference bagasse price for the period from October 1, 2018 to September 30, 2021 will be adjusted by a 5% backward indexation rate, and previous invoices will be revised accordingly.

It was noted that based on the principles outlined, Chiniot Power and the Central Power Purchasing Agency-Guarantee (CPPA-G) reached a settlement agreement.

The negotiated settlement agreements with all bagasse-based IPPs, along with the agreement with Chiniot Power, would result in estimated savings of Rs238 billion when operated at full load.

Complete calculations of the estimated savings were placed before the cabinet, which was requested to approve the negotiated settlement agreements.

It was also requested to approve the revised indexation terms and authorise the CPPA-G to execute the settlement agreements.

The cabinet was asked to authorise the CPPA-G to file joint tariff petitions with Nepra based on the tariff discounts offered by the IPPs.

The cabinet considered a summary titled "Revision in Tariff and PPA Amendments with Eight Bagasse-Based Power Plants," submitted by the Power Division, and approved the proposal.