IPP deals to result in thin tariff cut

Govt estimates reduction of Rs0.50 following revised deals with seven IPPs

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ISLAMABAD:

The government has estimated power tariff reduction of only Rs0.50 per unit following revision in agreements with seven independent power producers (IPPs).

However, officials of the Power Division claimed that total savings would be Rs920 billion over the entire life of the private-sector IPPs. The savings comprise capacity payments to the IPPs, but the amount is very low when compared with the annual capacity charges of Rs2.5 trillion to Rs2.8 trillion paid to the IPPs.

At a public hearing held on Monday to review the revised tariff, the National Electric Power Regulatory Authority (Nepra) was informed that consumers would enjoy a relief of Rs0.50 per unit following revision in agreements with seven IPPs.

The government has signed revised agreements with the seven IPPs, which included Nishat Power, Nishat Chunian Power, Saif Power, Sapphire Electric, Engro Power, Narowal Energy and Liberty Power Tech.

During the hearing, a question was asked as to whether the IPPs were forced to revise their tariff agreements. Power Division officials dismissed such allegations, saying that the seven IPPs had voluntarily agreed to revise agreements without any pressure.

They revealed that the IPPs like Orient Power did not agree; therefore they were not part of the petition pertaining to the revised electricity tariff. However, they said that the government was locked in talks with all those IPPs, which were reluctant to revise agreements, in a bid to reach a mutually agreed deal. So far, the government has signed agreements with 29 IPPs, which have agreed to revise power tariffs.

Regarding the impact on consumers, government officials said that the tariff would be reduced up to Rs0.50 per unit for seven IPPs. They elaborated that the reduction in tariff was related to the electricity sales volume. If there are low sales, this impact will be wiped out and in case of increased sales, there will be a higher reduction.

Interveners asked questions about the fixing of furnace oil price at Rs165,000 per ton. They opposed the fixing of furnace oil price, saying that there was no consumption of furnace oil in Pakistan, which was why refineries had exported one million tons of oil.

However, the government officials said that any reduction in the price of furnace oil would be passed on to consumers. Price fluctuations have been linked with the Karachi Inter-bank Offered Rate (Kibor), which was earlier 4.5%, but now it has come down to Kibor plus 1%.

The interveners also questioned the potential of passing on tariff relief to the consumers. They said that there were reports that the International Monetary Fund (IMF) had refused to allow the government to pass on the relief to the consumers following revision in agreements with the IPPs.

Seven power companies have waived the late payment surcharge worth Rs11.19 billion. Nishat Power has waived Rs1.77 billion, Nishat Chunian Power Rs1.84 billion, Saif Power Rs1.6 billion, Sapphire Electric Rs1.39 billion, Engro Power Rs1.7 billion, Narowal Energy Rs1.5 billion and Liberty Power Tech Rs1.35 billion.

These IPPs were facing action due to excessive savings, prompting Nepra to issue notices to them, but they were challenged in court. Now, a settlement has been reached and Nepra will withdraw the notices. The government will recover the previous excess profits up to 2023 from these IPPs.

According to an application submitted to Nepra, the operation and maintenance components of Nishat Chunian Power and Liberty Power Tech shall be revised as per the amendment agreement. For the remaining IPPs, the NEP-approved operation and maintenance costs for the quarter ended September 30, 2024 shall continue.

Indexation shall be lower than 5% per annum or the average NCPI for the preceding 12 months. The indexation shall follow the existing mechanism, provided that the PKR/USD depreciation shall be allowed only up to 70% of the actual depreciation per annum. As many as 100% appreciation shall be passed on to the consumers.

Regarding, operation and maintenance components for foreign cost of working capital, there will be seven-day inventory at 100% load factor (residual fuel oil – RFO) and 15-day receivables at 15% load factor (gas).

RFO price has been set at Rs165,000 per ton, excluding sales tax. Sales tax, currently included in the existing CWC component, shall be removed. The spread over Kibor on CWC has been revised from 2% to 1%. The revised CWC in future shall be indexed at Kibor plus 1%.

The maximum limit of insurance component shall be capped at 0.9% of the allowed engineering, procurement and construction (EPC) cost.