IPP Agreements and the Political Will to Renegotiate: A Critical Analysis

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Khalid Masood Khan

Rising Capacity Charges and Calls for Renegotiating IPP Agreements

The government of Pakistan (GoP) is currently under intense scrutiny and criticism for the increasing capacity charges, leading to a vehement demand for revisiting agreements with Independent Power Producers (IPPs). The ongoing debate revolves around the justification of capacity payments and the construction linked to these payments. On one side, there is a strong push for renegotiation of the terms, while on the other side, the focus is on justifying the capacity payments and the associated constructions.

Before delving into specific aspects of this issue, it is essential to address a fundamental concern. It raises the question of how the government, which itself receives dollar-based returns from its power plants, can negotiate different terms with private investors. This is especially pertinent considering that these investors made significant investments during a time when the entire country was grappling with extensive load shedding and rolling blackouts of 8 to 12 hours daily.

The government owns a significant number of power plants, including the older GENCOs such as Jamshoro Power Company Limited (JPCL), Central Power Generation Company Limited (CPGCL), Northern Power Generation Company Limited (NPGCL), and Lakhra Power Generation Company Limited (LPGCL).

In particular, this discussion will turn the spotlight on four RLNG-based combined cycle power plants. These are the 1230 MW Haveli Bahadur Shah (HBS) and the 1223MW Balloki plants, both owned by the Government of Pakistan through National Power Parks Management Company Ltd. (NPPMCL), and the 1263MW Punjab Thermal Power (Pvt) Limited (PTPL) and the 1180MW Quaid-e-Azam Thermal Power (Pvt) Limited (QATPL), also known as the Bhikki Power Project, owned by the Government of Punjab.

Capacity payments encompass various elements, including debt repayment charges, return on equity (ROE), insurance, and fixed operations and maintenance (O&M) costs. While reprofiling debt for a longer period might offer a possible approach, the more crucial aspect lies in converting dollar-based returns to rupee-based returns. This entails fixing the dollar value at a certain point.

At the inception of these projects, the tariff’s ROE component was calculated based on a 16% internal rate of return (IRR) on equity investment, coupled with dollar indexation for all four RLNG plants. This raises an important question: if the government itself requires dollar-based returns, why should private investors be expected to accept rupee-based remuneration?

In 2021, the reduction of the ROE component was initiated following the CCoE decision No. CCE/46/13/2020 dated August 27, 2020, which was ratified by the Cabinet in case No. 648/35/2020 dated September 8, 2020. This decision resulted in the reduction of the ROE of government-owned power projects (RLNG IPPs) from 16% IRR with dollar indexation to 12% IRR with dollar indexation. The Power regulator NEPRA, or the National Electric Power Regulatory Authority, is responsible for regulating the electricity generation, transmission, and distribution in Pakistan. While NEPRA has revised the ROE to 12%, dollar indexation remains.

As a crucial first step, the government should eliminate dollar indexation from all government-owned power plants. A 12% return seems reasonable, but it should be rupee-based. This move would establish a precedent for negotiating similar terms with private investors, fostering a more sustainable and equitable energy sector.

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Turning to the older power plants known as GENCOs, NEPRA provided detailed insights in its State of Industry Report 2023:

Jamshoro Power Company Limited (GENCO-I) consists of four units, with only Unit-1 supplying nominal electricity during FY 2022-23. The remaining three units drew electricity from the National Grid without contributing any power. Unit-1 operates on RFO with notably low efficiency, resulting in a plant utilization factor of just 2.7% for FY 2022-23. The average Energy Purchase Price (EPP) per unit from Unit-1 during this period was Rs54.62/kWh.
Central Power Generation Company Limited (GENCO-II) has access to cost-effective dedicated gas but faced notable performance challenges during FY 2022-23. Three out of four steam turbines, designed to work in conjunction with gas turbines, were out of operation, with the fourth steam turbine underperforming. Gas turbines either couldn’t operate or had to run in open cycle mode, leading to substantial financial losses for electricity consumers. Utilization factors for its units were 41.08% (Units 5-10), 0.56% (Units 11-13), and 40.63% (Units 14-16).
Northern Power Generation Company Limited (GENCO-III) exhibited poor performance, further straining the power sector. Plant utilization factors were 2.96% for TPS Muzaffargarh and 28.86% for Nandipur. The average EPP per unit from Muzaffargarh and Nandipur during FY 2022-23 were Rs50.01/kWh and Rs28.86/kWh, respectively.
Lakhra Power Generation Company Limited (GENCO-IV) has been non-operational for the past few years.

The inefficiencies of these older GENCO power plants lead to inefficient fuel consumption, resulting in increased generation costs and burdening the country’s power sector. Maintaining these outdated and inefficient facilities, despite having sufficient capacity for more efficient alternatives, is not advisable.

These plants should be retired, and manpower should be adjusted to NTDC and DISCOs. Moreover, grid station assets can be transferred to the relevant DISCO or NTDC, based on the voltage levels. Furthermore, NTDC has already initiated a study to utilize some older turbines for reactive power stability within the transmission network.

By strategically phasing out outdated and inefficient generation facilities in the public sector, the government can minimize the burden of capacity payments and ensure the operation of only efficient plants. This will pave the way for a more efficient and sustainable energy sector, bringing optimism for the future.

It is imperative that dollar indexations be removed from government-owned plants, and no agreements should be renewed with IPPs established under the 1994 and 2002 policies. The establishment of an open electricity market for direct/bilateral trading of electricity, promoting fair competition, and conducting independent auctions through a functional market operator, coupled with an independent auction agency such as PPIB, is crucial for the long-term sustainability and equity of the energy sector. Fairness in negotiations is key to a balanced energy sector.

The negotiations with the IPPs will necessitate exhaustive legal, technical, and financial deliberations among experts to determine the room available for adjusting the agreed terms. Rushed or poorly planned negotiations could lead to unintended consequences, such as legal disputes or financial losses, and potentially result in a situation reminiscent of another catastrophic event similar to Reko Diq. Therefore, it is crucial to approach these negotiations with caution and thorough preparation.