The rise and fall of RLNG power plants

LAHORE: Pakistan’s four regasified liquefied natural gas (RLNG) power plants, once hailed as the most efficient in the world, have become virtually worthless as the government’s policy changes have reduced their profitability and attractiveness for investors, officials said on Saturday.

Of the four RLNG plants in Pakistan, the federal government owns the 1,230-megawatt Haveli Bahadur Shah plant and the 1,223-megawatt Balloki plant under the umbrella of the National Power Parks Management Company Limited (NPPMCL).

These electric generation plants were touted as the most efficient power units in the world, with an unprecedented efficiency of over 62 percent. At the time of their launch, the per-unit cost of generation was in single digits, and their contribution to bridging the energy shortfall was highlighted with much fervor by the authorities.

However, the privatization deal for these plants has become less attractive for investors after the return on equity was revised downward from 16 percent to close to 11 percent. In this situation, a senior official of the Energy Ministry hinted that the federal government would not sell either RLNG plant.

Although the move to revise ROE helped in reducing capacity charges, it dented the plants' ability to earn profits, making them less profitable for investors.

Since their launch, these plants have faced various problems, such as gas pressure issues, mismatch in calorific value of RLNG, and lack of imported gas, making them more of a liability than a contributor to the power mix.

Interestingly, these plants have been on the market for sale for the past five years or so and were even part of the negotiation with the International Monetary Fund (IMF) for the loan deal. The IMF successively pressed the government to privatize these plants with a view to earning foreign exchange.

According to insiders, the government has been left with the option to run these power plants itself instead of selling them to foreign buyers.

A senior official of the Ministry of Energy also supported this view, saying that selling the plants to foreign buyers would result in an outflow of dollars, further burdening the economy. Insiders said that if the government succeeds in attracting local investors, the smooth running of RLNG plants could be made possible, and the government would be able to earn much-needed capital from the sale deal.

According to Shahid Khaqan Abbasi, who was Energy Minister and later Prime Minister in the last year of the previous PML-N government, four RLNG-based power plants, two each by the federal government and the Punjab government, of around 1,350 MW each were built to resolve the power shortage in the country. This approximate 5,000 MW capacity with over 62 percent thermal efficiency was the most efficient power generation in the world.

He continued to say that these four plants were built with 100% government funds without any loans in record time and at the lowest cost. Later, he believes some loans were taken by the government against these projects.

It was envisaged from the start of these projects that the plants would be privatized to allow the government to recover its invested equity.

Regarding the government's decision to roll back their privatization, he said he was not aware if any decision has been made not to privatize these plants. However, he added, it must be understood that the power tariff for these plants was approved by NEPRA in the IPP mode, and 70% of the equity invested by the government is considered to be a loan for the purposes of determining the tariff; any buyer in a privatization process will discount the cash flows to determine the price, meaning that the government cannot recover its investment upfront in the privatization process.

Abbasi was asked about the IMF's assessment that "transactions of equity sale of two RLNG power plants would generate funds for the cash-starved government" is not a big deal, and that the generated proceeds would not be substantial to be channeled to debt reduction and poverty programs as stated by the IMF.

He replied that any money that Pakistan can generate is good money; the alternate is to borrow it at 24 percent interest. So, the IMF was not wrong.

He concluded that the only thing important in this connection is that the sale of the plants would not provide an immediate return of the $4 billion spent on them.