Official warns against unilateral action on IPPs deals

ISLAMABAD: The government cannot walk away from the sovereign guarantees-based contracts with the IPPs unilaterally as it will warrant huge penalties for the government in arbitration courts like in the case of Reko Diq, one of the top officials of the Power Division told The News.

“However, keeping in view the escalating criticism from eminent exporters headed by former minister Dr Gohar Ejaz on capacity payments, the government can again renegotiate the contracts only if IPPs volunteer to talk. Under this scenario, a little bit of solace for the end power consumers can be harnessed.”

During the PTI regime, the Power Purchase Agreements of IPPs installed under 1994 and 2000 power policies were amended and the value of US dollar was capped at Rs148. However, the power plants set up under the 2015 power policy would haunt the power consumers for a longer time in the shape of higher capacity charges payments as they were offered 17 percent return based on the US dollar indexation on the current value of the dollar.

The export industry has become unviable because of the highest industrial tariff in the region with competing economies. The industrial tariff in Pakistan still hovers around 15 cents and it can be reduced to the regional tariff if the whole cross-subsidy of Rs240bn industrial players are extending to the domestic sector is waived off. “The government has so far ended Rs150 billion cross-subsidy.”

“Right now the base tariff for FY25 stands at Rs35.50 per unit. Of it, the capacity payments contribution in the base tariff is Rs18.39 per unit and if we dissect the capacity payments’ component in the tariff, the Rs10-12 per unit contribution comes because of the loans and their interest payments the IPPs borrowed from lenders. In every project, equity stands at 20 percent and debt at 80 percent. So the payments of loans and interest payments in the first 10 years of new IPPs installed under the 2015 power policy are the main cause of higher side capacity payments.”

“This year the end consumers are projected to pay over Rs2 trillion as capacity payments alone. The government’s top ministers — financial minister and Power Division minister are currently in China to persuade the authorities to re-profile the loan and issue the panda bond of $300 million and convert the imported coal power plants to Thar coal.”

The official said: “More importantly, if the government stops getting the return on equity (RoE) amounting to Rs100 billion per annum on its power plants, the basket tariff price for end consumers will tumble by Re0.95 per unit. The government owns the nuclear, hydel and RLNG-based power plants.

“We have already reduced the return on equity of RLNG-based power plants from 16 to 12 percent and hydropower houses owned by Wapda to 10 percent from 17 percent. This means that there is no further space available to slash the return on equity as it will trigger a crisis-like situation for arranging financing for ongoing and future projects of Wapda.”

The official added: “Wapda has shown its inability to further reduce the RoE on its projects arguing that it has been deprived of Rs26 billion over the last three years due to the above RoE reduction, which has added to the financing costs for the projects.

“If ROE is further decreased from 10 percent, Wapda will face a major shortfall in the financing needs rendering these projects commercially unviable.”