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April 23, 2019

Government begins talks to renegotiate power purchase agreements with IPPs

Business

April 23, 2019

LAHORE: The government has started renegotiating power purchase agreements with the independent power producers (IPPs) to ease burden of mounting circular debts, officials said on Monday.

A senior official at the ministry of energy said a meeting has been convened on Tuesday (today) to finalise the proposed amendments into the power purchase agreements with the IPPs.

Irfan Ali, secretary of Power Division, confirmed with The News that renegotiation on power purchase agreements with IPPs was carried out “to seek some cushion in the payment mechanism”.

“This task is being done to minimise outstanding amount of power sector,” Ali said. “Such reduction in financial burden will ultimately pass on to consumers (in form of) revision of electricity tariffs.”

An official estimate puts circular debt at more than Rs600 billion, excluding the debt parked with the Power Holding Private Limited. The circular debt is still very high even after the government recently settled Rs200 billion arranged via sukuk.

An official said the federal government is presently discussing revised agreements with around 14 IPPs as part of power sector’s reforms. “We hope that all the private power producers will follow changes in payment mechanism.”

Officials said the government is very close to strike a deal with the IPPs for reducing late payment surcharges. Following the revision, late payment surcharge is expected to be applicable after 60 days instead of 30 days.

“Such changes will lead to reducing volume of circular debt,” an official added. At least Rs10 billion could be saved annually with ease in payment conditions and lowering of markup rates. The official said increase in recoveries of electricity distribution companies coupled with lower distribution losses would contribute towards timely payments to the independent power producers and other stakeholders of power sector.

The officials acknowledged that circular debt could not be contained without smoothening payments of government subsidies. Work for streamlining issues of power sector has recently been initiated, they added. “We are aiming with clear mind and follow objective approach to deal with complex issues of power sector,” an official said, requesting anonymity.

“These reforms are indispensable to get rid of circular debt, which has been a lingering obstacle.” Circular debt emerges when the Central Power Purchasing Agency couldn’t make payment to power generation companies, including independent power producers, government-owned thermal generation companies, hydropower producers and National Transmission and Despatch Company.

The consequent persistent revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, refiners, and producers resulting in a shortage of fuel supply to power producers.

The circular debt first emerged in 2007 as an outstanding overdue liability to power supply companies. Circular debt has been termed as one of the biggest threats to the viability of power sector.

Previous government did try to end this menace. But, the standalone approach of cash injection gave only a temporary relief and the issue emerged again with larger financial impact.

The cash injection of Rs480 billion in 2013 could not lead to ending circular debt. The circular debt also ballooned in the present government. Now a plan is being carried out to restraint rising financial liabilities of power sector through a reforms process.

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