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August 15, 2020

Huge relief soon as changes made to PPAs with IPPs

Top Story

August 15, 2020

ISLAMABAD: In a major breakthrough, the government has ultimately managed to earn credit for paving way towards introducing fundamental changes in the Power Purchase Agreements (PPAs) with the IPPs installed under 2002 power policy.

This will ensure huge relief for the end consumers and government. However, talks are in final stages with the IPPs installed under 1994 and 2015 power policies.

The government is also in talks for maximum relief through some alternation in the PPAs of the IPPs (coal based power plants and RLNG based power plants) installed under and outside CPEC umbrella installed by Chinese companies underpower policy 2015.

The government has also inked agreements with Wind Power Projects that will be binding after different level approvals from power companies. Under material changes in PPA with IPPs established under 2002 power policy, there will be no 15 percent profit with US dollar indexation for local IPPs, rather they will get 17 percent profit with Pak Rupee Indexation. However, for foreign-funded IPPs, the profit would stay with US dollar indexation but it will be reduced from 15 percent to 13 percent and in some cases 12 percent depending upon the power policy under which they were installed.

The dispute resolution mechanism will be the same under which the London Court of International Arbitration (LCIA) will be the forum in case of any dispute with the government.

However, one of the owners of IPPs said these are not the final agreements rather these are MoUs (Memorandum of Understanding) and all know the value of MoUs in legal language. “The IPPs want the government to first come up with a mechanism to pay their dues amounting to over Rs600 billion with timeframe prior to inking the final agreement. They have agreed to material changes in the supreme interest of the country. He said the signed MoUs are yet to be approved by the Board of Directors of power houses. And still there is a long way to be covered prior to reaching the final agreements with the government.

The IPPs say their existing agreements with the government are based on take or pay mode and until Pakistan has competitive market system having multi-buyers of electricity being generated by IPPs, the agreements cannot turn into the ones based on take and pay mode.

At present, Central Power Purchase Agency (CPPA), which is 100 percent government entity, purchases electricity meaning that the currently Pakistan has the single buyer system in power sector. However, for oil fired power houses, any saving in fuel will be shared with the government also.

When asked if the government has twisted the arm of the IPPs for fundamental changes in agreement, he opted to stay mum giving the impression that IPPs have signed the MoUs under duress.

The 11-point MoU finalized by the government body headed by Chairman Federal Land Commission Babar Yaqoob Fateh Muhammad, comprising an officer of Power Division not below a Joint Secretary, Muhammad Ali, former Chairman, Securities and Exchange Commission of Pakistan, Barrister Qasim Wadood and a senior officer of Inter Services Intelligence (ISI) unfolds that the committee for negotiations with IPPs notified by the government of Pakistan and the IPPs representing the 2002 Power Policy projects had several rounds of negotiations to arrive at the mutually agreed changes in their existing contracts that include (i) for oil fired projects, any savings in fuel will be shared on a sliding scale starting from 70:30 in favor of the Power Purchaser for the first 0.5% efficiency improvement above currently NEPRA determined benchmark efficiency, followed by 60:40 for next 0.5%, followed by 50:50% for next 0.5%, and finally 40:60 for any efficiency above that.

Power purchaser will not share in any efficiency losses; (ii) for oil fired projects, any savings in O&M will be shared 50:50 after accounting for any reserves created, or to be created, for major overhauling, to be reviewed by power purchaser or NEPRA as mutually agreed.

If the reserve for major overhaul remains unutilized, it will be shared in the ratio of 50:50 between the power purchaser and the IPP. Power purchaser will not share in O&M and major overhaul losses;(iii) for gas fired projects, the fuel and O&M will be taken as one consolidated line and any net savings will be shared 60:40 in favor of the Power Purchaser, after accounting for any reserves created, or to be created for major overhaul, to be reviewed by power purchaser or NEPRA as mutually agreed.

If the reserve for major overhaul remains unutilized, it will be shared in the ratio of 60:40 between the power purchaser and the IPP. Power purchaser will not share in fuel, O&M and major overhaul losses;(iv) in order to ensure that the actual efficiency is matching the efficiency reported in the accounts, the GoP shall conduct a heat rate test for all projects for which the GoP and IPPs' representatives will agree on the TORs and corrections required;(v) Late Payment Surcharge (LPS) will be lowered from currently KIBOR + 4.5% to KIBOR + 2.0% but it will be ensured that payments follow the PPA mandated FIFO payment principles for this rate to be effective.

Compounding and interest on interest provided for in the PPA, etc. will be adjusted to match the settlement agreement initialed (but never put into effect) by the GoP and some of the IPPs in 2019;(vi) for foreign investors registered with SBP, the Return on Equity will be 12% prospectively.

For local investors, the Return on Equity will be changed to 17% in PKR with no dollar indexation. In recalculating the return, the equity approved by NEPRA on COD in USD shall be converted into PKR at the exchange rate of Rs.145 for prospective calculation; (vii) on "miscalculation" of IRR on account of periodicity of payments, no adjustment shall be made for the past as the regulator had expressly allowed this in its decisions. For the future, NEPRA shall make the calculation of IRR on a monthly basis and shall consider on merit adjustments for costs denied in lieu thereof;(viii) all projects will convert their contracts to Take and Pay basis, when Competitive Trading Arrangement is implemented and becomes fully operational, as per the terms defined in the license of each IPP;(ix) in order to assess if a company has made any "excess profits", the reconciled financials between the Committee and the IPPs engaged in this exercise, shall be submitted to NEPRA. As a legal body vested with the authority for tariffs, NEPRA shall decide in this matter and provide for a mechanism for recoveries where applicable ; (x) payment of the receivables of the IPPs is an integral part of this settlement.

The Power Purchaser and government will devise a mechanism for repayment of the outstanding receivables with agreement on payment of receivables within an agreed time period, which will be reflected in the final agreement to be signed and ;(xi) once NEPRA and Federal Cabinet approve the terms of this MoU, the parties shall agree and document details and procedures of these understandings within 15 days, after which the same shall be submitted to NEPRA and CPPA, to be followed by legal documentation to reflect the amendments needed in the relevant agreements.

Coming to the deal signed by the government functionaries with Wind Power Projects, the government and Wind Power Producers (WPPs) have signed agreements that will be binding after different level approvals from power firms.

This document shall not affect the parties' rights and obligations under the agreements signed pursuant to the Government of Pakistan's RE Policy 2006 (such as the IA, the EPA, the GoP Guarantee and the Site Lease/ Sub-Lease).

This document shall remain non-binding unless and until the following conditions precedent have been satisfied: (i) approval of the board of directors of the WPPs; (ii) approval of the shareholders of the WPPs; (iii) approval of the lenders of the WPPs; (iv) approval of any other counterparty of the WPPs; and (v) any and all legal and regulatory approvals including approval from NEPRA in relation to the WPPs' projects.

According to the draft MoU, the parties confirm that (i) the proposals contained herein will be implemented on a non-discriminatory manner vis-à-vis all WPPs; and (ii) necessary amendments will be signed between the relevant parties to each project agreement.

The committee has offered to help and support the WPPs in relation to the matters that include: (i) WPPs' curtailment by NTDC/ NPCC to be stopped immediately coupled with an appropriate amendment into the EPA to remove any doubts. The NPMV concept to be amended to compensate the WPPs on the basis of energy lost during curtailment; (ii) WPPs' overdue receivables to be paid within agreed days from the date hereof; (iii) future invoices to be paid as per the EPA.