New payment model for IPPs without ‘profit bonanza’

• Govt wants to cut capacity costs, hold power producers accountable for ‘excess profiteering’
• ‘Unhappy’ companies blame heavy taxes for costly electricity tariffs
• Independent generators say ‘forced’ renegotiations will damage investors’ confidence

A NEW financial model proposed by the government to 18 independent power producers (IPPs) will significantly reduce their capacity payments and also recover “excess profits” made by these companies in the past, senior managers of three IPPs and a government official told Dawn.

A government task force is currently renegotiating the terms of power purchase agreements with four IPPs set up under the 1994 power policy and 14 under the 2002 policy.

The present round of negotiations with the 18 IPPs, aimed at slashing the burden of capacity payments and reducing electricity tariffs, started last Monday. The talks are expected to conclude in the next couple of weeks.

The current negotiations, the task force member said, “are part of the structural power-sector reforms”.

“They [IPPs] have made good money. Now it is incumbent upon them to help solve the crisis facing the consumers and the economy at large.”

The government is aiming to scrap the ‘take-or-pay’ model under which the IPPs were paid fixed costs, commonly referred to as capacity payments — to cover their capital and operations expenses — regardless of the electricity sold to the grid.

Background interviews with stakeholders from both sides involved in the negotiations reveal that the authorities intend to substantially cut the fixed costs by moving the IPPs to a ‘take-and-pay’ model for the remaining life of these plants, which range from three to 17 years.

This, according to the government, was because the IPPs “overstated” their fixed costs at the time of tariff determination.

The power producers deny it.

They claim the alleged excess profits were made possible by making the plant more efficient.

“All IPPs use the same technology and were given the same tariff. Only some of them were able to increase their efficiency and earn more,” a director of one IPP claimed, adding the government wants to “punish us for being efficient”.

The accusations of excess payments made to the power producers are based on a 2020 inquiry report prepared by a committee headed by former SECP chairman and caretaker energy minister Muhammad Ali.

The task force member Dawn talked to said the excess profits over and above the guaranteed returns are being incorporated into the revised payment model because IPPs “could not justify” this amount by labelling it as efficiency gains.

Revised contracts

Once the contracts are revised, the capacity payments to IPPs — for the remaining life of the plant — will be reduced to 70 to 75pc of the average annual fixed costs over the last five years.

This payment will be besides the amount paid for electricity dispatched to the national grid.

The task force has also revised the deals with eight bagasse-fired IPPs, with an estimated savings of Rs85bn to 100bn.

The exact amount of savings will be known once the revised contracts are finalised.

A source linked with the task force told Dawn that the tariff of these bagasse-based IPPs has been reduced substantially by delinking the fuel prices from the imported coal rates and replacing it with local currency-based pricing.

“[T]he formula is changed by delinking the bagasse price from international coal price and removing dollar indexation. It will significantly reduce the tariffs,” he added.

Capacity payments vs taxes

The private power producers have called the government’s renegotiations approach “coercive” and complained about the “arm-twisting tactics” in a letter to Prime Minister Shehbaz Sharif.

The 10 IPPs challenged the claims that capacity payments were responsible for making electricity unaffordable for consumers.

“The average generation tariff is Rs 27/kWh, while the average consumer tariff is over Rs60/kWh; this increase of over 100pc is due to heavy taxes, transmission & distribution costs and losses/ theft,” the letter stated.

The capacity payments, IPPs claimed, is Rs17/kWh in the total tariff, of which “more than half goes to [the] government-owned IPPs”.

The letter by at least ten IPPs further said the generation tariff would reduce by only Rs0.5/kWh even if the government scraps the entire capacity payments of IPPs, set up under the 2002 policy, which cumulatively produce 2,400 MW of electricity.

They said the drastic decline of 22pc in electricity demand in the last two years and the exchange rate depreciation has increased capacity payments by over 40pc.

‘Termination not an option’

The power producers argued their sovereign contracts are being renegotiated or terminated“ for the fourth time.

These coercive measures will severely “damage” investors’ confidence and affect the government’s efforts to privatise state-owned entities, one of the IPP representatives said.

The letter by 10 IPPs sought the premier’s intervention, demanding that their contracts be terminated and outstanding payments be cleared.

They said the take-or-pay contracts of all IPPs — run by the government, built under CPEC and owned by other private companies — should be terminated to eliminate capacity payments altogether.

However, the task force member told Dawn that terminating contracts of IPPs “is not an option”.

“We need them for baseload stability and also because of their location … Their termination would result in load shedding of two to three hours a day in some regions,” he said.

The government’s terms are “decent” which will ensure that contractual changes “don’t affect [IPPs] business and that the plants are kept in good condition for future dispatch”.

“The lifeline essential fixed payments will not be cut. We don’t want any of them to go bankrupt. Only their profitability will reduce,” he said.

When asked about how much the task force expects to save from the revision of IPPs’ agreements, the official said a number can’t be quoted unless new contracts are finalised.

“But the savings should be substantial and help reduce the power subsidy burden on the budget.”

For now, the IPPs are not happy with the way their contracts are being revised.

The chief executive of an IPP told Dawn that policymakers “continue to focus on short-term gains” and have completely disregarded the damage it is doing to investors’ confidence.

Local media has reported that the government has already received messages from different foreign governments over the “one-sided” deals reached with some IPPs after the renegotiations.

The German government has conveyed its reservations over the termination of the Rousch Power Project Ltd, of which Siemens is a shareholder.

“What is happening now is worse than Bhutto’s nationalisation,” the IPP chief executive told Dawn, while referring to the move by ex-PM Bhutto to take private companies into government control in the early 70s.

Published in Dawn, November 2nd, 2024