Allowing capacity payment to IPPs: MoW&P, MoP lock horns over ECC move

Ministry of Water and Power and Ministry of Petroleum have reportedly locked horns over the unwise decision of the ECC allowing Independent Power Producers (IPPs) to claim capacity payment because of force majeure, well informed sources in PPIB told Business Recorder. Four gas fired IPPs, namely Saif, Sapphire, Orient and Halmore, established under Power Generation Policy 2002, with a cumulative capacity of 842 MW are in commercial operation.
The sources said an aggregate of 152 mmcfd of pipeline quality gas through Sui Northern Gas Pipeline Limited (SNGPL) system was allocated to the projects in 2004 on nine month basis and pursuant to the terms and conditions of the Gas Supply Agreement (GSA), the gas supplier is obligated to supply a minimum daily quantity of 38 mmcfd to each of the projects. This gas allocation expired on June 30, 2011.
These IPPs, through the project agreements, have been provided with the option to operate on High Speed Diesel (HSD) as an alternative fuel, during as and when available gas period. The matter was considered by the Economic Co-ordination Committee (ECC) of the Cabinet, on June 30, 2011 and it approved firm gas allocation of 76 mmcfd to the projects till November 30, 2011.
On February 28, 2011, SNGPL claimed Force Majeure Event (FME) under the GSA owning to its inability to supply gas to the projects due to rupture of pipeline supplying gas from Zamzama gas field and terrorist activity at Maramzai gas field. The gas supplier modified its FME on March 3, 2011 to the extent that each of the projects would be supplied reduced quantity of 31 mmcfd against minimum daily quantity of 38 mmcfd till resumption of normal supply from the Maramzai gas field. The FME was finally lifted by the gas supplier on May 11, 2011 and fully supply of gas was restored to each of the projects.
Meanwhile, IPPs claimed FME under the Implementation Agreement (IA) and Power Purchase Agreements (PPA) on account of gas supplier's FME. However, GoP/ PPIB and the NTDC (power purchaser) rejected these claims of FME in light of contractual provisions.
Given that the projects are financed on non-recourse basis with sole revenue emanating from the power purchaser, FME by the gas supplier was rejected by the projects. Nevertheless, due to gas curtailment, IPPs were unable to dispatch their full output and consequently capacity payments were reduced by the NTDC on the pretext of lower capacities made available by the projects. The option of alternate fuel was not exercised by the parties under the PPA.
The sources further stated that sponsors of the IPPs are agitating that the SNGPL, in breach of the GSA, has failed to supply contractually assured minimum daily quantity of gas whereas, at the same time, other industrial consumers were supplied gas on preference without any binding commitments and obligations. Further more, it is their opinion that the position taken by the SNGPL and NTDC on the FME are inconsistent legally and unsustainable commercially. Keeping in view the 'cost plus' model of tariff determination by Nepra and payments from NTDC tied to available capacity under the PPA, the sponsors argue that any reduction in the capacity payments due to non- availability of gas shall have material and adverse impact on debt servicing which may ultimately lead to default under the financing documents.
In order to secure the financial and economic viability and integrity of the projects, especially during the early phase of commercial operations, the sponsors are claiming reimbursement of loss in capacity payments to ensure continued and uninterrupted operations of the projects. According to PPIB, reported loss to the IPPs on account of deduction in capacity payments by the NTDC due to curtailment in gas supply by the SNGPL is to the tune of Rs 735.87 million collectively with breakdown as follows: Rs 234.27 million of Orient, Rs 251.60 million of Sapphire and Rs 250 million of Saif Power.
PPIB further pleaded that the three IPPs have incurred significant financial losses due to non-availability of gas resulting in loss of capacity payments under the PPA. Other than the operation of the projects on 'alternate fuel' that could have ensured full capacity payments which was however not exercised by the parties under PPA, there is no remedial mechanism available under the project agreement.
PPIB further agued that GoP has to be mindful of the fact that the IPPs are playing a pivotal and critical role in addressing power requirements of the country by contributing almost 40 per cent of total supplies to the national grid.
IPPs have revealed that the consequential reduction in their capacity payments have seriously impacted and jeopardised their ability to operate uninterruptedly in future due to financial constraints which will ultimately cause further worsening of power crisis in the country.
The Ministry of Water and Power has proposed the following options to resolve the dispute: (i) the audited loss of capacity payments as substantiated and incurred by the IPPs on account of inadequate gas supplies by SNGPL should be compensated by the supplier or (ii) the issue of determination of payments of lost capacity incurred by the IPPs be resolved through 'Joint Expert Mediation" between the SNGPL, NTDC and IPPs.
SNGPL, sources said, is of the view that force majeure is entirely in line with the GSA and nothing will be paid to the IPPs on this account.
The sources said Ministry of Petroleum and Natural Resources has also strongly opposed the proposal of Ministry of Water and Power, saying that force majeure was declared by the SNGPL in line with the provisions of GSA between the gas supplier and IPPs.