Financial crunch: nine IPPs invoke sovereign guarantees

Nine Independent Power Producers (IPPs) facing a severe financial crunch following non-payment of Rs 31 billion by state owned Central Power Purchasing Agency (CPPA) have invoked sovereign guarantees to avert closure and continue adding 1800 MW electricity to the national grid, said Chairman of IPP Advisory Council (IPPAC) Abdullah Yousaf.
Yousaf told media persons at a news conference that the government has been asked to give payment guarantee on behalf of power producers that have not been able to make payment to the IPPs against the power purchased. He said the recovery of Rs 28 billion against the monthly billing of Rs 56 billion to Pepco has weakened the IPPs financial position and banks are no longer ready to extend working capital facility to them.
He expressed fear that four out of nine power plants with power generation capacity of 900 MW might terminate their contract because they were being provided gas for power generation. The running of four IPPs on diesel was not a viable option because this would require an additional Rs 120 billion for the purchase of diesel which would result in about 10 per cent increase in power tariff.
He said either the government or power purchaser has to make overdue payment of Rs 31 billion within 30 days after the notices. He said the government decision not to pass on the cost differential of almost Rs 2/kWh to the consumers would increase the power subsidy to Rs 190 billion. On the other hand due to various structural and governance issues of Pepco there is another cost of Rs 170 billion. Both these factors cause huge strain on the government resources and in the last 3 years almost Rs 1 trillion has been picked up by the government.
Yousaf said total outstanding amount of IPPs against Pepco stands at Rs 211 billion stretching over a period from two to nine months which could be divided into two parts. Of Rs 211 billion outstanding against Pepco, Rs 130 billion is of Hubco and Kapco while remaining Rs 81 billion is of IPPs, he added. The PSO which is supplying oil to Hubco and Kapco on credit is also facing financial hardships and considering cancellation of Letter of Credit (LCs) because it might not be able to pay to banks on maturity of LCs. He said PSO''s Rs 20 billion LCs would mature in next few days.
The rest of IPPs, he said have to make their own arrangements and after refusal by banks to extend working capital to them which already reached maximum limit. As a result, he said IPPs are now unable to purchase fuel for operation of their plants. To resolve the problem of circular debt, he said the government needs to ensure that Pepco''s receivables are collected both from the public and private sector as the present situation was not sustainable. In the absence of the much needed cash injection by the government there is a serious threat of shutdown by power plants.
He said that historically the fuel mix for power sector was 70 percent hydel and 30 percent thermal, which kept the cost of electricity at the lowest level. "Over the year unfortunately this equation has reversed and presently almost 70 percent electricity comes through thermal system and 30 percent from hydel. Yousuf said cost of hydel electricity is almost Rs 1/kWh, gas fuel costs almost Rs 4/kWh and the furnace oil fuel cost which is about Rs 12/kWh while the diesel based around Rs 16/kWh.
"Despite increase in price of electricity over the period, there is still a cost differential of almost Rs 2/kWh which the government is supposed to pay as subsidy. Presently this amount is estimated around Rs 190 billion per annum," Yousuf said. He added that cash shortfall is Rs 170 billion due to structural and governance issues of Pepco.