EDITORIAL: A deal between the government and Independent Power Producers (IPPs) is a landmark achievement in symbolic terms as a signal as its impact on reducing the buildup of circular debt would be limited. It sets the tone for making similar changes in government-owned projects, and eventually the Chinese may be requested to reduce the returns on China Pakistan Economic Corridor (CPEC) projects in line with the rest. The three bones of contention for the power generation sectors are 'take or pay', dollar indexation, and higher tariffs as a starting benchmark. The negotiations are done on dollar indexation for IPPs with local investors while the return on equity (RoE) is reduced across the board along with sharing excess O&M profits. Moving to 'take and pay' is not possible without developing vibrant energy markets. Till that happens, direct wheeling or long-term contracts of power producers with industrial consumers (along with capacity charge) may reduce the capacity payment burden for projects situated close to the load centers. The government should sit with K-Electric (KE) to move excess capacity in south from National Transmission & Dispatch Company (NTDC) system to KE. The capacity in NTDC is in surplus at this moment while it is short in KE. That is how some of the burden can shift from NTDC to reduce the buildup of circular debt.
The problem of higher tariff as a starting point goes back to the 1990s when the template was set in terms of design of the projects. Every cost item was pass-through and high returns were guaranteed in US dollar. Thereafter, the same template was used to design subsequent projects with some minor alterations. The country never moved towards competitive bidding and energy markets were not developed to lure investors at their own risk.
It would take years to undo the impact of past three decades, but for that, fresh power generation capacities must be added to the national grid - especially in renewables. The country has enough plants (for the next few years) for base load; but for off-peak, targeted demand can be met by renewables (wind and solar). Tariffs of wind projects are now mouthwatering and adding these to the grid may slowly reduce the average tariff. In immediate term, resetting contracts of all power generation companies can reduce the bleeding. A better idea would have been to start with government-owned projects where savings are higher, and it could have been easier to take the new template to the IPPs and eventually to CPEC projects. But there were political brownie points in dealing with the IPPs first, the government took the challenge and did it well.
Savings from renegotiation of 1994/2002 and 2006 wind projects would be at best be Rs15 billion to 20 billion on annual recurring basis at current rupee-dollar parity. Currency depreciation gains will be higher for projects that are not indexed to Pak Rupee. O&M savings for past may be determined by National Electric Power Regulatory Authority (Nepra) and netted against the receivables due to these companies. This will partially resolve the stock of the circular debt. The real gains will come from the government-owned projects. These might be announced soon. Net capacity of 1994 (pre-94) and 2002 projects stands at 7,746MW. Debt of most of these projects is already paid. Capacity payments of these (prior to negotiations) stood at Rs 134 billion. The overnment's existing project capacity is at 18,925MW and another 3,400MW are coming online in twelve months. Most of these projects are recent and the debt is yet to be paid. Capacity payments of these government projects would reach around Rs750 billion next year at today's currency parity. Here, savings would be on both RoE reduction (including Pak Rupee indexation) and reprofiling of debt. Debt of power projects is front-loaded and shall be repaid in first 10 to 15 years of the project while equity return shall accrue till the Power Purchasing Agreement (PPA) expires - 25-30 years. Multiple permutations exist to lower debt capacity payment - such as move to interest only for the first few years, increase the debt repayment period to 20-25 years, and lower the risk premium on the debt. Savings from these can reach up to Rs80 billion to 100 billion per year.
At present, there are three CPEC projects of 1320MW each based on imported coal and two projects of 330MW each based on Thar coal are online while few more shall come online soon. Total capacity of CPEC projects is expected to reach 7,606MW in 12-18 months. Capacity payments against these shall reach Rs370 billion in today's currency. 'Variable cost" of coal projects is low; but fixed costs are high. Debt capacity payment of one imported coal project is $220 million (Rs37 billion). Three imported coal projects' debt capacity payment in total would be higher than all 1994/2002 projects by the year 2023. Debt reprofiling will have a significant impact on future tariffs. Cost of debt is high along with hefty insurance premium. The RoE part of coal projects is significant too and reduction shall bring some benefit. Once this power generation renegotiation cycle completes, annual savings could be in the range of Rs100 billion to 150 billion - (depending on negotiations). Bigger savings will accrue from the government and CPEC projects debt restructuring or reprofiling. However, debt must be eventually repaid. If not today, the impact will be higher tomorrow.
For that impact to be diluted, the denominator must increase, i.e., power consumption on grid must grow significantly to lower the impact of capacity payment per unit. Currently, NTDC system is generating 110 billion to 120 billion units (KWh). But the generation capacity can take this to 150 billion units. There are transmission constraints and fear that distribution losses may grow with higher consumption. Another correction that must be undertaken simultaneously is enhancement of transmission capacity. The government is therefore required to make environment conducive for long-term contracts between industrial buyers and power projects directly and separate the transmission and distribution functions for both electricity and gas. The government-owned utility companies should be doing transmission only. It used to be the case prior to nationalization. The need is to undo errors of past five decades. This will open way for competitive energy markets.
Copyright Business Recorder, 2020
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