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ISLAMABAD: The US government’s Development Finance Corporation (DFC) has reportedly “blocked” progress on Master Agreements and Power Purchase Agreement (PPAs) with Wind IPPs, well informed sources in AEDB told Business Recorder.

On February 10, 2022, Power Division briefed the Cabinet Committee on Energy (CCoE) that consequent upon approval of the payment mechanism and agreements with the IPP5, 14 Wind IPPs initialled agreements on the condition that these agreements would be signed and executed subject to their lenders’ approval.

The said Wind IPPs have financing arrangements with various International Financial Institutions (IFIs). In the initialled agreements, the Wind IPPs agreed to tariff discounts in terms of reduction in Return on Equity (RoE), Return on Equity during Construction (RoEDC), Operation & Maintenance (O&M) and Insurance and agreed to take up matter for respective lenders’ approval.

Power Division noted that discussions were also held with the lenders to share the overall power sector reforms and the goal to manage circular debt so that the tariff discounts agreed in initialled agreements could be secured for the GoP.

According to sources, amongst the lenders, IFC and ADB were positive for reduction in RoE & insurance as per initialled agreement; however, no formal commitment was provided as US-based Development Finance Corporation provided an alternate proposal. The latter offered to extend debt tenor by five years along with reduction in spread by 0.5%. DFC claims that its proposal would entail more than the savings resulting out of reduction RoE, RoDC, O&M and insurance.

CCoE approves revised Circular Debt Management Plan

The CCoE was informed that CPPA-G analyzed the DFC claim and held that as per initialled agreements estimated savings from reduction in RoE, RoDC, O&M and Insurance would be Rs.36 billion for four projects financed by the DFC.

It would initially provide a temporary relief in cash flows for the first six years but the GoP would eventually have to bear an additional financing cost of Rs.10 billion, approximately, for the said temporary relief.

The Finance Division maintained that the matter may be resolved by the Power Division without causing any financial implication to the GoP. Alternative Energy Development Board observed that the offer of DFC might hamper other Wind IPPs for proceeding with the initial agreement and a time limit should be set for the negotiations.

Power Division proposed that if the stalemate continues, the offer may be considered for acceptance subject to reduction of spread by 1.5% instead of 0.5%.

Power Division submitted following proposals to the CCoE for further deliberation and for approving the way forward: (i) to continue negotiations with the Wind IPPs, financed by lenders other than DFC, in line with the initiated agreements; and (ii) to continue engagement with DFC with a view to convince it to allow its projects to sign and execute the initiated agreements and inform DFC that its proposal has been analyzed and found less favourable than the initiated agreements.

During discussion, it was noted by the CCoE that majority of the Wind IPPs were keen to proceed ahead with the initialled agreements, setting different arrangement for the rest is likely to be viewed as discrimination by those who are willing to proceed with the agreed terms.

The CCoE was also informed and requested to confirm that the tariff reduction determinations related to the 12 IPPs (2002 policy) as determined by NEPRA have been notified to recover the discounts on the dates the payment (40%) was released.

After threadbare discussion, the CCoE approved the proposals of Power Division, which are to be placed before the Federal Cabinet in its forthcoming meeting.

Copyright Business Recorder, 2022

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