Tariff relief: AEDB urges govt to hold talks with DFC’s 5 wind power projects

ISLAMABAD: The Alternative Energy Development Board (AEDB) has proposed to the government to start negotiations with five wind power projects of US International Development Finance Corporation (DFC) in order to reach a mutually acceptable agreement and provide relief/reduction in tariffs, well-informed sources in the AEDB told Business Recorder.

US Ambassador to Pakistan Donald Blome at a meeting with Minister of State for Foreign Affairs, Hina Rabbani Khar made it clear that DFC will not invest in Pakistan until wind power projects issues are sorted out.

The government of Pakistan in August 2019, constituted a committee to look into the issues faced by the power sector including higher profits made by the IPPs and to recommend a way forward. The committee presented its report in March 2020 to the GoP highlighting the issues faced across the power sector.

Accordingly, in June 2020, the GoP notified another committee (Negotiation Committee) to negotiate with IPPs, which after successive rounds of discussions with IPPs and other power sector stakeholders executed MoUs with 47 IPPs and submitted report on September 24, 2020 to the CCOE. The CCOE considered the report of Negotiation Committee, and approved the proposed MoUs.

Thereafter, GoP, in a notification of October 7, 2020, constituted the Implementation Committee to, inter alia, convert the MoUs into binding agreements which submitted its report to the CCOE. Both the CCOE and the Economic Coordination Committee (ECC) considered the Implementation Committee report and approved the payment mechanism and agreements with IPPs in meetings held on February 08, 2021, which was ratified by the Cabinet on February 09, 2021.

In the report, 46 IPPs initialed the amendment agreements to Energy Purchase Agreement (EPA) which include 17 wind IPPs, out of these wind IPPs five wind IPPs have been financed by US International Development Finance Corporation.

As per the initialed EPA amendment agreements, the wind IPPs agreed for tariff discounts in terms of reduction in Return on Equity (RoE), Return on Equity during Construction (RoEDC), Operation and Maintenance (O&M) & Insurance components subject to their lender’s approval.

The sources said, DFC, instead of giving its consent to reduce the tariff discounts for the five wind projects financed by them, has proposed/ offered a five year debt tenor extension and reduction in spread by 50 bps with the request that GoP should consider DFC’s proposal on the following merits: (i) provides the GoP with an immediate and overall greater reduction in the tariff; (ii) sets a new benchmark for foreign financing, which can benefit GoP in future lending from international DFIs (including Chinese lending); (iii) improves the country’s balance of payments by spreading debt payments over longer tenor; (iii) preserves investor confidence in the GoP and the sector, thereby assisting future investments in ARE sector which will help promote low-cost indigenous power generation and reduce dependence on imported fuels; and (iv) NPV of savings to GOP from the reduction in tariffs is greater than the increased interest exposure over the extended debt term.

According to sources, CPPA has carried out analysis of DFC’s proposal which indicates that estimated savings from reduction in RoE, ROEDC, O&M and insurance is Rs. 36 billion for four projects financed by DFC, whereas DFC proposal will initially provide a temporary relief in cash flows for the first 6 years but GoP will eventually have to bear an additional financing cost of Rs. 10 billion approx. for the said temporary relief.

The CCOE in its meeting dated February 10, 2022, considered the proposal of the DFC and directed to engage with DFC with a view to convince DFC to allow its projects to sign and execute the initialed agreements.

Pursuant to the decision of the CCoE in its meeting held on February 10, 2022, Power Division on November 14, 2022 notified a committee comprising of following members to engage with DFC with a view to convince DFC to allow its projects to sign and execute the initialed agreements: (i) Additional Secretary-1 (Power Division), Member/Convener; (ii) Additional Secretary-II (Power Division) Member; (iii) Additional Secretary-Corporate Finance (Finance Division), Member; (iv) CEO AEDB, Member and CEO, CPPA-G Member.

Three wind IPPs, ie, FFC Energy Limited, Act Wind (Pvt) Limited and Artistic Energy (Pvt) Ltd have signed and implemented the agreement with GoP. However, the following wind IPPs have not signed the agreement with GoP; (i) Yunus Energy Limited(local); (ii) Zorlu Enerji Pakistan Limited (Foreign IFC); (iii) Foundation Wind Energy- II (Pvt) Ltd(ADB/IFC); (iv) Foundation Wind Energy-1(ADB/IFC); (v) Metro Power Company Ltd (IFC/FMO/ Proparco); (vi) Gul Ahmed Wind Power Ltd (IFC/FMO/Proparco; (vii) Tricon Boston Consulting Corporation Pvt Ltd-B (ADB/IFC IDB; (viii) Tricon Boston Consulting Corporation Pvt Ltd-C(ADB/IFC/IDB; (ix) Tenega Generasi Limited (USDFC; (x) Jhimpir Power (Pvt) Limited (USDFC); (xi) Hawa Energy Pvt. Limited(USDFC);(xii) Master Wind Energy Pvt Limited (USDFC) and; (xiii) Sapphire Wind Power Company Limited((USDFC).

The committee held several meetings with DFC officials to persuade them to allow wind projects funded by them to sign and implement initialed agreements. However, DFC has regretted providing its acceptance in this regard.

The committee constituted by the Power Division was tasked with engaging the DFC on the basis of the initialed agreements and was not mandated to negotiate/agreeing on any other proposal.

The AEDB maintains that approval from the relevant forum may be sought for negotiations/discussions with DFC in order to agree on the terms/pro-position that is mutually acceptable and provide relief/reduction in the tariffs awarded to projects financed by DFC.

The sources said, Minister for Power, Khurram Dastgir Khan, has also sought opinion of bureaucracy of his Ministry on future line of action with respect to DFC wind projects.

Copyright Business Recorder, 2023