Capacity-based model transition to take-and-pay model: 24 conditions proposed to strike new deals between govt, IPPs

ISLAMABAD: The government’s experts and officials have proposed 24 conditions for proposed transition of capacity based model to take-and-pay model meant to strike new deals with the Independent Power Producers (IPPs) to reduce consumer end tariff.

The deal is close to finalisation, high level sources told this correspondent. Top bosses of some IPPs held an important meeting with the highest ranking authorities in Islamabad, wherein a clear message has been conveyed that the existing level of electricity tariff is neither suitable for industry nor domestic consumers; hence, power generators have to cooperate with the government.

The IPPs documents, collected from power plants, have already been scrutinised by the technical experts aimed at finding loopholes in procurement of fuel, import of machinery and equipments, and other related costs.

Rs1trn capacity payment made to 26 IPPs in 10 years

Power sector Task Force is holding its meeting at a secret location in Rawalpindi instead of Islamabad as one of the key members of Task Force, who attended the first meeting in the Power Division, is unwilling to come to Islamabad for this purpose.

There is the distinct impression that something will be announced in the current month in relation to reduction in tariff, re-profiling of debts of coal-fired and hydel Chinese IPPs established under CPEC and reduction in Return on Equity (RoE) of public sector power plants. However, officials maintain that giving a timeline at this stage is difficult.

According to a document, which is semi-similar to actual document, the government has proposed 24 conditions for proposed transition of capacity based model to take and pay model which are as follows:

(i) Return on Equity (RoE) has been reduced to 10% with a PKR/USD indexation fixed at 168;

(ii) RoEDC was not addressed in the subject draft, which requires clarification;

(iii) Operation & Maintenance (O&M) costs, both foreign and local, have been reduced by 70%, with PKR/USD indexation fixed at Rs 168;

(iv) delayed payment rate has been set at 3-month KIBOR + 2%;

(v) agreement proposed to withdraw the company right under the Implementation Agreement (IA) and GoP guarantee;

(vi) fuel arrangement burden has been shifted on the company;

(vii) in the absence of GoP guarantee the receivable stand unsecured;

(viii) tariff for the working capital component has been withdrawn;

(ix) capping on dispatch up to 101.5% has been removed and fixed at 100%;

(x) dispatch instruction clause amended that the power purchaser notify it’s requirement of NEO and reactive power on hourly basis for operating day and not later than 10 hours;

(xi) clauses 9.3-9.5 have been abolished, thereby eliminating the forced outage and scheduled outage allowance for the company;

(xii) invoicing for EPP has been changed to 30 days with a due date of 30 days;

(xiii) Section 8, which pertains to Testing and Capacity Rating (Initial/Annual Capacity Test), has been omitted;

(xiv) the company will bear the insurance costs;

(xv) tax exemption and the Change in Law benefit under the Implementation Agreement (IA) have been excluded for the Company;

(xvi) the company right to claim the pass through item has been withdrawn (i.e. WWF, WPPF, Withholding Tax on Dividend etc);

(xvii) the earlier Power Purchase Agreement (PPA) has been terminated;

(xviii) “Take and Pay” arrangement has been introduced with exclusive rights to the CPPA;

(xix) Government of Pakistan security clearance will be required every three years;

(xx) Force Majeure clauses have been omitted;

(xxi) other party with a 12 months’ notice can terminate the contract without any liability except the liability arose prior to such termination;

(xxii) the LD clause has been no more available under the PPA;

(xxiii) dispute resolution mechanism under the PPA has been replaced, now requiring disputes to be resolved by an expert or through the Islamabad Courts; and

(xxiv) the Schedule and Technical Limits have been withdrawn, as they were not enclosed with the amended PPA.

However, power sector argues that the “experts” who have drafted these conditions are not aware of the definition of capacity payment. This mechanism is even available in UK.

Copyright Business Recorder, 2024