IPPs accused of making windfall profit

Independent Power Producers (IPPs) have been accused of making a windfall profit due to which the government is compelled to extend subsidy and consumers are paying high tariff, well informed sources told Business Recorder.
These views were expressed in the Economic Coordination Committee (ECC) of the Cabinet on September 26, 2014 when a summary of Water and Power Ministry titled "approval of the draft Energy Purchase Agreement (EPA) and draft Implementation Agreement (IA) prepared for biomass based projects on IPP mode" came under discussion.
The sources said, Ministry of Water and Power is also planning efficiency audit of all the IPPs through National Electric Power Regulatory Authority (Nepra) as there is a perception that efficiency of private sector power plants is not at par with the agreement.
On the other hand, IPPs, facing liquidity problems, argue that they are the biggest corporate victims in Pakistan.
According to official documents, the meeting was informed that Pakistan, being an agriculture based country, was producing large amounts of agriculture residues/biomass such as cotton stalk, rice husk, bagasse etc that could be utilised for generating electricity. The use of biomass for generation of power is globally considered as environmentally-friendly and economically feasible.
The GoP policy for development of renewable energy for power generation 2006 has provided for standard security agreements comprised of the Implementation Agreement (IA) and Energy Purchase Agreement (EPA) which provided the legal and contractual framework for the design, financing, engineering, procurement, construction, commissioning, operation and maintenance of power projects based on biomass energy.
These project agreements were structured on standardised approved and executed security agreements for wind energy projects based on cost-plus tariff regime and which were based on the ECC approved security agreements for thermal power projects on May 29, 2006 as the base template.
The meeting was further informed that the overall contractual framework of the standardised cost-plus project agreements has been maintained. Some tariff structure based on specific modifications in the standardised cost plus project agreements have been made in compliance with Nepra''s tariff determination of biomass based IPP projects and in consultation with the National Transmission and Dispatch Company (NTDC) - power purchaser and other relevant stakeholders. The risk allocation matrix of the GoP has been maintained as per the standardised cost-plus agreements.
The meeting was briefed that the draft Energy Purchase Agreement (EPA) and Implementation Agreement (IA) have been revised as directed by the ECC and have been vetted and cleared by AEDB''s legal counsel.
Ministry of Water and Power in its summary has recommended that: (a) standardised security agreements for biomass based power generation projects on IPP mode may be approved; and (b) AEDB be authorised to approve any project specific amendments in standardised security agreements for biomass based power generation projects on IPP mode during negotiations subject to provision of legal opinion in order not to increase GoP obligations or liabilities beyond the provisions of the Policy and Development of Renewable Energy Power Generation 2006.
During ensuing discussion, it was observed that IPPs were making windfall profits while the government had to extend subsidies and consumers had to bear high cost of electricity.
It was pointed out that AEDB must do its job and issues may be resolved at the Ministry level.
Finance Minister, sources said, stated that a Memorandum of Understanding (MoU) may not create a binding obligation on Government of Pakistan. It may be ensured that there should be no investment between signing of MoU and IA. The MoUs/agreements must be clearly spelt out and be based on upfront tariff determined by Nepra.