Exaggerated benefits of IPP renegotiations – Business

It seems that the hopes of major relief in the electricity prices on account of ongoing scrutiny and revisions of the power purchase agreements of power producers to slash the huge burden of nearly Rs2.1 trillion capacity payments in consumer tariffs were exaggerated after all.

The entire exercise is likely to help cut the power tariffs by less than Rs2 per unit, provided the government decides to pass on the benefit to the consumers at all.

Contrary to the earlier messages relayed by the Shehbaz Sharif government about intending to examine the Power Purchase Agreements of every power generation company — private, public and Chinese — set up in the ‘independent power producer (IPP) mode’ to reduce capacity payments to slash power prices substantially, the Special Assistant to the Prime Minister on energy, Muhammad Ali, has disclosed that the “authorities are looking at capacity payments of [just] Rs400 billion”.

The entire exercise may help cut power tariffs by less than Rs2 per unit if the government decides to pass on the benefit

In other words, the army-backed task force on power is basically “targeting private power companies set up under or before the 1994 and 2002 power policies with a share of approximately Rs210bn in capacity payments”. Besides those, the purchase agreements with all private wind, solar, and hydel plants, representing capacity payments of Rs130bn, are being examined and revised. The only public sector IPPs being scrutinised are the RLNG-based plants that the government plans to privatise.

Without naming the nuclear power plants or other projects financed by Chinese banks under and outside the China-Pakistan Economic Corridor (CPEC) initiative, Mr Ali told a dialogue organised by the Parliamentary Forum on Energy and Economy led by Dr Nafisa Shah in Islamabad last week on ‘Renegotiating IPP Agreements: A Step Forward in Resolving the Energy Crisis?’ that the reopening of the contracts of strategic projects could be very disruptive for the country.

In the same breath, however, he claimed that “the electricity tariffs would be slashed by Rs8 per unit in the summer” as the task force on power, which is renegotiating with the private IPPs, is also looking at and addressing other factors responsible for higher electricity prices.

So far, the task force has terminated the contracts of six IPPs, renegotiated agreements with 14 others, and revised the fuel price of bagasse-baaed plants. This has resulted in annual savings of Rs117.3bn.

Recently, power minister Awais Khan Leghari claimed that the renegotiations completed so far had achieved a cumulative saving of about Rs1.46tr in future payments, resulting in the removal of Rs137bn annual burden on consumers.

Negotiations with solar and wind power owners and revisions of the terms of RLNG plants are expected to result in savings of another Rs 64- 74 bn. Overall, the government is looking at Rs180.3-191.3bn in annual savings over the remaining life of these plants.

Capacity charges of Rs18.39 per unit account for 31 per cent of the total consumer tariff compared to the cumulative share of 32pc of taxes, surcharges and duties. The electricity charges account for just 18pc of the consumer tariff, according to Khalid Mansoor, the former CEO of Hubco.

“Capacity payment of 11,500MW has jumped from Nepra’s [National Electric Power Regulatory Authority] reference of Rs265bn to Rs748bn due to adverse macro environment, rupee devaluation from Rs97 per US dollar to Rs278, increase in Libor [London Interbank Offered Rate] from 0.45pc to 5.5pc per annum as well as Kibor [Karachi Interbank Offered Rate], and lower than anticipated despatch considering average load factor of less than 45pc compared to reference load of 85pc.

“Their average capacity tariff was Rs2.78 per unit upon tariff determination in 2015-16; however, now it adds over Rs18 per unit due to macro factors and lower dispatch,” Mr Mansoor said.

Recently, the government is reported to have received a formal notice regarding a claim from the British owner of the Halmore Power Company pursuant to the Bilateral Investment Treaty (BIT) between Pakistan and the United Kingdom and Northern Ireland, warning that the investor reserves his right to submit his claim to international arbitration under Article 8(2) of the BIT to ensure that his legal rights are fully protected and enforced in Pakistan.

According to the notice, the media reports said Pakistan has gradually reneged on its promises to some IPPs, including Halmore. “In 2021, Pakistan forced Halmore to accept several concessions, including a reduction of its guaranteed rate of return from 15pc to 12pc, which caused a financial loss of at least $52m over the remaining term of the project.

“More recently, Pakistan has accelerated its efforts to revise energy sector arrangements forcibly, using coercive tactics to extract concessions from private businesses. The government has threatened to prosecute those who insist on their rights being respected.”

The notice also highlights that Pakistan’s actions are discriminatory. While some privately owned IPPs, including Halmore, have been targeted, state-owned energy producers and other IPPs owned by Chinese investors have not faced the same treatment.

It further states that owner Karim-Ud-Din’s investments in Halmore have been harmed by Pakistan’s actions. “He, along with Halmore, has faced relentless coercion to renegotiate the company’s tariff and contractual terms, stripping him of the guarantees that initially encouraged his investment in Pakistan’s electricity market.”

Furthermore, it states that on November 11, 2024, Halmore’s CEO was summoned and threatened with detention unless Mr Karim-Ud-Din —who resides in London — authorised the acceptance of pre-determined terms that could potentially lead to Halmore’s bankruptcy. Although the CEO was eventually released, Pakistan has continued to exert pressure on Mr Karim-Ud-Din to compromise on his rights, placing Halmore’s future, as well as the security of its personnel, in immediate danger.“

This is exactly the kind of situation the participating experts, practitioners and parliamentarians urged the government to avoid as they raised questions on whether IPP negotiations will lead to lower tariffs as projected in the absence of revision of contracts with the CPEC and government-owned projects, which constituted nearly 75pc of the total capacity payments.

Published in Dawn, The Business and Finance Weekly, January 20th, 2025