Daily Times

Currently installed capacity of IPPs is 17,266 MW and connected to grid is 16,250 MW. As per power purchase agreements price is split into two components, energy price and capacity price. According to capacity price mechanism, even if buyer is unable to evacuate energy due to lack of transmission line the power producer shall be paid capacity price component of the payment. This causes rise in per unit price in system. Currently capacity price component has ballooned to 2/3 of energy price due to idle capacity, new power generation units, system failures and low demand.

Another element is partial load adjustment. In case there is technical failure and buyer is not able to take energy produced this causes higher fuel consumption for producer and as per Take or Pay principal buyer has pick up additional costs incurred upon inefficient fuel burning. In this regard, as per NEPRA Industry Report 2020, CPPA-G paid 12,464 million on account of partial load adjustment (PLA) for the year 2019-2020. Though as per Power Policy 2015 buyer has been given option of choosing to point of purchase but still planning process and design of transmission line is responsibility of NTDC thus any failure or delay on part of NTDC leads to penalties besides payment of capacity price.

Power Purchase Agreements are highly technical and complex since the average age of project 25 years there they entail long term financial obligations for countries and societies. All five power policies from 1994 to 2015 insulate power producers from foreign exchange variations on account of foreign equity, foreign loans, fuel price and 2015 policy absorb foreign costs on Operation and Maintenance (O&M) in some case as well. Since 1994 rupee has depreciated by 400% against dollar. Thus, all payment indexed to foreign currency have appreciated by roughly 400% whereas revenue streams are denominated in local currency. Therefore, to avoid subsidy on account of currency variations all costs of devaluation of rupee passed on to consumers resulting in high tariffs.

Power policies from 1994 with exception of power policy 2015 provided upfront tariffs and negotiated tariff at option of producer. The rationale is that this is time saving and two parties are not subjected to protracted negotiations in selection of site, technology employed and reasonability of IRR. However, flip side is that upfront tariffs do not subject companies for competitive bidding which otherwise may result in lowering price for buyers. World Bank study has found that international competitive bidding in power sector results in reducing price by 25% at an average.

As power purchase agreements are hugely skewed in favor of IPPs it can safely be concluded that all risks are concentrated at buyers’ end and all profits are concentrated at sellers’ end

As thermal power plants are operated both by public and private sector it is their technology and fuel choice that determines their efficiency and the cost of production. Different fuels in the existing thermal sector are described below.

Gas based Generation: The share of gas operated electricity generation in the overall thermal generation during FY 2019-20 has remained 25.28%.The price of pipeline quality gas is lower than the price of RLNG. Further, pipeline quality gas was utilized in some of the less efficient power plants of GENCOs and KE, which is not cost effective.

RLNG (Re-gasified Liquid Natural Gas) based Generation: The share of imported RLNG based generation in total thermal generation during FY 2019-20 remained 32.88%. RLNG based electricity generation is cheaper as compared to High Speed Diesel (HSD) or Residual Fuel Oil (RFO). Since the reserves of local gas are under constraint the demand for RLNG is projected to increase in future. In recent years, RLNG plants have added the most efficient and cleanest generation capacity to the Grid.

RFO (Residual Fuel Oil) based Generation: The electricity generation using RFO has been showing a steady decrease over last three years. The share of RFO based electricity generation in total thermal generation during FY 2019- 20 remained 10% while the share of the same during FY 2017-18 was 30.60%. Although the RFO based generation has decreased, yet utilization of RFO plants while under-utilizing the more efficient RLNG, gas and coal based power plants is adversely affecting the generation basket price.

Coal based Generation: As per NEPRA State of Industry Report 2020, the share of coal-based electricity generation in total thermal generation during FY 2019-20 remained 31.84% while the share of the same during FY 2017-18 and FY 2018-19 was 13.29% and 18.71% respectively.  Coal-based power generation is the best option to reduce cost of production of electricity. The major concern is the environmental hazard which can be addressed by using super-critical boilers and green technologies which should be the core focus of the concerned Government agencies along with efficient and cost-effective power generation.

As power purchase agreements are hugely skewed in favor of IPPs it can safely be concluded that all risks are concentrated at buyers’ end and all profits are concentrated at sellers’ end. High upfront tariffs, high IRR, exposure to exchange rate risk are the crux of objection.  However, power purchase agreements cannot be scraped unilaterally since they are contractually binding upon purchaser which in our case is ultimately government of Pakistan. NEPRA also cannot absolve of its responsibilities since looking into reasonability of tariff was its exclusive domain, which again happens to be institution of government of Pakistan

(To be concluded).

Saud Bin Ahsen is an old Ravian. He can be reached at saudzafar5@gmail.com.