ISLAMABAD:
The government has successfully reached an agreement with 14 Independent Power Producers (IPPs) to revise tariffs, which will result in savings of Rs813 billion for consumers and help resolve the circular debt, estimated at Rs329 billion.
Under the revised agreement, the IPPs have agreed to return excess profits totaling Rs31 billion, compared to the initial claims of Rs55 billion. Additionally, the government has agreed to close ongoing investigations by the National Accountability Bureau (NAB) and the National Electric Power Regulatory Authority (NEPRA) against certain IPPs, including Nishat Power Limited, Nishat Chunian Power Limited, Liberty Power Tech Limited, and Atlas Power Limited.
As part of the negotiations, the IPPs also agreed to waive their claims for late payment interest (LPI) on outstanding amounts.
The prospective buyers of UPL and UPL-2 had agreed to waive their claim of LPI receivables from power purchaser worth Rs 62.5 billion on the condition that government shall facilitate in waiver of the LPI claim by OGDCL from UPL and UPL-11 amounting to Rs 46 billion. OGDCL had not recorded that LPI claim in its books of accounts.
Similarly, five IPPs on the SNGPL network had also waived their LPI receivables from power purchaser amounting to Rs 4.6 billion on the condition that government would facilitate in waiver of the LPI claims of SNGPL that amount to Rs 1.9 billion towards the IPPs.
Under the deal, the IPPs had agreed to conversion of all return on equity (ROEs) to the rupee and reduction in capacity payments and tariff under a hybrid take-and-pay model.
Both the sides also agreed on settlement of dispute of excess savings of the past and waiver of late payment interest.
Government officials said that deal was in the best interest of the country, resulting in a saving of Rs813 billion and settling the circular debt for an estimated amount of Rs. 329 billion. The circular debt as a “bottomless pit” was hemorrhaging the economy.
The task force on the Implementing Structural Reforms in the Power Sector, constituted by the Prime Minister had deliberated on the recommendations of the System Operator proposed to continue the operations of 18 IPPs—five thermal plants under the 1994 Power Policy and 13 plants under the 2002 Power Policy (12 thermal and one hydro)—with a view to renegotiating their tariff structures.
Following the recommendation from the System Operator, the Task Force held several rounds of discussions with the sponsors of these IPPs and succeeded in renegotiating the tariff structure of 10 IPPs under the 2002 Power Policy and four IPPs under the 1994 Power Policy to reduce the future tariff.
The Task Force also negotiated and recommended the recovery of excess savings of the past for 10 IPPs under the 2002 Power Policy. The contract negotiations with the remaining three IPPs of the 2002 Power Policy, namely Laraib Power Limited, Orient Power Company (Pvt) Limited, and Halmore Power Generation Company Limited, were still in process.
The System Operator further recommended terminating one IPP under the 1994 Power Policy and including KAPCO in the grid, which was also negotiated and recommended by the Task Force.
On the reduction in capacity payment and tariff under a Hybrid Take-and-Pay Model, the IPPs had agreed to reduce their tariffs under a model where their fixed Operations and Maintenance (O&M) cost would be paid based on their existing actual O&M (Take or Pay with reduced payments in the future).
Their RoE would be paid based on their actual energy generation instead of the current model of payment on full capacity, with a certain minimum agreed RoE to ensure sustainability. Accordingly, agreements were reached to implement the tariff reduction under a Hybrid Take-and-Pay Model.
Regarding the dispute between government and 12 IPPs, subsequent to the report dated 16 March 2020 submitted to the government by the Committee for Power Sector Audit, Circular Debt Resolution, and Future Roadmap, and renegotiations held between government and power plants set up under the 2002 policy, a dispute of Rs. 55 billion regarding excess savings by IPPs in the past arose. The government and the 12 IPPs agreed to submit the dispute to arbitration under the terms of the Arbitration Submission Agreements (ASAs) executed on 15 June 2022.
These ASAs were executed on September 13, 2021 and 24 December 2021. The government and IPPs were able to form the Tribunal by nominating judges, as required by the ASAs, but arbitration proceedings remained pending for the last three years due to various legal and procedural matters.
Due to the prolonged pendency, the Task Force negotiated recovery of past savings with these IPPs and recommended the recovery based on the model that from CoD till 2021, savings made by IPPs in fuel shall be calculated by deducting the eligible actual fuel cost, as reported in the annual audited financial statements of the respective years, from the payment allowed in lieu of the Fuel Cost Component by the IPPs for the corresponding years.
These savings will be shared in the ratio of 90% for the Power Purchaser and 10% for the IPP. From 2022 onwards, the sharing mechanism for savings in fuel cost shall be determined in line with provisions of the Master Agreements executed between the Power Purchaser and IPP.
From CoD till 2021, it was agreed that savings in O&M shall be calculated by deducting the eligible actual O&M, as reported in the annual audited financial statements of the respective years, from the payment allowed in lieu of the O&M Component by the IPPs for the corresponding years.
Further, an overhauling reserve is allowed to the IPPs to cover and pay for the cost of overhauls of plant and machinery in the future years. The IPPs will be required to account for the overhauling reserves in their audited financial statements, and 100% of the unutilized reserves, if any, will be passed on to the Power Purchaser. From 2022 onwards, the sharing mechanism for savings in O&M shall be determined in line with provisions of the Master Agreements executed by the relevant IPP and the Power Purchaser.
On the settlement of the dispute with nine IPPs having ASAs and Uch-II Power Limited, a settlement was proposed with the 10 IPPs whereby an amount of Rs. 31.65 billion had been calculated for recovery by the Power Purchaser from the IPPs in lieu of past savings.
Following the recovery of the Fuel and O&M savings of the past, the government agreed to unconditionally and irrevocably withdraw and extinguish all claims against the relevant IPPs under the respective nine ASAs and the disputed claim with Uch-II Power (Private) Limited. It was agreed that relevant IPPs and government shall jointly communicate with the Tribunal established under the ASAs to formally terminate and relinquish arbitration proceedings.
Additionally, it was agreed that government shall facilitate Nishat Power Limited, Nishat Chunian Power Limited, Liberty Power Tech Limited, and Atlas Power Limited in the withdrawal of proceedings initiated by NEPRA against them for abnormal profits/excess savings in Fuel and O&M. NAB Lahore, in its letter on February 9, 2024, informed that the Competent Authority had approved the termination of the investigation at NAB’s end and referred the matter to the Ministry of Energy (Power Division) with specific reference to the invocation of Arbitration on the subject matter.
