China to review Power Purchase Agreements (PPAs) of the Independent Power Producers (IPPs) under CPEC

ISLAMABAD: In another positive development, Chinese authorities have also indicated to Pakistan’s top notches that they would also review the power purchase agreements (PPAs) of the independent power producers (IPPs) installed under China Pakistan Economic Corridor (CPEC) umbrella keeping in view the rising circular debt and other power sector financial woes adversely impacting economy of the country, a senior top official at Power Division told The News.

The official said coal-based Port Qasim Power Plant, Sahiwal Power Plant, Hubco Power Project, Hub Balochistan, Engro Thar and UEP wind power plant have been installed under CPEC and their agreements will be discussed with Chinese authorities to get maximum solace in agreements. The said projects were set up under the 2015 power policy with 15 percent rate of return plus US dollar indexation.

The official said Pakistan will engage Chinese authorities on government to government level for maximum relief in PPAs for the projects Chinese companies have installed under CPEC umbrella once the process to complete the finalisation of the agreements with the IPPs established under various power policies are completed and signed.

However, Shahzad Syed Qasim, Special Assistant to Prime Minister on Power sector, while talking to The News on MoUs signed with IPPs set up under power policies 1994 and 2002 and its impact on end consumers also said that once the final agreements are signed with IPPs and Gencos, RLNG-based power plants, Wapda hydro projects, then government will initiate talks with Chinese government for required changes in power plants installed under CPEC umbrella. However, he avoided sharing more information on CPEC power plants saying it is a sensitive issue.

He said that now the government has decided to reduce the profit of three Gencos such as Jamshoro, Muzaffargarh and Guddu and other smaller government power plants from 15 and 16 percent to 10 percent and in addition the government will also reduce the rate of return of hydro power projects owned by Wapda to 10 percent. The four RLNG-based power plants set up at Bulloki, Haveli Bahadur Shah, Bhikki and Trimmu will be privatised with rate of return of 12 percent, not the 10 percent, just to incentivise the expected buyers and to this effect he would make the proposal in consultation with Privatisation Commission that is to be pitched in the ECC and then cabinet for approval.

Qasim said that the changes in PPAs are being made with mutual consent between government and IPPs. The government has decided not to make changes arbitrarily in PPAs with IPPs to avoid any penalty from London Court of International Arbitration (LCIA) as has been done in the past in many cases.

He said that the government side has signed MoUs with seven IPPs established under the 1994 policy and 12 IPPs set up under the 2002 policy. The government wants to bring down not only the cost of electricity but also the tariff as well and once the final agreements are signed with all IPPs and government projects, then the impact is to be determined when it gets included in tariff order. However, the impact in the shape of relief to end consumers will be sizable.

About the salient features of MoUs signed with IPPs installed under the 2002 power policy, there will be no 15 percent profit with US dollar indexation for local IPPs, rather they will get 17 percent profit with Pak rupee indexation. However, for foreign-funded IPPs, the profit would stay with US dollar indexation, but it will be reduced from 15 percent to 12 percent depending upon the power policy under which they were installed. He said that past dues of IPPs which are in billions of rupees will be paid in instalments but within a time frame to be agreed and signed with IPPs prior to reaching the final agreements.

Qasim also said that the agreements based on take or pay mode will be converted into the ones based on take and pay mode only when the country has a competitive market system having multi-buyers of electricity of IPPs. He said that the government will take two to two and half years to open the power sector market and turn it into a competitive market with multi-buyers of electricity. He also said that under the signed MoUs, IPPs running on oil and gas will be sharing the savings in fuel and efficiency.

And in the head of O&M, any savings in O&M will be shared 50:50 after accounting for any reserves created, or to be created, for major overhauling, to be reviewed by power purchaser or Nepra as mutually agreed. And late payment surcharge (LPS) will be lowered from currently Kibor + 4.5 percent to Kibor + 2.0 percent. While mentioning the IPPs which are still in debt trap will be provided extension in debt tenure that will provide ease to them in terms of debt servicing.

Coming to the MoUs signed with IPPs under the 1994 power policy, the existing capacity payments and variable O&M will be sliced down by 11 percent. As per the MoU copy available with The News, USD exchange rate and US CPI indexations will be discontinued on 50 percent of the reduced capacity payment, which shall be fixed at National Bank of Pakistan’s TT/OD selling PKR/USD exchange rate prevailing as on August 12, 2020 without any local or international currency indexation or inflation adjustment for the future;(iv) in lieu of the tariff reductions herein above, any heat rate sharing by any IPP as per its existing arrangement shall cease to exist;(v) USD exchange rate and US CPI indexations on reduced variable O&M and 50 percent of the reduced capacity payment shall continue as per existing arrangement ;(vi) the parties shall look into the possibility of termination of plants considering their’ commercial and technical viability;(vii) the parties acknowledge that the IPPs predate the creation of the Nepra regime.

August 15, 2020: Advisor to the Prime Minister for Commerce, Textile, Industry and Production, and Investment of Pakistan Abdul Razzaq Dawood on Saturday credited former prime minister and Pakistan Muslim League-Nawaz (PML-N) supremo Nawaz Sharif for ending power crisis.

In an informal discussion with the media in Islamabad on Saturday, he said that loadshedding ended due to installation of power plant during the tenure of former prime minister Nawaz Sharif, adding that power plants had been set up in during the previous regime under China-Pakistan Economic Corridor (CPEC).

The adviser said that the CPEC is one of the top most priority of the incumbent government.

He said that the work on the CPEC neither stopped nor slowed down, adding that the work on CPEC projects is in full swing.

Razzaq Dawood went on to say that we are entering the next phase under CPEC and the focus of China-Pakistan Economic Corridor is now on the development of industries and agriculture.