The agreement (MoU) between Government & Independent Power Producer is a great achievement & should lead to reduction in power costs and also circular debt. It remains to be seen by how much since there are further negotiations to take place. Highlight of the MoU are:
- Projects will convert their contracts to Take and Pay basis, when Competitive Trading Arrangement is implemented and becomes fully operational, as per the terms defined in the license of each IPP. This will hopefully address the issue of IPPs that not utilised still being paid
- ROE on IPP for foreign investors (as registered with SBP), will be 12% in $, but for local investors 17% in PKR without dollar indexation. Equity value will be fixed in PKR at a $ conversion rate of Rs145. Rupee depreciation will result in reduced hike hikes impact than earlier
- Efficiency improvement in oil-based projects will be shared through a sliding scale starting from 70:30 in favor the GoP for 1st 0.5% above currently determined benchmark by Nepra, followed by 60:40 for next 0.5%, followed by 50:50 for next 0.5%, & 40:60 for any above that.
- Savings from O&M (operations and maintenance) of these plants will be shared on 50:50 basis after accounting for any reserves for major overhauling. If the reserve remains unutilized, it will be shared in the ratio of 50:50 between IPP and the government.
- For gas projects, the fuel & O&M will be taken as one consolidated line and any net savings will be shared 60:40 by the GoP & IPP, after accounting for any reserves for major overhaul. The unutilised reserve for overhaul would be shared on 60:40 by the government and IPP.
- Delayed Payment Rate will be reduced to KIBOR + 2% for the first 60 days after the due date, and thereafter at KIBOR + 4.5%. IPPs with Gas Supply Agreement with an entity with significant ownership of GoP, same DPR rates shall be payable by the IPP to Gas supplier.
Government has state that it intends to improve transmission sector, which would reduce the line losses and improve cash flows of the sector.
Exact numbers in terms of how significant the impact on tariffs and reduction of circular debt still needs to be worked out
Exact numbers in terms of how significant the impact on tariffs and reduction of circular debt still needs to be worked out
As stated earlier it will only become clear how much tariffs reduce after further negotiations with other power projects as well as improvements in transmission efficiency. However, what is self evidently clear is that PMLN/PPP govts were incompetent in agreeing to the IPP terms
