The Memorandum of Understanding (MoU) signed between the federal government and Independent Power Producers (IPPs) that came under 1994 and 2002 power policies is quite an attraction in the country. However, its efficacy is yet to be known as several questions are still to be answered.
Supporters of the MoU claim the agreement will pave the way for the recovery of “excess” payments of billions of rupees made to IPPs and thus would bring relief to the nation in return. However, many believe the 11-point MoU has to encompass the power plants which do not fall in this category such as those which are producing power under the China Pakistan Economic Corridor (CPEC).
Some reports, however, say, the government was in touch with Chinese leaders in this regards and it will take time to yield results. Some suggest Pakistan may save millions of dollars through extension in payment period of loans. However, negotiating and winning benefits in this case is a harder task to achieve.
First, the MoU which covers old IPPS that as many say are approaching their tenures and the companies have extracted their gains already.
The MoU says as following:
- For oil-fired projects, any savings in fuel will be shared on a sliding scale starting from 70:30 in favor of the Power Purchaser for the first 0.5% efficiency improvement above currently, NEPRA determined benchmark efficiency, followed by 60:40 for next 0.5%, followed by 50:50% for next 0.5%, and finally 40:60 for any efficiency above that. Power purchaser will not share in any efficiency losses
- For oil-fired projects, 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. If the reserve for major overhaul remains unutilized, it will be shared in the ratio of 50:50 between the power purchaser and the IPP. Power purchaser will not share in O&M and major overhaul losses;(iii)
- For gas-fired projects, the fuel and O&M will be taken as one consolidated line and any net savings will be shared 60:40 in favor of the Power Purchaser, after accounting for any reserves created, or to be
created for a major overhaul, to be reviewed by power purchaser or NEPRA as mutually agreed. If the reserve for major overhaul remains unutilized, it will be shared in the ratio of 60:40 between the power purchaser and the IPP. Power purchaser will not share in fuel, O&M and major overhaul losses
- In order to ensure that the actual efficiency is matching the efficiency reported in the accounts, the GoP shall conduct a heat rate test for all projects for which the GoP and IPPs’ representatives will agree on the TORs and corrections required
- Late Payment Surcharge (LPS) will be lowered from currently KIBOR + 4.5% to KIBOR + 2.0% but it will be ensured that payments follow the PPA mandated FIFO payment principles for this rate to be effective. Compounding and interest on interest provided for in the PPA, etc. will be adjusted to match the settlement agreement initialed (but never put into effect) by the GoP and some of the IPPs in 2019
- For foreign investors registered with SBP, the Return on Equity will be 12% prospectively. For local investors, the Return on Equity will be changed to 17% in PKR with no dollar indexation. In recalculating the return, the equity approved by NEPRA on COD in USD shall be converted into PKR at the exchange rate of Rs.145 for prospective calculation
- On “miscalculation” of IRR on account of the periodicity of payments, no adjustment shall be made for the past as the regulator had expressly allowed this in its decisions. For the future, NEPRA shall make the calculation of IRR on a monthly basis and shall consider on merit adjustments for costs denied in lieu thereof
- All 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
- In order to assess if a company has made any “excess profits”, the reconciled financials between the Committee and the IPPs engaged in this exercise, shall be submitted to NEPRA. As a legal body vested with the authority for tariffs, NEPRA shall decide in this matter and provide for a mechanism for recoveries where applicable
- Payment of the receivables of the IPPs is an integral part of this settlement. The Power Purchaser and GOP will devise a mechanism for repayment of the outstanding receivables with agreement on payment of receivables within an agreed time period which will be reflected in the final agreement to be signed and
- Once NEPRA and Federal Cabinet approve the terms of this MoU, the parties shall agree and document details and procedures of these understandings within 15 days, after which the same shall be submitted to NEPRA and CPPA, to be followed by legal documentation to reflect the amendments needed in the relevant agreements.
Moreover, reports claim the government has yet to sign deals with power projects established under the Generation Policy, 1994, and RLNG and coal-fired power plants set up under Power Generation, 2015.
Although, the agreement may be expected to help bring down generation costs and thus slow down the accumulation of circular debt and also a reduction in consumer tariffs in the future the issue is linked the whole set of power plants (both in private and public sectors and of all kinds) in the country if some tangible results to be achieved.
Furthermore, issues such as distribution and transmission lines, recoveries, power losses, and theft are of immense importance and the resolution requires a comprehensive approach, governance, and then adequate investments
