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Aftab Maken
In a significant development, the Government has decided to withdraw proceedings initiated by NEPRA against Independent Power Producers (IPPs) for abnormal profits and excess savings in fuel and operations & maintenance (O&M) costs.
Additionally, the government has terminated the agreement with PakGen Power Limited and included KAPCO in the national grid. Exclusive information reveals that the government has finalized Negotiated Settlement Agreements (NSAs) with 14 IPPs, empowering the Central Power Purchasing Agency-Guaranteed (CPPA-G) and the Private Power and Infrastructure Board (PPIB) to execute these agreements after incorporating necessary adjustments.
A Task Force on Implementing Structural Reforms in the Power Sector, constituted by the Prime Minister on August 4, 2024, played a pivotal role in this development. It reviewed recommendations from the System Operator, which proposed the continued operations of 18 IPPs under the 1994 and 2002 Power Policies, renegotiating their tariff structures. Following several rounds of discussions, the Task Force successfully renegotiated tariffs for 14 IPPs, reducing future payments while securing recovery of past excess savings from 10 IPPs under the 2002 policy.
The renegotiations resulted in IPPs agreeing to key terms: converting Return on Equity (RoE) to PKR, reducing capacity payments under a Hybrid Take-and-Pay Model, settling disputes over past excess savings, and waiving Late Payment Interest (LPI). Under the new tariff model, fixed O&M costs would be paid based on actual operations, and RoE would align with actual energy generation rather than full capacity. This model ensures sustainability while reducing costs.
The dispute over Rs. 55 billion in excess savings from 12 IPPs under the 2002 policy was addressed through arbitration agreements signed in 2022. Although arbitration proceedings were delayed, the Task Force negotiated recovery terms for fuel and O&M savings. For fuel savings until 2021, the savings would be shared 90% with the Power Purchaser and 10% with the IPPs. From 2022 onward, sharing mechanisms will align with Master Agreements. Similar principles applied to O&M savings, with unutilized reserves from overhauls returned to the Power Purchaser.
A settlement of Rs. 31.65 billion in past savings was negotiated, and the IPPs waived LPI claims totaling Rs. 80.2 billion. Additionally, the prospective buyers of Uch Power Limited and Uch-II Power Limited, Sapphire Fibres and Mind Bridge (Private) Limited, agreed to terms pending their legal acquisition. They also waived LPI claims, contingent upon similar waivers from other entities, including OGDCL and SNGPL.
Regarding PakGen Power Limited, the System Operator recommended its replacement with KAPCO, citing KAPCO’s superior multi-fuel operation, black start facility, and grid connectivity. Following technical and commercial evaluations, the Task Force recommended terminating PakGen’s agreement and signing a new Power Purchase Agreement with KAPCO. The agreement included specific measures to facilitate the transition, such as incorporating the black start facility and acquiring KAPCO’s switchyard for the MEPCO region.
The NSAs addressed indexation mechanisms, aligning terms across IPPs under the 1994 and 2002 policies. For example, Engro Power’s agreement was amended to ensure parity with other IPPs in terms of capacity-based RoE and fuel cost-sharing ratios. The government also committed to settling outstanding payables of Rs. 115 billion to IPPs by utilizing funds already allocated for the power sector.
These measures are expected to yield significant benefits. The government projects a cumulative saving of Rs. 813 billion in capacity payments, including Rs. 67.51 billion annually. The resolution of disputes and renegotiation of tariffs will also reduce the circular debt burden by Rs. 329 billion, providing much-needed financial relief to the power sector.
To implement these agreements, the Cabinet approved several key steps, including amending Power Purchase Agreements, terminating arbitration proceedings, and facilitating settlements with various stakeholders. NEPRA was directed to withdraw proceedings against IPPs for abnormal profits, while exemptions and waivers were granted to streamline processes.
The government’s efforts mark a critical step toward addressing inefficiencies in the power sector. By renegotiating agreements, recovering past excess savings, and securing substantial cost reductions, the administration aims to mitigate the circular debt crisis and ensure a more sustainable and efficient energy system. The approval of the NSAs by the Cabinet underscores the government’s commitment to structural reforms, bringing much-needed stability to the power sector and the broader economy.
