Independent’ money producers?
Shahid Sattar and Madiha Nisar
April 07, 2019
Water and Power Development Authority (WAPDA) and the Karachi Electric (KE) owned all power generating plants in Pakistan up until the mid-1980s. In 1985, a lack of funds in the public sector forced the Government to discontinue its support to WAPDA. Consequently power policy 1994 was formulated to meet power shortages and it was highly successful as it attracted substantial foreign direct investment to Pakistan’s power sector. However, the policy also generated a great deal of controversy in which the independent power producers used various means to secure money-spinning contracts.
The largest private sector power generation venture in Asia; HUBCO and the rest of Pakistan’s independent power producers(IPPs); all of them thermal plants, now account for almost 46 percent of total installed capacity of electricity generation in Pakistan.
However, this share enjoyed by the IPPs does not exist without a price. Since the introduction of the IPPs in the country in 1994, the electricity tariffs have been rising constantly. The liberalization of the power generation sector has drained power sector resources and trapped it into huge losses. According to financial reports of WAPDA and the Discos’, the utilities incurred a Rs. 325 million operating loss in FY17 and now it has reached to billions of rupees. Nevertheless, the IPPs alone cost the government billions of dollars in capacity payments every year. Hypothetically speaking, this means that if all of the IPPs in Pakistan do not produce a single unit of electricity, government would still have to pay them for the availability of their capacity. The latest estimate of fixed costs versus variable costs of CCPAC states that 70 percent of costs are not variables.
Previous governments offered very lucrative incentives to investors to actively attract investment for the power sector. The incentives include a cost plus method to determine tariffs and the cost used for tariff determination was based on assumptions, not on actual cost of IPPS. Power plants were said to be instrumental in getting very high upfront tariffs. Apart from high tariffs they had the leverage to use any technology and any main fuel they want. These seemingly unrealistic power tariffs, high inefficiencies, low payment recovery and the inability of the government to manage its subsidies mechanism caused massive losses to the country, which has been estimated to be 2 percent of GDP per annum.
Through purportedly questionable means wind power projects successfully got high upfront tariff of Rs. 12.71/KWH and levelized tariff of Rs. 15.32/KWH (world-wide Wind power tariffs are 2.6 cents/Kwh) against the assumed capital cost of $1.5-1.8 million/MW. While the installed capital cost of similar projects worldwide average at US $ 0.8 million and even in India it is less than US $ 0.7 million. Similarly, coal projects have been awarded on very high costs and high tariffs causing a gigantic loss to the energy sector.
These practices created cost inefficiencies on the IPP side as they were assured return on equity regardless of their performance whereas the efficiencies stated in the NEPRA determination were already 2.5-3 % below the actual efficiency of the power projects, apart from the other costs being massively overstated. By virtue of these suspicious terms, IPPs received huge overpayments causing billion of rupees to the economy of Pakistan.
Pakistan’s history is full of instances where governments have formulated policies based on exaggerated growth models and misplaced assumptions, ultimately implementing them in a highly
non-transparent manner. The long-term consequences are often ignored for short-term political and personal financial gains. The IPPs made, and are still making huge profits on virtually zero-risk investments.
Case of the oil-based IPPs: NEPRA determined 15 percent return on equity to IPPs but, each oilbased IPPs, is receiving a profit of $27 million against a legitimate return of $6.2 million per annum. This excessive profitability is almost $160 million per IPP in the last 8 years equating to 61 percent return per annum in dollar terms on a80:20 debt equity ratio. This has only been possible as the NEPRA tariff determination procedure was manipulated and understated efficiency figures and massively overstated costs. The government tried to stop this through energy audit and NEPRA redetermination of tariffs but couldn’t succeed.
The oil-based IPPs were also allegedly involved in sale of excessive fuel oil (because of higher efficiency) in the underground market.
Governments since 1994 have accused each other of corruption, disloyalty, and political victimization, and absolved themselves of all responsibility. In the meantime, the public has been paying ever-rising electricity bills. The question remains: who should be blamed for this fiasco? The IPPs, the governments, or the consumers who are not standing up for their rights? In the meantime the entire industry and economy of Pakistan has been priced out of the international market due to the excessive energy costs.
Power sector issues can only be resolved by formulating fair and just polices. Looking ahead, taking heed from mistakes of the past is the key to formulating a workable economic recovery plan. An energy audit and tariff redetermination is required to recover the overpayment of over $1 billion in the last 8 years to these oil-based IPPs.
The government should also take steps to strengthen NEPRA by decentralizing it making it more transparent and accountable to Parliament. NEPRA should be expanded to include over sight and monitoring both technical and financial to avoid repetition of such blunders.
======================================================================= Summary of Overpayments to Power Projects ======================================================================= Power Source Annual Overpayment Life of the project Million Billion ======================================================================= Coal Power Projects (2400 Mws) $ 475.00 $ 14.2 Wind Power Projects(2000 Mws) $ 430.00 $ 10.7 Solar Power Projects (400 Mws) $ 94.64 $ 0.9 Fuel Oil Based IPPs(1400 Mws) $ 80.00 $ 1.8 TOTAL AMOUNT $ 1,079 $ 27.77 Billion =======================================================================