Govt ends contracts with five IPPs to save Rs411bn – Business

• Terminations to reduce average electricity tariff by 71 paise per unit
• Further cuts of Rs8-10 per unit expected as part of overall policy measures
• Govt mulls winter package, incentivising additional usage with Rs20-30 per unit discounts
• Plans to open charging stations for electric vehicles within next few weeks

ISLAMABAD: The government announced on Thursday the premature termination of power purchase agreements (PPAs) with five of the oldest independent power producers (IPPs), claiming future savings of Rs411 billion and an impact of around 71 paise per unit on the average electricity tariff, which currently stands at about Rs36 per unit, excluding taxes and duties.

Prime Minister Shehbaz Sharif made the announcement during a federal cabinet meeting, which was followed by a news conference by Power Minister Awais Ahmed Khan Leghari. The minister vowed to continue reviewing contracts with other IPPs and state-owned power plants to further reduce tariffs by Rs8-10 per unit.

The cabinet has approved the termination of the contracts, which will now undergo procedural approvals by the Private Power and Infrastructure Board (PPIB) and the Central Power Purchasing Agency (CPPA) before being presented to the National Electric Power Regulatory Authority (Nepra) for regulatory approval and de-licensing, Mr Leghari said.

He said the contracts were ended through “mutual agreement”, with the IPP owners prioritising national interest over personal gain. He thanked the army chief and government institutions, including power companies and regulators, and PM’s special assistant Muhammad Ali for “making the impossible possible”.

The five IPPs that agreed to terminate their contracts included Saba, Lalpir, Atlas and Rousch — set up under the 1994 power policy — and the country’s biggest private utility, the 1,292 MW Hub Power Company Ltd, set up before that. These plants, with a combined generation capacity of 2,463 MW, were set to expire within the next two to three years.

The minister said the government is also preparing to offer reduced rates as part of a winter package aimed at boosting electricity consumption, with discounts of Rs20 to 30 per unit on additional usage.

The government, he said, is taking several tangible measures to cut the electricity tariff by Rs8-10 per unit in the short term. He said the prime minister set up a National Task Force to bring reforms to the power sector. In the first phase, five IPPs were identified and negotiations were initiated.

The termination agreement with the five IPPs is one among several measures the government is taking to reduce tariffs, he said.

Elaborating, Mr Leghari said the agreements with these IPPs will bring annual savings of Rs70bn that were to be paid to them over the remaining life of contracts, while the overall savings would be Rs411bn. The government will clear Rs71bn in outstanding payables to the IPPs without incurring late payment surcharges or penalties for early termination.

The minister claimed that the savings achieved through these terminations exceeded those secured by the previous PTI government.

He also confirmed that the government is reviewing the performance and costs of all power plants, both public and private. “We have initiated the process by starting negotiations to reprofile the debt of Chinese power plants established under the CPEC portfolio,” he said. “If the Karachi (airport blast) incident did happen, several Memorandums of Understanding would be signed with China in the next couple of weeks.”

The minister said the government also wanted to bring IPPs established under the 2002 power policy to “take and pay” from the existing clause of “take or pay” in their contracts but stressed that the case of each IPP would be reviewed individually.

Mr Leghari noted that the government aims to reduce tariffs by Rs3.5 per unit through agreements with local IPPs, Rs3.75 per unit through reprofiling debt of Chinese IPPs, Rs0.75 per unit through surcharges, and Rs0.72 per unit by closing the five IPPs. Additionally, a Rs0.16 per unit reduction will come from the removal of the television fee currently included in electricity bills.

Replying to a query regarding the conversion of imported coal power plants to local coal, he said this transition would take three to five years and could reduce tariffs by about Rs3.60 per unit.

The minister also announced the establishment of the Independent System and Market Operator (ISMO) by merging the CPPA and the National Power Control Centre (NPCC). This merger aims to shift the power sector to an operational exchange system similar to a stock exchange over the next three to four years. The ISMO is expected to be fully operational by January 2025, which Mr Leghari said would promote competition and enhance the power sector.

He said the National Transmission and Despatch Company (NTDC) was also being fully transformed.

The minister said that with the implementation of these measures, electricity consumption would pick up and support industrial productivity and competitiveness and promote business.

He said that all power distribution companies, except those in Hyderabad, Sukkur and Quetta, had reduced their losses in the first quarter of the current fiscal year. Plans are also underway to open charging stations for electric vehicles in the coming weeks.

The minister said the tariff reduction measures, particularly the winter package, would be introduced after taking the International Monetary Fund and other lenders on board. He said increasing the electricity demand was the only strategy before the government, something that was impossible without reducing rates and can only be achieved through addressing inefficiencies.

Addressing concerns about the impact of contract terminations on future privatisations, Mr Leghari rejected the notion that investors would be deterred. He stated that IPPs in Pakistan had earned some of the highest profits in the world, and future bidders would still find the investment returns attractive.

The minister said the ownership of four IPPs — Saba, Hubco, Atlas and Lalpir — would remain with their owners as they were set up on the build, own and operate model. However, Rousch, which was established under the build, own, operate, and transfer (BOOT) model, will shift to government ownership and subsequently be privatised.

Published in Dawn, October 11th, 2024