The negotiations of 47 Independent Power Producers (IPPs) and the Finance Ministry has been suspended till tomorrow (Wednesday). Market experts claim that the representatives of the government and IPPs are close to finalize the deal.
“The meeting has been going on for the last two days but the owners of IPPs are demanding the immediate clearance of previous dues of Rs 450 billion out of a total of Rs 700 billion outstanding,” a source privy to the situation said.
According to sources, 47 owners of the IPPs had signed a Memorandum of Understanding (MoU) with the government in August 2020, while many small IPPs are waiting for the government’s decision.
“The meeting is underway between power producers (IPPs), covered under Power Policy 2002, and the Minister for Finance while a meeting between Minister for Finance and power producers (IPPs) covered under Power Policy 1994 is scheduled to take place tomorrow (Jan 06, 2021),” said an analyst.
The agenda of both the meetings is to finalize amendments to Power Purchase Agreements of IPPs, in line with MoUs signed in August 2020, thereby paving the way for payments to IPPs on account of the energy sector circular debt, he added.
On December 31, a meeting took place between the Minister for Finance and representatives of IPPs wherein the Minister offered IPPs to pay one third of the outstanding amount of circular debt in the form of one third cash and two thirds Pakistan Investment Bonds (PIB) at a floating rate, while the next one third of the outstanding amount – in the same ratio – is to be paid in June 2021 and subsequently the final amount in December 2021. Following this announcement, IPPs outstanding amount will be resolved in a total of 13 months.
According to a Topline Securities report issued today, the government is inching closer towards a settlement with IPPs with regard to a downward revision in their returns against the release of power sector circular debt. The report further said that this move will provide relief to IPPs in the short-term. However, measures need to be taken to address this problem in the long-term.
As per these measures, the government is contemplating an increase in the power tariff by 30% over a period of time, which can improve the liquidity of the sector by Rs 400-550 billion (equal to annual shortfall), assuming an annual power demand of 110bn Kwh.
The shortfall could increase if international oil prices trend up from here. Hence, it would be more sustainable to address issues with respect to Transmission and Distribution (T & D) losses, recoveries, unbudgeted subsidies and delayed tariff adjustments, the report further claimed.
T&D losses and recovery shortfall together are termed ‘Aggregate Technical and Commercial losses (AT&C)’, which contribute 40 per cent to the total circular debt. Delayed tariff adjustments and unbudgeted subsidies make most of the remaining, the report claimed.
Ensuring a 100% recovery (current 90-92%) requires political will, but it is doable in the short-term. However, reduction in T&D losses would require heavy investment which will could take time. The privatization process of distribution companies (DISCOs) will also be pivotal, as it has been seen in case of K-Electric (KEL), which has reduced its T&D losses from 36% in 2008-09 to 20% in 2019-20, the report claimed.