20000301

Tariff cut accords

may result in

heavy losses

to Wapda

ASHRAF KHAN

KARACHI: The government's understanding with some of the small independent power producers (IPPs) to cut buy-back power tariff may result in heavy losses, amounting to hundreds of millions of dollars at later stage of their commercial operation.

Industry sources on Tuesday said these covert losses lay in the extension of these IPPs' commercial lives by eight to ten years under the memoranda of understanding (MoUs) recently signed by the government.

The MoUs, which have yet to be translated into binding agreements, will bring in a 'costlier relief' to the Water and Power Development Authority (Wapda), they said.

The measures so far been taken by the officials would remain a mere eye-wash unless the government reaches an 'agreeable' accord with the larger IPPs including the 1,419-mw Kapco, 1,292-mw Hubco, 856-mw Uch Power and AES with a cumulative capacity of 725 mw, they said.

They were of the view that Wapda, by pretending progress on smaller IPPs, was strategically isolating these larger IPPs, for making these MoUs a leverage for getting Wapda's restructuring loan of 250 million dollars from the Asian Development Bank (ADB).

A number of smaller IPPs, namely 125 mw Tapal Power, 157 mw Fauji Kabirwala, 131.4 mw Kohinoor Energy, and 126 mw Gul Ahmed Energy are also facing great difficulty in striking a working commercial resolution of their respective differences with the government.

Another medium-sized IPP, 412 mw Rousch Power, had offered a tariff reduction, but it has been learnt on good authority that the accord was not reached under 'amicable' conditions as claimed by Wapda. Sources said that Wapda, rather threatened the IPP with not commissioning the plant and cancelling the contract unless Rousch acceded to grant 'cash flow concessions' to Wapda.

Against the marginal decrease in tariff over the initial 1-10 years period of project life, Wapda has increased the lives of these projects from existing 20-22 years to 30 years. In addition Wapda would waive liquidated damages due to IPPs from Wapda as well as letter of credit requirement by IPPs and Wapda.

Sources said that reduced tariff would work for initial 10 years of project life. Nevertheless, the additional payments to be made by Wapda to these IPPs in the last 10 years of extended project life are of such magnitude that they drastically neutralise the saving in the initial period.

In case of Southern Electric (115 mw), the life of the project has been extended from 22 to 30 years. During the first 22 years tariff reduction provides a savings of 19 million dollars, they said. From the 22nd year, and than on, Wapda would be purchasing electricity worth 42 million dollars inclusive of capacity payment charges.

Moreover, Wapda would be waiving liquidated damages to the time of 4.3 million dollars. These damages are due to Wapda from Southern Electric for not having its required plant capacity available as per contract. The end-result of these transactions comes to a negative saving of 27 million dollars to Wapda, they said.

Likewise, Japan Power, which has offered much larger tariff reduction Ñ of 128 million dollars Ñ in the first 22 years, necessitates Wapda to pay an additional 139 million dollars in the last eight years of the project life. In addition, Wapda has been asked to waive liquidated damages of about five million dollars. Thus Wapda would face net negative impact of about 16 million dollars, they said.

The 140-mw Habibullah Coastal Power plant is not comparable to other IPPs as it uses natural gas Ñ a much cheaper fuel than fuel oil. Only Saba Power (of 114-mw) offers net savings of 17 million dollars to Wapda over the project life, they said.

Nevertheless, delays in implementation of these offers can still occur as they are subject to approval by the government of Pakistan, company's banks and their respective board of directors.

The government has held many rounds of talks with the sponsors of larger IPPs, especially Hubco, with no positive outcome so far. Though Hubco had offered tariff cut of 0.25 cents per unit to Wapda, the later did not consider it desirable.

Experts suggest that the instant benefit Wapda can avail of is optimum plant utilisation of Hubco (about 80 percent), as being done in case of Tapal, Gul Ahmed and other IPPs and the tariff can also be reduced substantially.