960424

Gas-based power plants

to bear forex rate risk

AZMATULLAH

ISLAMABAD: Foreign exchange rate fluctuation risk for indexation of gas prices has to be borne by power plants based on gas.

The major decision to this effect came in the wake of long-drawn row between Wapda and Liberty Power Project over indexation of gas prices, said officials in the Directorate General, Petroleum Concessions.

While examining the issue, a high-powered committee, headed by the petroleum minister, unanimously decided that liberty power should bear fluctuation risk.

Signing of Power Purchase Agreement (PPA) between two sides was held up over the question: who will bear exchange rate fluctuation risk.

Since fuel cost is pass-through item, the decision has far-reaching consequences. It will cut fuel cost and save consumers from substantial additional burden.

Petroleum policy of 1994 provides that gas purchasers (power producers) will pay gas producer in US dollars whereas Wapda will pay power producers in local currency. The exchange rates, notified by Price Determining Authority (PDA) are to be basis of Wapda payments.

The PDA notify producer gas price on six monthly basis; 1st of January and 1st of July. Power Producer will bill Wapda on monthly basis and get rupees in accordance with exchange rates on the first of January or 1st of July as the case may be.

Because foreign exchange rates VS local currency keeps increasing, when power producer gets those rupees converted to dollars, it does not get same amount of dollars which it paid to gas producer. Here the question arose: who will bear exchange rate fluctuation risk?

Wapda refused to accept this liability as fuel cost is pass through item and will result in increase of consumer price.

In this case, the committee unanimously decided that Liberty Power should borne fluctuation risk. The committee recommended that according to international experts the gas price at dollar 3.5/MMBTU in combined cycle power plants is sustainable at the present power purchase price of 6.5 cents/KWH. In case of Liberty, the price is even more lower at 2.00 to 2.5 dollar per MMBTU.

The Committee also directed Liberty Power to make agreements with gas producers on take or pay basis as provided in petroleum policy.

The Power Purchase Agreement protects investment of power producer through 60 percent capacity payment on inability of Wapda to receive power at a lesser capacity. Liberty is willing to pass only 60 percent of the capacity payment to gas producer in case of its inability to take gas. The gas producer is not satisfied with 60 percent of capacity payment which works out to 36 percent for gas producer. According to Petroleum Policy 94 the gas producer has provision for protection of its development cost through take or pay. Also in case of allocation of gas to gas companies, the minimum take or pay of 80 percent is guaranteed.

The Committee observed that Liberty Power project should sign agreement with gas producers on at least 60 percent take or pay for contractual volume of gas deliveries if they wish to use the allocated gas which has been allocated to them at their own request.

Liberty Power Project is sponsored by a US based consortium, infrastructure capital group.

Liberty has been allocated gas ex-East Badin Block, Kandhkot East and Habib Rahi formation of Qadirpur field. Interestingly, first two fields were allocated to the Liberty even before they were declared commercial.