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All forums to be approached over reported returns: IPPs Advisory Association.

ISLAMABAD -- The Independent Power Producers (IPPs) Advisory Association on Monday said they would approached all forums including the Prime Minister over reported returns higher than allowed under tariff (Capacity Payment).

Briefing the media persons here, member IPPs Advisory Association Khalid Mansoor said that they were ready not only to present before the Senate Standing committee but also shared details of profit in this regard.

The IPP model has been critical in attracting the necessary foreign and local investment required to alleviate the power crisis in Pakistan.

IPPs were set up in accordance with prevailing government policy for Power Sector. "In future as Pakistan's economy grows, more investment will be required to replace and upgrade inefficient publicly owned power plants and add renewable / indigenous fuel based power projects to the grid," he said.

He said IPPs operated in a highly regulated environment with stringent government / regulator approval processes at each stage of project development, execution and subsequent operations

as per applicable prevailing policies and approved tariff. All invoices paid to IPPs subsequent to NEPRA approval and auditing of power purchaser, he said.

"There is a serious lack of understanding in how accurate equity rates of return are calculated

for investors in Power Projects leading to false accusations of excessive (windfall) profits,"

Khalid Mansoor said.

He was of the views the key reasons for the circular debt issues in Pakistan were excessive Transmission and Distribution losses, power theft, inefficient power generation by publicly owned GENCOS, and low recoveries from consumers by power distribution companies (DISCOs).

IPPs bore most of the consequences of circular debt and end up taking a significant hit on their returns due to time value of money as well as high interest cost on working capital, he said.

He said high power tariff for consumers was mainly attributable to higher T and D losses and taxation. Only 60 per cent of total cost of power was actually relates to generation while 20

percent to high transmission and distribution losses and 20 percent relates to taxes.

Regarding myth about high capital cost for new power projects, it is stated that upfront tariff for projects need to be determined taking the above considerations into account so that investors are covered for the above mentioned factors.

About evolution of power project capital costs, the cost of Renewable Power Projects (Solar and Wind) has seen a significant fall in recent years due to rapid technological advancements and increase in manufacturing capacity for associated equipment globally.

He said the construction timelines for these projects was short (12 months to 18 months) so new projects were not locked into old capital costs.

Thermal Technologies (RFO, Coal, and Gas) on the other hand were technologically more mature and therefore the capital costs of these projects was highly subject to the prices movement of equipment raw material such as steel and other metals, availability of EPC Contractors - Cost of EPC contracts depended on market conditions.

He said large plants required complex engineering and manpower requirement of thousands that had specific construction skill set.

In relation to high rates of return for power project sponsors, the rate of return that was required to attract equity investors to huge infrastructure projects in Pakistan including the power sector was dependent on the factors including country risk premium, benchmark equity premium and technology premium.

Passive investors from abroad could earn a dollar yield upwards of eight percent on Pakistan bonds (Recent Pakistan Eurobonds were issued at 8.25 percent). Therefore, investors taking significant commercial and country risk to set-up large infrastructure power projects in Pakistan must be incentivized with a risk premium, he said.

Regarding thermal efficiency and Operation and Maintenance expenditure, it should be remembered that tariff for reciprocating engines based furnace oil plants setup under the 2002 Power Policy was based on a benchmark for lifetime thermal efficiency (45%) including performance degradation over life of project and sludge losses.

The thermal efficiency was fixed for the life of the plant for the relevant tariff components for the IPPs, Khalid said.

No sharing mechanism existed in the 2002 Power Policy for sharing of savings on account of better thermal Efficiency.

He said in some cases IPPs had been able to achieve higher levels of efficiency (1% to 2%) after significant technological efforts and investing further funds to improve plant performance. In such cases IPPs were able to save on cost of fuel and improve their profitability.

Certain IPPs having thermal efficiency below the NEPRA benchmark were bearing the additional cost of fuel as it was not a pass through in the tariff, he said.

Similarly, NEPRA approved O and M costs for 25 years tariff, however all risk of actual costs escalations had been born by IPPs.

The 2002 Power Policy was designed in a way that the risk of actual thermal efficiency and O and M costs was on account of the IPPs.
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Publication:Balochistan Times (Baluchistan Province, Pakistan)
Geographic Code:9PAKI
Date:Jul 23, 2019
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