NSAs with 14 IPPs on Hybrid Take and Pay Model and termination of M/s PakGen Power against inclusion of KAPCO
ISLAMABAD : The Government has decided to withdraw proceedings initiated by NEPRA against IPPs for abnormal profits / excess savings in Fuel and O&M against and terminate IPPs and termination of M/s PakGen Power against inclusion of KAPCO in national grid.
Exclusive information available with Newzshewz, indicates the way, the government has finalised Negotiated Settlement Agreements (NSAs) with 14 IPPs and empowered Central Power Purchasing Agency-Guaranteed (CPPA-G) and and Private Power and Infrastructure Board (PPIB) to execute these NSAs after incorporating adjustments.
Sharing the details, sources said, a Task Force on Implementing Structural Reforms in the power sector, constituted by the Prime Minister on August 4, 2024, deliberated on the recommendations of the System Operator shared in a letter of October 22, 2024 in which it had been proposed to continue the operations of 18 IPPs, 5 thermal plants under the 1994 Power Policy and 13 plants under the 2002 Power Policy (12 thermal & one hydro), with a view to renegotiating their tariff structures.
The sources said subsequent to the recommendation received from the System Operator, the Task Force held several rounds of discussions with the sponsors of those IPPs and had succeeded in renegotiating the tariff structure of 10 IPPs of 2002 Power Policy and 4 IPPs of 1994 Power Policy to reduce the future tariff. The Task Force had also negotiated and recommended the recovery of excess savings of the past for ten IPPs of 2002 Power Policy. The contract renegotiations with remaining three IPPs of 2002 Power Policy, viz. Laraib Power Limited, Orient Power Company (Pvt.) Limited and Halmore Power Generation Company Limited were still under process. The System Operator further recommended to terminate one IPP of 1994 Policy and include KAPCO in the grid, which was also negotiated and recommended by the Task Force.
As a result of renegotiations, the IPPs had agreed to the following: (i) conversion of all Return on Equity (RoEs) to PKR and reduction in capacity payment and tariff under a Hybrid Take-and-Pay Model ;(ii) settlement of dispute of excess savings of the past; and (iii) waiver of Late Payment Interest.
On the reduction in capacity payment and tariff under a ‘Hybrid Take-and-Pay Model’, the sources said that the IPPs had agreed to reduce their tariffs under model where their fixed Operations & Maintenance cost (O&M) would be paid on the basis of their existing actual O&M (Take or Pay with reduced payments in the future), whereas their RoE would be paid on the basis of their actual energy generation, instead of under the current model of payment on full capacity, with a certain minimum agreed RoE to ensure their sustainability. Accordingly, agreements had been reached wherein parties agreed to implement the tariff reduction under a ‘Hybrid Take-and-Pay Model’.
Regarding the dispute between GoP and 12 IPP, it was apprised that subsequent to the report of March 16, 2020 submitted to the GoP by the ‘Committee for Power Sector Audit, Circular Debt Resolution and Future Roadmap’, and renegotiations held between GoP and Power Plants set up under the 2002 policy, a dispute of Rs. 55 billion regarding excess savings by IPPs in the past arose between the GoP and twelve IPPs.
The GoP and 12 IPPs agreed to submit the dispute to arbitration under the terms of the Arbitration Submission Agreements (ASAs) executed on June 15, 2022.
According to sources, such ASAs were executed in the light of CCoE’s decision of September 13, 2021 and 2nd December 2021. The GoP and IPPs were able to form the Tribunal by nominating the judges, as required by ASAs, however arbitration proceedings remained pending for the last three years due to various legal and procedural matters. Due to the long pendency of the matter, the Task Force negotiated recovery of past savings with these IPPS and recommended the recovery based on the following principles: (i) from CoD till 2021, savings made by IPPs in fuel shall be calculated by deducting the eligible actual fuel cost, as reported in the annual audited financial statements of the respective years, from the payment allowed in lieu of the Fuel Cost Component by the IPPs for the corresponding years, to be shared in the ratio of 90% for Power Purchaser and 10% for the IPP ;(ii) from 2022 and onwards, sharing mechanism for savings in fuel cost shall be determined in line with provisions of the Master Agreements executed between the Power Purchaser and IPP; and (iii) from CoD till 2021, savings in O&M shall be calculated by deducting the eligible actual O&M, as reported in the annual audited financial statements of the respective years, from the payment allowed in lieu of the O&M Component by the IPPs for the corresponding years. Further, overhauling reserve is allowed to the IPPs to cover and pay for the cost of overhauls of plant and machinery in the future years. The IPPs will be required to account for the overhauling reserves in their audited financial statements and 100% of the unutilized reserves, if any, will be passed on to the Power Purchaser. From the year 2022 and onwards, the sharing mechanism for savings in O&M shall be determined in line with provisions of the Master Agreements executed by the relevant IPP and the Power Purchaser.
On the settlement of the dispute with 9 IPPs having ASAs and Uch-II Power Limited, the sources said that based on the principles given, a settlement was proposed with the 10 IPPs whereby an amount of Rs. 31.65 billion had been calculated for recovery by the Power Purchaser from the IPPs in lieu of past savings by them. Following the recovery of the fuel and O&M savings of the past , the GoP agreed to unconditionally and irrevocably withdraw and extinguish all claims against the relevant IPPs under the respective 9 ASAs and disputed claim with Uch-II Power (Private) Limited. Also, it was agreed that relevant IPPS and GoP shall jointly communicate with the Tribunal established under the ASAs to formally terminate and relinquish the arbitration proceedings. In addition, it was agreed that GoP shall facilitate Nishat Power Limited, Nishat Chunian Power Limited, Liberty Power Tech Limited and Atlas Power Limited in the withdrawal of proceedings initiated by NEPRA against them for abnormal profits / excess savings in Fuel and O&M. It was pertinent to mention that NAB Lahore in its letter of February 9, 2024 had informed that the Competent Authority had approved the termination of investigation at NAB’s end and referred the matter to Ministry of Energy (Power Division) with specific reference to invocation of Arbitration on the subject matter.
On the waiver of outstanding Late Payment Interest (LPI), the sources said, that as part of the negotiations, all IPPs had agreed to waive their outstanding Late Payment Interest (LPI) claims the Power Purchaser subject to the prescribed variations which pertained to back-to-back arrangement with SNGPL and OGDCL.
In respect of Uch Power (Private) Limited (UPL) and Uch-II Power (Private) Limited (UPL-I), the sources said that those terms and arrangements had been agreed with prospective buyers of UPL and UPL-I, viz. Sapphíre Fibres and Mind Bridge (Private) Limited. The prospective buyers were in the process of acquiring 100% ownership of UPL & UPL-II. In this regard, the prospective buyers, had entered into the Share Purchase Agreement (SPA). However, the completion of SPA was pending due to various legal conditions precedents required for its execution. The negotiated terms shall become binding on the Prospective Buyers upon successful completion of the legal acquisition process for UPL and UPL-II.
The prospective buyers of UPL and UPL-II had agreed to waive their claim of LPI receivables from Power Purchaser to the tune of Rs.62.5 billion on the condition that GoP shall facilitate in waiver of the LPI claim by OGDCL from UPL and UPL-II amounting to Rs. 46 billion, the sources said, adding that OGDCL had not recorded the LPI claim in its books of accounts.
Similarly, 5 IPPs on SNGPL network had also waived their LPI receivables from Power Purchaser to the tune of Rs 4.6 billion on the condition that GoP shall facilitate in waiver of the LPI claims of SNGPL of Rs 1.9 billion towards the IPPs.
Regarding the termination of Pak Gen and inclusion of KAPCO in the System, the sources said that during negotiations with the IPPs to change terms of their tariff, System Operator(NPCC) provided technical analysis regarding the replacement of PakGen Power Limited with alternatives such as KAPCO, ROUSCH or Fauji Kabirwala. The System Operator, in its letter November 1, 2024, had considered KAPCO as a suitable and better replacement for PakGen Power Limited due to its location, multi-fuel operation efficiency, Black start facility, and connectivity with the grid system. MEPCO and the System Operator in their letters of November 27, 2024 and December 20, 2024, had requested retention of KAPCO in the grid. KAPCO had communicated its willingness to make the plant available and had agreed to the terms outlined in its letter of January 02, 2025. The Task Force had analysed the commercial aspects and technical limits explained by the System Operator for both KAPCO and PakGen and recommended termination of the agreement with PakGen Power Limited and entering into a new Power Purchase Agreement with KAPCO, by including Black start facility as per NTDC requirement, while considering the terms outlined in their letter. The Task Force, as part of these negotiations, had agreed to certain facilitation measures to be provided by the GoP to various IPPs.
According to sources, the miscellaneous adjustments in the Negotiated Settlement Agreements were placed before the Cabinet as follows: (i) for 1994 Policy IPPs, an indexation mechanism had been agreed with all IPPs, however, the NSA initialled with Uch Power comprehensively explained this mechanism and this indexation mechanism, provided in Uch Power NSA, shall be applied to all NSAs ; and (ii) for 2002 Policy IPPs: Engro Power was the first one to initial the NSA against payment of minimum RoE on the basis of 30% of their capacity, however negotiations with other IPPs finally led to an agreement at minimum RoE based on 35% of their capacity. Similarly, sharing fuel cost in the ratio of 90:10 was allowed to all IPPs except Engro Power. Therefore, to keep all IPPs at par, Engro’s NSA would be amended in line with other IPPs of 2002 policy.
The NSAs with IPPs included payment of their outstanding payables as of October 31, 2024, amounting to Rs. 115 billion, which are to be made within 90 days of the date of approval of NSAs by the Cabinet. The Power Division would require technical supplemental grant of Rs.115 billion to discharge the outstanding payables to the aforesaid IPPs through the Power Purchaser, and that the funds required would be met from the funds already available under lump provision for the power sector in Finance Division’s Demand No 45. Further, it was agreed that past payables of OGDCL would be settled by UPL & UPL-II in 18 equal monthly installments on receipt of payments from the Power Purchaser in a timely manner.
In view of the cardinals of the negotiations, the sources said, the GoP had successfully recovered an amount of Rs. 31.65 billion in resolution of the dispute pertaining to the past excess savings . Furthermore, the GoP had secured savings of Rs. 80.2 billion through the waiver of LPI, which was otherwise payable by the Power Purchaser as of October 31, 2024. Additionally, the estimated annual savings in capacity payments were projected at Rs. 67.51 billion (including three IPPs pending for negotiations ) contributing to a cumulative reduction in future capacity payments and related obligations, totalling Rs. 813 billion and would settle circular debt for an estimated amount of Rs. 329 billion.
The sources maintained that during the implementation of NSA of Rousch (Pakistan) Power Limited, it was highlighted by SNGPL that a matter of RLNG tariff was pending with OGRA, the determination of which would have financial implications. Previously, clause 2.3(c) of the approved NSA with Rousch (Pakistan) Power Limited, was stated as: “The Company shall invoice, and the Power Purchaser shall process and pay, WWF and WPPF accrued till June 30, 2024, by December 31 2024, in addition to the payment under section 2.3, clause (a)” . It was proposed that Clause (c) of the NSA be replaced with the following: “The Company shall invoice, and the Power Purchaser shall process and pay, WWF, WPPF and any differential of Energy Purchase Price (due to change in RLNG prices determined by OGRA) along with GST invoices accrued till September 30, 2024, in addition to the payment under section 2.3, clause (a).”
The sources said, after detailed discussion, Power Division requested the Cabinet to: (i) approve the Negotiated Settlement Agreements with 14 IPPs and authorize CPPA and PPIB to execute these NSAs after incorporating proposed adjustments ; (ii) approve the NSAs for UPL and UPL-II executed with the prospective buyers and authorize CPPA and PPIB to execute the said NSAs. Provided however the said NSAs shall be binding upon successful completion of the legal acquisition process for UPL and UPL-II by the Prospective Buyers; (iii) authorise CPPA to amend the relevant PPAs as per the NSAs and make any relevant changes to standardize such amendments; (iv) approve recovery of excess savings amounting to Rs. 31.65 billion of the past from IPPs as per the principles mentioned in the summary; (v) approve the termination of ASAs with the relevant IPPs and withdraw all disputed claims against the relevant IPPs under the respective ASAs and against UPL-II; (vi) authorise the Power Division to formally communicate with the Tribunal established under the ASAs for termination and relinquishment of arbitration proceedings; (vii) advise NEPRA to withdraw proceedings initiated against the IPPs listed regarding abnormal profits / excess savings in Fuel and O&M; (viii) approve waiver of LPI of Rs. 46 billion receivables in the books of OGDCL from UPL and UPL-II and consequently, OGDCL shall issue credit notes in favour of UPL and UPL-II; (ix) approve waiver of LPI of Rs. 1.9 billion receivables in the books of SNGPL from IPPs and consequently, SNGPL shall issue credit notes in favour of these IPPs; (x) approve facilitation measures to be provided by GoP for specific IPPs as disclosed in the summary; (xi) authorise CPPA-G to file jointly tariff petitions with relevant IPPs based on the discounts in tariff offered by IPPs in the specified NSAs, with NEPRA; (xii) approve the termination of PPA and IA of PakGen Power Limited and authorize CPPA and PPIB to execute the said terminations respectively; (xiii) advise NEPRA to amend the existing EPPR 2022 enabling CPPA and NTDC to enter into Tripartite PPA with KAPCO; (xiv) authorise NTDC to enter into the negotiated arrangement to procure/acquire the Switchyard on a permanent basis from KAPCO to meet the requirements of the MEPCO region; (xv) grant exemption of PPRA rules to NTDC for procurement of Switchyard on value to be approved by NEPRA for the determination of Use of System Charge (UoSC) of NTDC; (xvi) advise NEPRA to consider and issue the Tariff Determination in respect of KAPCO to the extent of NTDC requirement in the Grid on filing of tariff modification petition by KAPCO; (xvii) approve Income Tax, Workers Welfare Fund and Workers Profit Participation Fund as pass through for KAPCO; approve draft Tripartite PPA and authorize NTDC and CPPA to execute the agreement with KAPCO after incorporating (q) above and make any project specific changes required; (xviii) approve amendment in NSA of Rousch (Pakistan) Power Limited and authorize CPPA and PPIB to execute the same; and (xix) approve technical supplementary grant of Rs. 115 billion to discharge the outstanding payables agreed in NSAs for the period ended October 31, 2024.
The sources said NSAs would result in a saving of Rs.813 billion, and settle the circular debt for an estimated amount of Rs. 329 billion as the government believes the circular debt as a ‘bottomless pit’ that was hemorrhaging the economy.
” After threadbare discussion the Cabinet the approved the NSAs and other proposals of Power Division regarding reduction in capacity payments through revision in tariff of 14 IPPs and termination of PakGen against inclusion of KAPCO in national grid’ .
Ends
