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Govt considers new agreement with IPPs to tackle circular debt impact

The federal government is mulling striking a new agreement with the independent power producers (IPPs) for one year in order to avoid negative impact of the circular debt, official documents revealed Tuesday.

On recommendations of the ministry of water and power, improvement is being made in terms of settlement of dues with the IPPs, which would be submitted subsequently to the Economic Coordination Committee (ECC) of the Cabinet for approval. The ministry had sought approval of the sub committee’s report on delay of payments by power purchasers to IPPs under power policy 2002.

According to recommendations of the sub-committee, improved terms of payment should be incorporated in a ‘side agreement’ between the IPP and the power purchaser – the National Transmission & Despatch Company.

As per new set of rules, in case of delayed or non-payment by the power purchaser, the IPPs will not suspend their operations due to non-availability of fuel until the quantity of fuel equivalent to 90 days (for residual fuel oil-based IPPs) or 33 days for IPPs operating on HSD or gas.

After reaching the threshold, if plants are available but cannot be dispatched due to non-availability of fuel solely caused by non-payment of fuel cost component (FCC) by the power purchaser, this duration will be treated as additional forced outage hours.

However, in case the power purchaser continues to make partial payments of FCC, the IPPs will be obligated to operate the power plant equivalent to payments of FCC made by the power purchaser even after reaching the threshold.

Moreover, IPPs will not be entitled for delayed payment interest (KIBOR + 4.5 percent) on the delayed energy payments. Based on the previous record, the power purchaser is likely to save an average estimated amount of Rs296 million per month based on 50 percent payments compared to the likely cost at an average estimated amount of Rs970 million per month.

Furthermore, IPP will neither issue notices for payment events of default to the power purchaser due to delayed or non-payment of energy payments nor call the GoP guarantee for the same. Nevertheless, the IPP will be entitled to issue notices for any payment events of default in respect of capacity payments.

These proposals are being fine tuned in the light of objections raise by the ministry of finance. Secretary Finance Division, who is also member of the committee, has expressed reservations on recommendations and the side agreement. The reservations mainly pertain to additional financial implications and potential increase in the subsidy amount in case the NEPRA does not allow the additional financial impact to be passed through to the consumers.

Further, the Finance Division is of the view that the revenues of the power sector must be improved for long-term solution of such problems.

It is stated that these settlement were being revised to address monetary issues raised by as many as 12 IPPs, with a cumulative net capacity of 2,409 megawatt that were commissioned from March 2009 to June 2011. However, since May 2011, these IPPs have been continuously facing delays in payments by NTDC. As a result of delays in payment, these IPPs are unable to meet their obligations to lenders, fuel suppliers, operations & maintenance (O&M) contractors in time.

As a consequence, these IPPs have served and continue to serve notices of default and call on GoP guarantee under the Power Purchase Agreement (PPA) and the Guarantee, respectively. Faced with this situation, to avoid imminent default by the GoP on its sovereign commitments and ensure continued supply of fuel for generation of power, the ministry of water & power executed settlement agreements, with limited duration of initially one month which was subsequently extended for another two months.

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