The Independent Power Producers (IPPs) are once again under spotlight. They are under spotlight from the 1990s when the first IPPs were installed. This time IPPs came under spotlight for making exorbitant profits. Pakistan allowed private investment in power generation in 1994 and it attracted substantial foreign direct investment to Pakistan’s power sector.
Since the introduction of the IPPs in the country in 1994, the electricity tariffs have been rising constantly. The liberalisation of the power generation sector has drained power sector resources and trapped it into huge losses. According to financial reports of WAPDA and the Discos’, the utilities incurred a Rs. 325 million operating loss in FY17 and now it has reached to billions of rupees.
Nevertheless, the IPPs alone cost the government billions of dollars in capacity payments every year. Hypothetically speaking, this means that if all of the IPPs in Pakistan do not produce a single unit of electricity, government would still have to pay them for the availability of their capacity. The latest estimate of fixed costs versus variable costs of CCPAC states that 70 percent of costs are not variables.
The incentives include a cost plus method to determine tariffs and the cost used for tariff determination was based on assumptions, not on actual cost of IPPS. Power plants were said to be instrumental in getting very high upfront tariffs. Apart from high tariffs they had the leverage to use any technology and any main fuel they want. These seemingly unrealistic power tariffs, high inefficiencies, low payment recovery and the inability of the government to manage its subsidies mechanism caused massive losses to the country, which has been estimated to be 2 percent of GDP per annum.
Through purportedly questionable means wind power projects successfully got high upfront tariff of Rs. 12.71/KWH and levelised tariff of Rs. 15.32/KWH (world-wide Wind power tariffs are 2.6 cents/Kwh) against the assumed capital cost of $1.5-1.8 million/MW. While the installed capital cost of similar projects worldwide average at US $ 0.8 million and even in India it is less than US $ 0.7 million. Similarly, coal projects have been awarded on very high costs and high tariffs causing a gigantic loss to the energy sector. But IPPs are making profits of billions of rupees. The people of Pakistan are paying the ultimate price of high tariffs.
The IPPs made, and are still making huge profits on virtually zero-risk investments.
NEPRA determined 15 percent return on equity to IPPs but, each oil-based IPP, is receiving a profit of $27 million against a legitimate return of $6.2 million per annum. This excessive profitability is almost $160 million per IPP in the last 8 years equating to 61 percent return per annum in dollar terms on a80:20 debt equity ratio. This has only been possible as the NEPRA tariff determination procedure was manipulated and understated efficiency figures and massively overstated costs. The government tried to stop this through energy audit and NEPRA redetermination of tariffs but couldn’t succeed.
However, the policy also generated a great deal of controversy in which the independent power producers were accused of using illegal means to secure lucrative contracts. The sub-committee of Senate Standing Committee on Power has revealed that five independent power producers (IPPs) have made an exorbitant profit of over Rs40 billion in the past seven years. There are around 42 independent power producers (IPPs) that contribute significantly in electricity generation in Pakistan.
The sub-committee recommended the launch of criminal proceedings against the IPPs, confiscation of their assets and recovery of looted money if they were found reluctant to cooperate.
The National Electric Power Regulatory Authority (Nepra) acknowledged that the five IPPs registered windfall gains of Rs40.175 billion over the past seven years. These power plants got profit in the range of 35-40% compared to the permitted return on investment of 15%. These five IPPs earned more than double profits that laws allowed. They continued to mint money for seven years without any hurdle.
The committee chairman revealed that Atlas Power recorded a profit of Rs9 billion, Nishat Power earned Rs7 billion, Attock Gen Limited Rs11 billion, Nishat Chunian Power Rs7 billion and Liberty Power Rs5 billion. Only Hub Power faced loss and its return was 12%. Three out of five companies owned by the business tycoon and one of the leading industrialists of the country Mian Mansha. NAB has already initiated an inquiry against him on other charges.
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17 November, 2019