RENTAL POWER PROJECTS: PROS AND CONS

KANWAL SALEEM
Sep 21 - Oct 04, 2009

Finally, Pakistan People's Party led coalition government has opted the option of using Rental Power Plants (RPPs) to overcome persistent electricity crisis that is not only causing great amount of hardships for the fellow citizens but also hitting hard to country's economy.

There is much hue and cry from political and other circles over alleged kickbacks in deals of RPPs. Pakistan Muslim League-Nawaz has already announced to issue a White Paper on RPPs while another opposition party-Pakistan Muslim League (Q)- is also at the forefront in highlighting alleged wrongdoings in the execution of RPPs.

Sources in PEPCO told PAGE that RPPs would provide electricity at a quick speed compared to IPPs which will reduce power deficit on an emergency basis. These rental projects are for five years and its costing responsibility rests with private sector investors.

The contract life of these projects is between 3-5 years, after which the government has no obligation to purchase power from these units.

According to them, it is incorrect to suggest that rental power costs are substantially higher than that of IPPs. Due to different tariff of rental plants, even after taking into account the high fuel costs, the cost difference is almost equal or marginally higher in case of RPPs.

Compared with IPPs, RPPs power generation cost ranges between 12-13 cents per KWh, and IPPs' power generation costs approximately 12 cent per KWh.

Government circles are of the view that mere blame game is going on just for the sake of leg pulling. There is nothing wrong in RPPs and the only viable option to get rid of load shedding is rental power plants, they believe. They said rental tariffs for the projects depended on number of factors including location of the plants, system maintenance, and consumption of fuels.

Others factors are variation in project cost due to difference in technology, age of machinery, and variations in financing.

As many as, 14 approved RPPs with total generation capacity of 2250MW will start functioning by December, which would expectedly end the energy crisis.

However, critics of RPPs are of the sanguine view that highly controversial RPPs are proving last resort to overcome the power crisis, which has hit hard the economic growth of the country besides adding salt to public miseries at large.

The political government has surrendered to public pressures on construction of Kalabagh Dam, the only way to survive ahead and instead preferred to go after a stopgap arrangement at a higher cost.

The independent experts are of the view that RPPs would not only fail to meet rising electricity demand but also burden the national exchequer in general and power consumers in particular.

The public is justifiable in questioning that if RPPs are the option, why it is adopted too late.

According to Pakistan Electric Power Company (Pepco) Managing Director Tahir Basharat Cheema, an investment of around US $2 billion is expected in power sector through RPPs. Apart from investment in power sector, additional electricity of 1675 MW will be added in the system by December 2009 when nine rental power projects will start generation.

However, overall 2250 MW electricity will be generated through RPPs in current fiscal year (2009-10). Two rental power projects that have already started generation include Atlas Power (213 MW) and Attock Generation (156 MW) while remaining seven will start functioning by December 2009. These RPPs include Nishat (196 MW), Engro (203 MW), Saif Power (213 MW), Fauji Foundation (176 MW), Sapphire Electric Company (213 MW), and Orient Power Company (213 MW).

He said all proposals of RPPs were accepted only with bid bonds and performance guarantee by sponsors. Monthly rental payments are to be made only after commissioning of the plants while penalty will be imposed on delay in commissioning.

He said there was no pressure from the government on any bank in the public or private sector to fund any rental project, adding lenders to rental power companies had undertaken their own due diligence and had taken decisions based on their own financial position.

According to Tahir Basharat Cheema, last government was also committed to work on RPPs to overcome energy deficit problem. It is the only option in the country, as shortest possible time is required to generate electricity from RPPs.

There are several other aspects that favor the idea of RPPs. There is no need of large area for its installation unlike IPPs.

All RPPs have been selected by PEPCO and PPIB through an international competitive bidding process publicly and transparently, the sources said, adding rental projects are funded, normally on an 80:20 debt-equity ratio with banks demanding 20 percent cash upfront. They said valuation of the plant and machinery was done by reputable, independent auditors appointed by the competent forum, and who reported directly to the lending banks.

It takes three to four years for an IPP plant to be set up and generate electricity whereas for a rental power plant six to eight months are required.

Many countries including China, Bangladesh, India, Sri Lanka and UAE, Egypt, USA, UK Puertorico, Guetamala, Mexico and West Indies have successfully been implementing RPPs to meet their emerging electricity needs.

With a demand-supply gap of about 3500 MW, the government is working to bridge the immediate gap besides building an additional capacity. A short-term solution to resolve the current energy crisis is crucially needed and the thermal rental power plants are the only solution available on short term and immediate basis.

Critics argue Rental Power Plants will only cause more financial difficulties for power consumers and it would be difficult that the RPPs would help bridge gap in demand and supply of electricity.

They are of the view that real issue is circular debt and despite promises, the government has failed to clear outstanding dues of IPPs, which are increasing. The government owes over 32 billion rupees to one of IPPs i.e. KAPCO. This is alarming for IPPs and the situation vis--vis electricity shortfall cannot improve without finding out solutions of real problems. According to them, the existing IPPs have capacity to meet gap in demand and supply of electricity and the need is to clear their dues so that they could work with their full capacity.