The CPPs is to some extent a substitute to development of generation capacity


By Muhammad Bashir Chaudhry
Nov 17 - 23, 2003




With the intent of helping the government redrafting policies on energy, the Engineering Review organized a Panel Discussion on "Power Policy of Pakistan in Next 10 Years" at Karachi on 9th October 2003. The Panel comprised senior officials from the Private Power and Infrastructure Board (PPIB), Wapda, KESC, a Senator and a number of industrialists, university professors, electrical consultants and other professionals. Beside, a number of senior electrical engineers and professionals were present in the audience. The proceedings started with an excellent presentation on Power Policy 2002 by the PPIB official. The Senator, who is also a top industrialist, shared his experience and enthusiasm in the promotion and use of local coal for industry and power generation. Panel discussion was frank and the audience fully participated. Some shortcomings in the existing policies/procedures were identified and a number of recommendations were developed for submission to the government. One recommendation pertained to the need of a clear policy for the setting up of the small power plants and the captive power plants (CPPs). The CPPs refer to generation from units set up by industries largely for their own consumption.

The Power Policy 2002 stipulates that Small Power plants up to 20 MW (50 MW) will be implemented through a one-window facility available at the provincial/AJK level, under the Policy or the provincial/AJK policy. It has been further said that fiscal and financial incentives/concessions outlined in the Policy will be available to these projects. In this context it may be mentioned that the NEPRA has already issued generation license to 15 small power projects (having aggregate generation capacity of 300 MW) while applications of about 20 plants are under consideration. None of these plants have been issued the distribution license. Total power generation capacity of all these small/captive plants may be around 1,000 MW and would possibly grow further in the coming years. A large number of these plants are actually the CPPs, for promotion of which clear policy guidelines are needed. In the Panel Discussion it was said that at present the CPP entrepreneurs sometimes visit Wapda and other times the PPIB but no one appears clear as to who is authorized to provide policy guidelines on such plants. Many of the existing CPPs are in a position to sell extra power to the national grid or industries other than that of the group but things do not progress due to ambiguity on applicable policies. These CPPs might be recognized as a separate group of power generation plants and policies might be drafted for governing their operations.

The CPPs are not alien to the electric power scene of Pakistan. In a way the power generation plants installed in most of the sugar mills, textile mills, cement plants, fertilizer factories, etc. fall in this category. The power-intensive or continuous process industries started setting up CPPs mainly as a back-up source of power to protect themselves against unreliable power from electric utilities. With increasing irregularity of power from the utilities, industries started using captive power as a full-time source of power. Captive power proved to be more reliable and over a longer run, even cheaper than power provided by the utilities. The CPPs are expected to continue in vogue as long as power supplied by the utilities remains irregular and unreliable.

The CPPs play a crucial role for competitiveness and profitability of the power-intensive and continuous process industries. Electricity breakdowns, even for a few minutes, adversely affect production flow and deteriorate quality of the product. Breakdowns of longer duration cause production loss, deterioration in quality and higher wastage. Each interruption in power supply translates into financial loss to the company concerned. Electricity interruptions for longer duration and with more frequency might disrupt delivery schedule and cause losing of good business. These are real losses and when added to the cost of electricity, the overall per unit electricity cost to the business is more than that actually appears in the tariff charged by power utility. Such a situation is not sustainable. The industries, other than power-intensive and continuous process, are also adversely affected by supply interruptions but to them financial cost is relatively lower.

The industries normally expect the power utility to take effective steps for improving reliability of power supply. However, if the industries feel that the things with the power utility are not going to improve to the desired level in the coming months, they build the CPPs through additional investment financed by internal cash generations or by bank borrowings. Globalization and the WTO regime are causing enhanced competition in trade and industry. Every rupee counts and these manufacturers may not be burdened with losses due to frequent interruption of power being supplied by the utilities. Such losses might be minimized, if not totally eliminated.

The spread of CPPs might have adverse impact on the electric utilities, in ways such as: (i) Industrial load is the main source for cross-subsidising revenue flows; (ii) Non-optimal growth of the power sector; (iii) Problems in grid management; and (iv) Adverse environmental impacts arising from types of fuels used and from higher emissions per unit of production as compared to large power plants. Electric utilities could rightly oppose installation of the CPPs if they were providing reliable power or if that they were fully compensating the industries for the losses due to frequent and prolonged interruptions in electricity supply. The utilities are not doing that and perhaps might not be able to do that for some time. Wapda and KESC are in the process of revamping the power systems and billions of rupees are being allocated by the government for the purpose. This is good news but it might take longer to revamp the entire system as the task is gigantic and for which sufficient resources might also not be readily available. In the circumstances, the CPPs appear a good alternative and might be encouraged.



The planners usually prepare power supply-demand balance for a number of years. In arriving at the generation capacity surplus/deficit in the coming years, it is felt that the assumptions made for determining the firm generation capacity are optimistic. Thus, there is high probability that the country might face shortages in generation capacity earlier than the year 2005-06 in which for the first time there has been shown a deficit of 411 MW. Moreover, some of the new plants envisaged to be available might get delayed as usually happens in the country. In view of this it would not be improper to assess the actual firm generation capacity and take opportune actions to meet the shortfall.

Given the chance, many industries might consider setting up the CPPs to utilize waste gases or materials generated during the manufacturing process. They may also consider generating electricity from burning of municipal solid waste generated by large cities such as Karachi and Lahore. Such generation helps in waste management and the overall cost of power generation is also not relatively high. The CPPs have low gestation period and can be financed based on the balance-sheet of individual companies. Willingness from sponsor to provide support and guarantees may have positive impact. The CPPs appear to have the potential to enhance power supply in an economic manner.

Looking from another angle, the installation of the CPPs is to some extent a substitute to development of generation capacity under the IPPs that are more difficult to finalize and the tariff is generally on the higher side. In India, as the State Electricity Boards (SEBs) participated in power generation, initially most of them were against the concept of CPPs; in spite of the fact that most of them were power deficit and the country had been experiencing power shortages. In recent years, the attitude of many states has changed. The IPPs that promised to usher in breakthroughs in power availability have either been non-starters or failures and the chronic shortage of power persuaded several SEBs to allow the CPPs as an important option for industrial development. Depending upon situation in different states, there are, however, major dissimilarities in policies on certain aspects of the CPPs. The estimates on the CPPs capacity in India are placed around 20,000 MW.

For facilitating setting up of new CPPs on proper lines and for enhancing effective utilization of existing capacity, it is suggested that clear policy guidelines are finalized in a participatory, fair and transparent manner. Areas that need to be covered in the guidelines might include:

1. Approving Authority: (i) The authority which will give permission for the installation and operation of the CPPs and monitor compliance with prescribed specifications, operational and maintenance standards from among the respective provincial government, PPIB, NTDC or NEPRA; (ii) The authority shall grant/renew or refuse the consent within 3 months from the date of receipt of complete application; (iii) If the authority has any objection to the grant/renewal of the permission, such objection(s) shall be furnished to PPIB/Nepra with a copy to the applicant; (iv) The submission of a feasibility report with the application for the CPPs on prescribed format; (v) Fee structure for processing the CPPs requests, the renewal of approvals and the monitoring during concession period; and (vi) A No Objection Certificate from the power utility in whose franchise area the proposed CPPs will be located.

2. Technical Matters: (i) Minimum technical specifications of the CPPs including transmission lines, transformers, meters, etc. desired for safety and environment considerations; (ii) Upper limit of capacity in MW beyond which the industries would not be allowed. The CPP capacity to be linked with the total sanctioned load of the partner industries to be supplied electricity; (iii) Identification of the fuels on which the CPPs are allowed to be set up. Relief from duties and taxes on fuel used in the CPPs for the export industries; (iv) Different levels of approval depending upon larger or smaller capacity of the CPPs; (v) Inter-connection with the national grid and who bears the cost; (vi) Transmission and wheeling to be allowed or not. If yes, conditions governing wheeling, wheeling charges, transmission losses and grid support charges to be collected by NTDC; the basis for determining the charges to be specified; and (vii) the banking of surplus electricity generated with NTDC or Discos and the settlement thereof.

3. Self-Use and Third-Party Sales: (i) The entities to set up the CPPs for meeting their own requirements of power; and whether a number of industries can make a joint venture to meet their electricity needs, even though the industries are not located in close proximity. In a few cases the partners might construct their own transmission lines while in some other cases they might require wheeling facility from the power utility against payment of agreed wheeling charges. An entrepreneur may set up a captive power plant for his own industry or even without having an industry of his own; (ii) Third party sale of surplus power to be allowed. Any restrictions on how much power can be so sold and the number of industries/customers to be serviced in this way; and (iii) Basis of tariff for purchase of power by NTDC from the CPPs being uniform to all the CPPs or different for each CPP.

4. Fiscal And Financial Regime: (i) Exemption from customs duty, sales tax, excise duty, provincial taxes, etc. for the CPPs and the period of exemption to be specified; and (ii) Facilities in the raising of loans and equity for the CPPs.

5. Miscellaneous: (i) Survey of existing CPPs capacity and the fuel base; and (ii) Limits on CPPs capacity as % of total capacity in the coming years.