WAPDA'S NEW LOVE FOR IPPS
Wapda by submitting the present proposal has raised a valid point for consideration by the Government
By MUHAMMAD BASHIR CHAUDHRY
July 15 - 21, 2002
Wapda has been lately subject of not so kind comments from different quarters ever since the press reported its submitting a proposal to the Ministry of Water and Power (MW&P) for permission to set up 1200 mw new thermal generation capacity, 600 mw each at Faisalabad and Multan. Wapda officials have attempted to clarify the position. This has helped but not much as the press criticism continues. The comments, surely made in good faith and perceived as in the best interest of the country, have thrown up a number of points that, in my view, need satisfactory resolution for forming a positive opinion for the new capacity and its rationale. New thermal capacity is gas-based and is an emergent measure to avoid severe load shedding in the coming 2-3 years, as hydel capacity cannot fill the supply gap in the timeframe available. Wapda, in spite of its past position vis-a-vis IPPs, has taken a bold step by proposing addition of new thermal power capacity at a time when popular wish is for new hydel power plants.
The authorities are urged not to dispose of Wapda's proposal summarily as it pertains a possible grave situation visualized presumably on the basis of the demand-supply projections under different scenarios and by using a set of probable annual load growth rates for the next decade or so. Moreover, it provided food for thought for important issues such as the proposed Power Policy-2002 including policy regarding new thermal capacity in the public sector, future of GOP's LTCF for financing IPPs, situation developing in the post KESC privatization scenario. In addition, the points raised in the press against this proposal should also be considered fully and all misgivings in the minds of local population and the foreign investors might be effectively removed. This may not be an easy and quick exercise and might require lot of work at different levels. This paper is an attempt to briefly list the steps for consideration by the GOP / Wapda for delineating an appropriate course of action in consultation with the international financial institutions. In order to put the things in proper perspective, main points of the proposal, the issues raised in the press, and Wapda's initial reaction to the comments, are first briefly stated.
Wapda proposal: It was first reported in the press on 14th April as a major policy reversal. Wapda was quoted having recently written to MW&P seeking permission to set up 1200mw gas-based thermal IPPs to meet energy shortage expected in the next 2-3 years. MW&P is reportedly processing Wapda's request. Main points about this proposal as gleaned from the press reports are as under:
There had been surplus power of around 1500 mw, but due to low availability of water in Tarbela and Mangla Dams during the last three years, hydel power component has reduced drastically. Wapda estimated that with no significant improvement in the availability of hydel power or gas supplies during the December-April period and expected load growth of six per cent, the shortfall in power supply during winter of next year was expected to range from 300 to 600 mw. As such if immediate measures were not initiated the country might face a situation similar to that of 90's when load shedding had forced the government to accept high tariffs of IPPs.
Wapda submitted the proposal to the MW&P for establishing two 3x150mw combined cycle stations, one each at Multan and Faisalabad within 2-3 years. From financing and ownership point of view, Wapda suggested two options. One, that the government should persuade donor agencies like the World Bank and Asian Development Bank to extend soft loans for these thermal stations for development within the shortest possible time, for which Wapda has its own land and other infrastructure facilities. The Faisalabad and Multan plants, if allowed to be implemented through Wapda, would produce power at around Rs1.70 per unit, which was far less than what WPADA was getting from the IPPs. Two, Wapda may be allowed to go for IPPs through international competitive bidding for establishment of two 300-450mw stations, one each at Faisalabad and Multan.
CRITICISM ON WAPDA'S PROPOSAL FOR NEW IPPS
Wapda proposal attracted lot of attention from the press and some of the related government departments. Main points mentioned in this context and on Wapda approach to the hydel generation capacity are given hereunder.
IPPS RELATED COMMENTS:
IPPs, is a move Wapda criticized for almost a decade. Wapda has condemned the IPPs and the past governments so much in the past and declared these projects against the interests of Pakistan.
The proposal contradicts the government's Power Policy-1998. Power Policy- 1994, under which IPPs were allowed, was virulently criticized that shook foreign investors' confidence in Pakistan as an investment-friendly destination. As for the corruption part of the deals with IPPs, allegation has not been proved in courts.
Wapda did not profitably use the respite provided by the IPPs, for it failed to add additional hydel power to the national grid. Instead, Wapda merely politicized itself by lashing out at IPPs and a political government.
COAL RELATED COMMENTS:
While Pakistan is short of oil and gas, it has plenty of coal, although of slightly inferior quality. It appears, Wapda does not intend to use the coal deposits, because its proposal visualizes setting up power plants away from Sindh where coal is found. This neglect of coal is in sharp contrast to the practice in many countries where coal is a major source of power generation.
Wapda has not foreseen the possibility of the use of Thar coal in the proposed power generation units at Multan and Faisalabad.
There appears hardly any firm plan at Wapda's level to give up the increased use of furnace oil and instead to switch over to either natural gas or coal.
FINANCING OF NEW CAPACITY:
One does not know where the money is going to come from for the new thermal power projects Wapda has in mind. The foreign investors have once burnt their fingers; they are not going to enter Pakistan's power sector again.
HYDEL POWER RELATED COMMENTS:
There had been powerful lobbies within the power utilities that discouraged development of hydel resources and not a single investor had been allowed during the last five years to invest in hydel power generation.
WAPDA is discouraging the hydro developers to a stage when the country is faced with immediate shortfalls and the nation is left with no option but to go for quick-fix solutions like thermal power.
The hydel-thermal combination is currently at 30:70, which should have been the other way round. Hydel power companies are being offered a tariff of US 3 cents per unit which is simply impossible while in some cases energy was being purchased from thermal producers at US 10 cents per unit even at present.
WAPDA'S CLARIFICATIONS OF THE COMMENTS
Wapda's clarification on some of the comments made against its proposal for new thermal capacity to the MW&P have been reported in the press. The clarifications on some of the points as gleaned from the press are summarized below:
Commenting on recommendations of Wapda for new thermal power stations, it was clarified that these power stations are required within the next 2 to 3 years, according to load flow studies carried out for future demand as well as stability of the power system. Load centers are located in areas of Lahore, Faisalabad and Multan, whereas the hydel power stations based are located in the North and the thermal power based stations are located in the extreme south of the country.
As regards criticism on previous IPPs, the main objection is that these were inducted without any competition and a uniform tariff of 6 plus cents was allowed to all types of thermal stations whether on gas, furnace oil, etc and installed any where in the country without taking into account the Transmission System required for linking the new power station with rest of the country. Quite contrary to the past policy, Wapda has now suggested that in case, thermal stations required are to be established through IPPs, these may be established by an open international competitive bidding basis, and the tariff of each station will be established, according to type of the station and fuel used as well as location of the station.
The impression that Wapda is against the development of coal-based power stations in the country is regretted. A task force has been established under the chairmanship of President of Pakistan for development of Thar. The feasibility on coal based power station has been going on by various entrepreneurs for the last many years, but for the first time this government has made very serious efforts to go for thermal power station on indigenous coal. In this regard, MOUs have already been signed with the Chinese Company to prepare feasibility on mining the Thar coal and establishing a power station based on coal in Sindh. The project envisages Thermal Power Station in different phases starting from 1000 mw up to 6000 mw during the next 10 years period.
Wapda is working to reverse the present hydro and thermal power generation ratio in the country, and it has taken up various hydro and coal based power stations to meet future power demand of the country under its Vision-2025, which also include development of about 10 hydro power stations with capacity of 2500 mw to meet the future power demand of the country. But unfortunately, the hydropower is available for about six months of the year i.e. from April to September, and in the remaining six months, the reliance has to be on thermal power. However, efforts are being made that the cheaper thermal power is available in the country through indigenous fuel i.e. gas and coal. Gas availability in the country is restricted to less than a half of the total requirements of Wapda and IPP; therefore, the deficit fuel has to be met from the expensive furnace oil.
Wapda is the cheapest to establish power stations through its own programme provided some soft loans are available through World Bank or other donor agencies, which is normally not encouraged these days. The second alternative, therefore, remains towards establishment of thermal stations through IPPs, and Wapda has proposed these two options to MW&P.
Wapda will not install any furnace oil-based thermal plant in future in the country, while the existing ones will be converted into combined cycle gas-fired plants. In the best national interests, in rare cases, gas-based combined cycle thermal projects could also be taken up for system stability in the load center areas like Faisalabad, Multan and Lahore. This approach has justification, as hydel power is not available throughout the year because of shortage of water. It is only possible for a maximum of six months subject to adequate flow of water. Wapda has never changed priorities in its policy of power generation from hydel to thermal but in certain cases, no one can deny the importance of thermal power. However, hydel power will continue to be top priority.
Wapda, MW&P and possibly other institutions might have to work extra hard to clarify the comments made in connection with the Wapda's proposal for new thermal capacity. Wapda has already considerably sorted out the matters with the IPPs through the MOUs / fresh agreements. Practical steps with satisfactory progress towards implementation of the hydel projects may clear the air. Wapda should take all the stakeholder in confidence so that they also support Wapda's proposal for the new thermal capacity. There is also need to share this highly technical subject of load demand forecast with the public so as Wapda's initiatives are looked in proper perspective. It will be better if Wapda releases relevant details about its operations to the public on its website, if there is one. Further, policy statements at government level might be helpful particularly these are included in the Power Policy-2002, presumably under preparation at present.
ROADMAP FOR SCREENING OF THE WAPDA'S PROPOSAL:
The Government, the World Bank and ADB are not expected to easily agree to the idea of new thermal capacity with one or more of the public sector Generating Companies as they are all committed for such capacity to be added through the efforts and initiatives of the private sector. The approach outlined in the following might be useful to handle Wapda's proposal as well as the other allied issues for streamlining the future activities:
Take stock of the conditionalities pertaining to energy sector particularly applicable to GOP, Wapda and Kesc. If there are defaults, the World Bank and ADB might insist on prior compliance.
The government and the IFIs might not buy the idea of setting up further thermal capacity in the public sector. Supposing they all agree to this, in that situation whether Wapda will be able to contribute 40 % cost of the new projects through its own resources keeping in view its present cash constraints.
The World Bank and ADB most probably would want the new thermal capacity to be in the private sector. Perhaps they might agree to joint venture between private sector and Wapda, Wapda holding minority interest. This may be another step in public-private participation and may be considered.
The need for new thermal capacity shall have to be justified on the basis of demand and supply projections under different scenarios and using a set of probable annual load growth rates. Such projections developed by Wapda may preferably be first discussed at MW&P, Energy Wing in the Planning Division, NEPRA, PPIB, LTCB (NBP), MOF and other stakeholder with a view to determine need for addition generation capacity in the specified as centers as well as in other parts of the country. This process will also help refine and improve Wapda methodology and the assumptions used.
There is need for finalization and implementation of the Power Policy-2002 of the GOP. The new policy should include all necessary checks and balances on the one hand and on the other offers enough incentives and safeguards to the private sector to come and invest in Pakistan in the present day conditions. As is the practice, the IFIs may also be contributing in the finalization of this Policy. Wapda has certain ideas about the financing of new IPPs in future in the private sector. In my view, all these ideas may be tabled and debated at the time of finalization of the Power Policy-2002.
In case there are delays in the finalization and implementation of Power Policy-2002, there may not be enough time left to negotiate fresh credit lines from the IFIs unless they are convinced of the need for new capacity and are agreeable to process the loans on fast track basis.
It is not clear how far the LTCF for financing up to 30 % of project cost through subordinated loan is now relevant. In the past large thermal power generation capacity was added by the IPPs without availing any finance from the LTCF. This issue may also need to be discussed and a decision reached.
US AID has recently indicated for restarting its operations in Pakistan. The government may consider attracting US AID to the financing of private power and for providing technical grant for various studies.
In respect of critical projects, GOP may consider allocating, out of country's huge foreign exchange reserves, part of the foreign exchange needed to make the down payments to the plant suppliers, selected as per prescribed procedures. This bridge facility in cases may substantially cut the implementation time for those projects.
Environment has assumed more importance in Pakistan now though this aspect was better covered in developing countries where this clearance is usually the among the first approvals. New Power Policy may also provide full coverage for the requirements and procedures for compliance.
Need for additional Power and the desirable fuel base can be better established through integrated energy planning. This process might be streamlined.
Conclusion: Wapda, in my view, by submitting the present proposal has raised a valid point for consideration by the Government. Naturally the calculations made by Wapda in arriving at the need for additional capacity will be checked thoroughly at various levels including at the level of IFIs. The comments and criticism on the proposal for new thermal capacity will help a lot in that Wapda and other institutions in similar position will in future make such proposals only after justification is established and is in the best interest of the country. The debate in my view has renewed the need for finalizing the Power Policy-2002, as in the absence of such a policy document; no IPP might be financed or set up in private sector in the country. Let this draft Policy be thoroughly debated at different forums and finalized after incorporating necessary checks and balances on all important issues, in the light of past experience. The stakeholders should not block the progress of essential national projects on flimsy grounds or to reap political gains. This Policy should reflect the aspirations of different stakeholders in the best interest of Pakistan.