IPPS - PAST, PRESENT AND FUTURE

IPPs' role cannot be undermined keeping in view the accelerating economic growth

SHABBIR H. KAZMI, Special Correspondent
Nov 06 - 12, 2006

The Pakistan government aims at privatizing electricity generation, transmission and distribution business. The 1994 Power Policy clearly announced that all future addition of generation capacity has to be established in the private sector. As a result of this various Independent Power Projects (IPPs) were established, mostly of smaller capacities. Power Wing of WAPDA was also converted into corporate entity responsible for power generation, transmission and distribution. However, no major breakthrough has been achieved through the privatization of these corporate entities.

The Hub Power Company (Hubco) was established outside 1994 Power Policy. In a nutshell it was created as a result of merger of two proposed IPPs, which were conceived to overcome power shortage in Karachi in particular and in Sindh in general. The need was felt because Sindh does not produce hydel electric and its demand has to be met by establishing thermal power plant. Various international financial institutions, World Bank in particular, were catalyst in its establishment. However, to protect the sponsors of Asia's largest private power plant in the private sector all the conceivable incentives were ensured and maximum protection was provided through ironclad agreements. Hubco became a role model for international financiers but its excellent performance, gauged through dividend payout, was the outcome of all the conceivable incentives and insulation against all types of risks. However, no one should try to undermine the role played by Hubco as a reliable producer offering uninterrupted and surge free electricity at affordable cost.

Though Kot Addu Power Company (Kapco) is often called an IPP the fact is that it was a unit of Wapda, which was privatized and incidentally International Power of UK managed to get its management control. It was one of the latest and best performing unit of Wapda and has also emerged better than Hubco because of its dual fuel firing system, capable of using furnace oil as well as natural gas. Collectively, Hubco and Kapco have the largest share in total electricity produced by the IPPs.

The Karachi Electric Supply Corporation (KESC), recently privatized integrated utility, is responsible for catering to the needs of domestic, commercial and industrial consumers in its franchised area - Karachi and parts of Sindh and Balochistan. At present the peak load of KESC's franchised area exceeds 2,200MW as against its in-house dependable generation capacity of around 1,100MW. To meet the shortfall it buys electricity from two small IPPs located in its franchised area and Wapda. It also buys electricity from Pakistan Steel and Kannup.

Ever since the new management of KESC has taken over the control of problem-ridden utility, the city has been suffering from worst power interruptions and load-shedding. Even the additional direct supply from Hubco could not help in overcoming power shortage, initially due to teething problems and subsequently 'technical' reasons. This has taught a lesson to new management that it has to establish its own additional power generation capacity to ensure uninterrupted and surge free electricity to its customers at affordable cost. Many analysts are of the view that the KESC is capable to generate electricity at much lower cost than the tariff being charged by Wapda.

It may be worth mentioning that till recently the number of units billed by the KESC were less than the number of units generated in-house. Therefore, it may be right to say that whatever electricity was bought from Wapda and others it went towards transmission and distribution (T&D) losses. One must remember that the bulk of KESC's T&D losses owe to power theft, mostly done in connivance with KESC staff. The T&D losses of a utility of KESC size should ideally be around 5% or at most 10% (keeping in view the overhead distribution system, which is also highly depleted). The new management of KESC has two options either to enhance its in-house generation capacity or buy out Hubco once its power purchase agreement with Wapda expires. Ideally the two managements must sit together and work out a joint strategy. According to some analysts Hubco was established for Karachi, however, it may be another thing that Wapda became its sole customer.

GRID ELECTRICITY DEMAND PROJECTIONS

YEAR

BASELINE SCENARIO

LOW ECONOMIC GROWTH SCENARIO

ELECTRICITY DEMAND

PEAK DEMAND

Electricity demand

Peak demand

TWH

MW

TWH

MW

2005*

61

14,502

61

14,502

2015

151

31,888

121

24,923

2020

230

48,173

160

32,937

2025

361

75,636

211

43,693

Average annual growth rate (2005-25)

9.3%

8.6%

6.4%

5.7%

* Actual data from HDIP (2005) and NTDC (2005)

One needs to explore the outlook of IPPs keeping in view the construction of five dams, also capable of producing hydel electricity. The overwhelming perception is that IPPs would become redundant after these projects commence electricity generation. However, some analysts term this notion completely outrageous because 1) demand for electricity would also go up and 2) hydel power generation is not possible round the year due to changing water levels in different seasons. Having said this they also say that the nature of agreement with IPPs has to be changed from guaranteed tariff to competitive bidding. They also say that IPPs just cannot be scrapped and must continue to complement the activity of utilities rather than being the only source of supply.

Some analysts are also critical of the philosophy of those who often say "the country has excess electricity". They are incorrect because they talk about installed capacity rather than dependable capacity. The difference becomes more pronounced in case of hydel generation because they take into account installed capacity rather than dependable capacity. Dependable capacity is directly linked with water levels in the reservoirs.

It may also be worth taking into account the situation confronting the KESC at Bin Qasim thermal power plant. Ironically the company has been running the plant for longer than the stipulated hours to meet the demand. The management might have been successful in containing load-shedding but this has resulted in faster than expected wearing out of generators for not undertaking routine repair and maintenance - resulting in unplanned outages. According to some insiders these generators stopped functioning only when they broke or developed major fault.

IMPORT OF POWER FROM IRAN

Agreement Signed

NOV 2002

Contract Period

30 years

Tariff re negotiated

Sept, 2005

New Tariff

US cent 5/kWh

Previous Tariff

US cent 3/kWh

 

(expired Dec 05)

INTERCONNECTION VOLTAGE

Jackigur (Iran) Mand (Pakistan)

132 kV

Taftan

20 kV

Mushkhel

20 kV

MAX. POWER ALLOWED (AS PER CONTRACT)

Mand Interconnection

35 MW

Taftan & Mushkhel

4 MW (2+2 MW)

MAX. LOAD RECORDED

Mand

25 MW (Dec 2005)

Keeping in view the growing demand of electricity, Pakistan needs to establish more IPPs in addition to the construction of new dams. However, this time power purchase agreement and other contracts have to be signed with care. While ensuring a minimum return on equity may facilitate in soliciting foreign direct investment, there has to be more checks and balances.

Another suggestion is that the new IPPs should be based on indigenous fuel - coal - rather than local natural gas or imported furnace oil. Even the existing power plants should be told specifically to switch over from gas/furnace oil to coal. Gas should be allocated for fertilizer plants only. Fertilizer production is value addition and heating boilers is waste of most precious natural resource.

Last but not the least efforts should be made to avail power generation facilities of sugar mills. All the sugar mills irrespective of their size have power generation facilities, which are used for limited number of days ranging from 150 to 250 days. If these mills agree to become part of power generation system they could add substantial quantum of electricity to national grid. The added advantage is that all these mills are located in rural areas and could become part of a sub-grid. This will on one hand ensure additional electricity for the country and on the other hand become a source of electricity in rural areas, which are the worst victim of load-shedding.

At present there are 16 IPPs in the country with a combined installed capacity of above 5,500 MW. This is roughly one-third of the total power generation capacity of the country. Power shortage has been one of the chronic problems hampering Pakistan's socio-economic growth. By 1994 the problem had assumed an acute dimension. On a routine basis, this forced interruptions in the supply of electricity to consumers during peak hours necessitating load-shedding. The unreliable power supply has shattered the industrial progress.

This situation demands intervention by the government through adoption of policy measures aimed at mobilizing huge investment in the power/energy sector. The enormous quantum of required investment compared with limited funding potential of the national exchequer was a serious constraint. Therefore, the government took a bold initiative to encourage private sector investment in infrastructure development in the power sector.

Pakistan is blessed with around 40,000 MW of hydel power potential, of which only about 6,000 MW have so far been tapped. Pakistan also has approximately 185 billion tons of coal resources. These resources, if properly exploited, can produce hundreds and thousands of megawatts of electricity. The country needs participation of the private sector to help in setting up power plants to bridge the projected gap between the demand and supply of electricity.

Environment for IPPs is not hostile. The initial turbulent period has passed. The misgivings and hostilities which occurred during the teething time and which were the result of inexperience on both sides of the fence i.e. IPPs and the government, have now been overcome. Now there is a new rapprochement between the government and the investors. The investors are very eagerly looking forward to invest in Pakistan.

IPPS INSTALLED CAPACITY

 

PROJECT NAME

GROSS CAPACITY (MW)

1

AES Lalpir Limited

362

2

AES Pak Gen. (Pvt) Limited

365

3

Altern Energy Limited

14

4

Fauji Kabirwala Power Company

157

5

Gul Ahmed Energy Ltd. (GAEL)

136.17

6

Habibullah Coastal Power (Pvt) Co.

140

7

Japan Power Generation (Pvt) Limited

120

8

Kohinoor Energy Limited

131.44

9

Liberty Power Project

235

10

Rousch (Pakistan) Power Limited

412

11

Saba Power Company Limited

114

12

Southern Electric Power Company Limited

115.2

13

Tapal Energy Limited

126

14

Uch Power Limited

586

15

Hub Power Project

1292

Source: PPIB