IPPS - A DEPENDABLE SOURCE OF ELECTRICITY

It is still not too late and the establishment of new IPPs can help overcome the power crisis.

SHABBIR H. KAZMI, Special Correspondent
Feb 26 - Mar 04, 2007

Electricity generation, transmission and distribution in Pakistan are presently undertaken by two vertically integrated utilities - one in the public sector and the other in the private sector. These utilities are Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC). WAPDA supplies power to all of Pakistan except the metropolitan city of Karachi and some of its surrounding areas, which are fed by KESC. The Independent Power Producers (IPPs), operating in the private sector, are making significant contribution to the total power generation. However, the latest reports show that the country is once again heading towards serious electricity crisis.

Transmission systems of WAPDA and KESC are interconnected through double circuit transmission lines. WAPDA as well as two IPPs located in KESC's franchised area supply electricity to KESC. The rising share of private sector in electricity generation and presence of some of the leading foreign and local companies in this business is an evidence of Pakistan being an ideal investment destination.

Keeping in view the electricity demand patterns and lack of funds in the public sector, the Pakistan government decided to mobilize private sector resources by inducting it into power generation. In November 1985, the government announced measures to encourage private sector participation in the sector. These initiatives were followed by the announcement of successive power policies in the country. The first successful Power Policy was announced in 1994, followed by Hydel Policy and Transmission Policy in 1995, revised Power Policy in 1998, and finally the Power Policy of 2002.

The 1292 MW Hub Power Project (HUBCO) was initiated at the same time, which was the first private sector power project of its size and kind in the entire world. It took almost 12 years for HUBCO to become fully operational; it commenced commercial operation in March 1997. Currently, there are 16 IPPs operating in the country, which have been implemented on a Build, Own and Operate (BOO) basis, mainly under the Power Policy announced by the government in 1994. These IPPs have an aggregate power generation capacity of approximately 5,500 MW.

In March 1994, the government announced its first ever Private Power Policy, which essentially comprised a well thought out package of incentives to attract foreign direct investment (FDI). The policy received enormous response. The incentive package offered through the 1994 policy were comparable with the incentives offered by other countries. Private Power Infrastructure Board (PPIB) was created to offer one window facility to eliminate unnecessary delays in finalization and approval and implementation of the projects.

It is often said that after the induction of IPPs the consumer tariff has been increased. However, IPPs alone cannot be blamed for the tariff hike. The tariff hike can be attributed to a number of factors, including increase in the furnace oil prices. According to some analysts, after the completion of debt servicing period the consumers are expected to get the real benefit of IPPs. The Bulk Power Tariff (BPT) offered by Pakistan was comparable to the IPP tariff in other Asian countries. As per a research conducted by a famous international firm the BPT was the third lowest amongst the list of 14 IPPs of some other countries of the Asian region.

It is often said that the working environment for IPPs is hostile, which is totally incorrect. They have initially faced turbulent period because of policy stance of Benazir and Nawaz Sharif governments. The misgivings and hostilities were the result of lack of understanding of the policy and ironclad agreements. After loss of billions of rupees on the legal battle and a dent to the government credibility both the sides - IPPs and the government - learnt to live together. The investors have shown interest in investing in power generation; in fact the response has been encouraging.

OUTLOOK

There cannot be two opinions about the contributions made by the IPPs, though one can argue about the incentives offered to them. However, one must always keep in mind the poor sovereign rating of Pakistan at that time forced the government to offer all the conceivable incentives to ensure establishment of power plants. Many critics say that the country might have succeeded in attracting investment in power generation but most of these IPPs are of small size. In fact Pakistan needs IPPs of HUBCO size that offer economies of scale and synergies.

It is regrettable that the country has not been able to attract fresh investment in power generation in the recent past. While the demand for electricity is on the rise failure in adding new capacity is bound to create shortfall, leading to frequent and longer hours of load-shedding. Still, it is not too late and establishment of new IPPs can help overcome the power crisis. As compared to hydel projects, thermal plants have shorter gestation period.

IPPs have helped the country overcome electricity shortage in the past and have the potential to add new generation capacity. Ideally, HUBCO and KAPCO are in a position to add new capacity in the shortest time. However, the point worth considering is will they be interested in adding new capacity. Keeping in view the earning potential and urgency to add new capacity any sponsor should be keen in taking the advantage. Why not help the existing players having credible track record?

Privatization of KESC has opened a new chapter in the history of power sector in Pakistan. Reportedly, the meeting of its Board of Directors is scheduled for 24th February. The most important item on the agenda, besides approval of half-yearly accounts, is approval of the contract for new power plant. At present KSEC buys electricity from Gul Ahmed Energy and Tapal Energy having aggregate dependable capacity of approximately 250MW. KESC is also dependent on WAPDA for meeting the shortfall.