INDEPENDENT POWER PRODUCERS
Research Analyst, PAGE
July 13 - 19, 2009
In Pakistan, private power producers control about 30% of the total generation capacity. The electricity market was opened to IPPs in 1990. Subsequently, 15 IPPs achieved commercial operations in record time under the first generation PPAs. For several years afterwards, the IPP program remained stagnant, only to have been revived after a huge power shortage hit the country in 2006-07. As a result, implementation agreements have been signed with several IPPs to contract about 2,500 MW of capacity by 2009-2010 under second generation PPAs (those signed under Power Policy 2002). In a regional context, Pakistan offers a relatively sophisticated operational and regulatory framework for the IPPs.
ANNUAL EXPECTED CAPACITY (IPPS) IN PAKISTAN
YEAR (MW) 2009 2543 2010 1201 2011 1268 2012 482 2013 2651 Total 8145
The Engineering, Procurement & Construction Contract (EPC) governs the contractual relationship between the IPP and the turnkey contractor, and outlines the scope of work, rights and responsibilities, the construction period during which the contractor is responsible to design, construct, complete and commission the power complex as well as the turnkey contract price. EPC constitutes almost 85% of the total project cost. Hence, a lump sum fixed price contract would be favorable to the IPP as the first layer of protection against cost overrun arises from any unexpected increase in variable contract costing above the budgeted cost. The EPC contract ensures that the IPP is protected against any cost overrun and delay risk, as these risks have been passed to the turnkey contractor through the back-to-back liquidated ascertained damages arrangement in the turnkey contract.
POWER PURCHASE AGREEMENT
AREAS OF DEVIATION FIRST GENERATION PPA SECOND GENERATION PPA Agreement period 30 years 20 years Determination of Tariff Cost Plus basis International Competitive Bidding (ICB) Currency denomination of tariff US Dollar Pakistan Rupee Nature of tariff Bulk tariff Two part tariff through ICB GoP exposure to exchange rate risk Yes No Average Tariffs Higher Lower Risk sharing GoP Guarantee for obligations of power purchaser and fuel supplier GoP Guarantee for obligations of power purchaser but not for fuel supplier Performance standards for operational IPPs Less Stringent More stringent Right of Renegotiation None None
Power purchase agreement (PPA) is signed between IPP and the purchasing utility. Thus, the PPA is the first thing that shall be carefully reviewed. To date, in Pakistan, there are two types of PPAs, the first and the second generation PPAs. The PPAs for the first generation IPPs were signed under the 1994 power policy of Pakistan. The second generation IPPs is signed under the 2002 Power Policy of Pakistan. The majority of commissioned IPPs in Pakistan are working under the first generation PPAs. Hence, the second-generation PPAs are largely untested.
For an IPP project, the capital structure is an important consideration. In Pakistan, IPPs are usually structured on an 80:20 or 75:25 debts to equity ratio. The equity requirement is to ensure commitment on the part of the project's sponsors. Projects with high equity participation will enjoy greater financial flexibility, as returns on equity, such as dividend payments, can be deferred during time of stress as opposed to debt service, which follows a fixed repayment schedule. The debt to equity ratio is an important indicator of the capitalization structure.
The off-taker for IPPs is the purchasing utilities: NTDC/WAPDA/KESC. The credit strength in terms of the ability and willingness of the off-taker to pay its obligations are assessed. In Pakistan, the GoP, under its sovereign guarantee, covers all obligations of the power purchaser. As is the case of any other sovereign, GoP with its sole authority to print local currency, is not likely to default on its local currency obligations. This acts as a mitigant of off taker risk, which, otherwise happens to be in a financially distressed state. Also, globally, there is not a material instance of an event of default on local currency payment occurring for an IPP and invoking of the sovereign guarantee.
ISSUE STRUCTURE ANALYSIS
TOTAL INSTALLED GENERATION CAPACITY (MW)
INSTALLED CAPACITY 2007-08 INSTALLED CAPACITY 2008-09 1 WAPDA 11,654 11,454 . Hydel 6,474 6,555 . Thermal 5,180 4,899 2 IPPs 5,760 5,954 3 Nuclear 462 462 4 KESC 1,690 1,884.0 Total 19,566 19,754 Various sources
Issue structures for IPP financing in Pakistan are generally backed by exclusive charge over assets. The issue structure spells out the principal terms, conditions and covenants of the debt facility, such as repayment, security, and designated accounts. Terms, conditions and covenants under the issue structure are directed towards ensuring the solvency of the project and the requirement of the IPP to manage its cash flows and service its debt obligations.
Pakistan has great potential, in terms of its both natural and human resources, and has good forward-looking development agenda and plans. Pakistan needs to clearly take concrete steps to pull the power sector out of its current state of decay. Clearly, the IPP's can play a much wider role in this regard and can contribute much for Pakistan's future. Time has proven that only the private sector can lead the country to prosperity.