IS RENTAL POWER ONLY VIABLE OPTION TO END SHORTFALL?

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Sep 21 - Oct 04, 2009

Rental power projects are attraction to opportunity cost seekers across the world. They guarantee immediate return on investment due to their short span of commissioning. In Pakistan, international bidding for rental power projects always meets an exciting response from investors endorsing a belief that there is an insatiable market appetite for this segment of power sector. Government seems to avoid issuing awards to rental power projects due to its cost ineffectiveness, agreed by government officials several times, and recently by Minister of Finance, notwithstanding its rapidity in granting licenses to rental power sponsors. It is interesting to note that out of several requests for proposals sent to independent power producers (IPPs) and rental power producers since May 2008, only rental power projects turned out to be qualifiers. And, not a single IPP went beyond bids; barring few whose agreements were also nullified for a reason best known to Private Power and Infrastructure Board (PPIB) - a government body to evaluate bids. Three IPPs projects of gross 929 MW capacity were abrogated because of non-provision of bank guarantees by their sponsors, according to an official document. These plants were expected to run service by December 2009.

There are around over 1,694 MW IPPs projects are under implementation and which have already crossed their due deadline of becoming online i.e. second half of 2009, the document suggests. As per cross verification of different reports, it is safe to assume that there is a growing demand and supply electricity gap of approximately 4,000 to 5,000 MW in the country. It should not be construed as merely incapacity of production since decrepit transmission and distribution and underutilization of capacity are two other important factors. The serious power crisis owing to inability of Geckos (generation companies) to match rising demand of electricity in the country forced this government to invite bids simultaneously for IPPs and rental power projects in three different times. All attempts of ensuring participation of IPPs met the awful failure. Unmet payments government owed to IPPs may have been one of the reasons of reluctance of new entrant.

Rental power projects have become unavoidable necessity for the government for lackluster mood of IPPs about power production. To meet government-estimated deficit of 2000 to 2500 MW by December 2009, there has no option seemingly left with the government except hiring of rental power plants.

Last year Economic Coordination Committee set 1500 MW target for additional energy by rental power plants until December 2009. Since then, government issued nine letters of awards- green signal- to qualified parties. Cumulative production of these power plants is calculated at 1248.8 MW. The plants would be commissioned by yearend, thereby adding the volume to the national grid. After first round of international competitive bidding (ICB) two rental power projects: Karkey (231.8 MW), and Walters (205 MW) were licensed to be commissioned by December 2009. Second round saw approval of further two rental projects: Gulf Rental Power (62 MW), Independent Power Private Ltd. (200 MW). According to the document, third and last round of international competitive bidding resulted in approval of five rental projects with gross production capacity of 550 MW.

Rental power plant is considered most unfavorable mode of adding electricity to the national grid amongst the list of other power generating options because of its exorbitant price and uncompetitive cost of outputs. Its dependency on thermal sources like gas and furnace oil makes it cost-ineffective. Ordinarily, the plant is hired for a predetermined time, and power purchaser accrues monthly rental fees.

Government approved nine rental power plants after comparing the reference tariffs submitted along with the proposals by the sponsors. This reference tariff included rental charges per kwh plus 1.2 times the fuel charges per kwh for the first two ICBs whereas 10% weightage was assigned to commissioning time in the 3rd ICB. The document revealed that government accepted bids that had bond of $1,000 MW and awarded projects only based on $5,000 per MW performance guarantee by the sponsors.

The shortest period in which rental power plant comes in to action is however its inimitable characteristic. Private Power and Infrastructure Board estimates 6 to eight months a rental power plant, fast track project, takes to become fully operationalized after contract signing, advance payment and fulfillment of other prerequisites.

Rental power project may be a viable option to lessen electricity demand-supply gap over the short run, but there is a need to reconsider whether burdening the economy with makeshift (and palatial) thermal energy sources is sensible under present strained budget. Rental power cut both ways. The disadvantages will outgrow advantages however, since oil bill will increase, gas reserves deplete, and tariffs will become highly uncertain while producing electricity from rental power plants. Only spending amount on rehabilitation of existing generators and promoting energy conservation can give out positive outcomes. Energy efficiency and conservation are what the USAID suggests two saviors of energy deficient country.

United States Agency for International Development (USAID) has recently detected 5,000 MW shortfall in the system, which it says, is potential threat to Pakistan's economic and social stability. Pakistan as high cost energy producer and with low energy efficiency makes it not easy for the agency to recover all energy that is lost. Therefore, the agency plans to reduce shortfall by 1500 MW-that is so within three years-under its recently started programme 'Empower Pakistan: Energy Efficiency and Capacity Building' through multi-faceted approach including conducting energy audits of firms, facilitating a shift to energy-efficient equipment, improving building codes, and launching public information campaigns. USAID assists government of Pakistan to prepare feasibility studies on different sectors and extends funds for the development of economic and social sectors.