Authorities looking to abolish ROE of govt power plants

ISLAMABAD: The government has decided to abolish the return on equity on its power plants which generate 52 per cent of the electricity across the country and, to this effect, the task force on the power sector will initiate talks with the government power plants (GPPs) in January, 2025.

Doing away with the return on equity (RoE) of government power plants would help massively reduce their capacity payments, a senior government official told The News.

The task force on power, he said, has so far terminated power purchase agreements with 6 IPPs, with savings of over Rs411 billion in future years, and inked revised contracts based on the take-and-pay mode with 16 IPPs with savings of Rs481 billion. Whereas against one IPP, the forensic audit has begun. “The agreements with eight bagasse-based IPPs have been settled, resulting in annual savings of Rs8.826 billion and national savings of Rs238.224 billion. The task force in toto has managed to get relief of Rs1,130 billion from IPPs.”

“Now the government is all set to initiate talks with the government power plants which would also be treated as private IPPs when it comes to bringing them on take-and-pay mode. The government power plants would make no more profit on their equities as they are not meant to do business but to facilitate the masses by giving relief in tariff.”

This is how the private IPPs and government power plants would be given the same treatment. Electricity would be purchased from government power plants based on take-and-pay mode. The payment would be made only for electricity to be purchased. Return on Equity is to be paid on a take-and-pay basis. The government power plants include Gencos, RLNG-based power plants, nuclear, coal and hydropower houses and provincial government power plants. “The government would finance them only to make them operational,” he said.

The government would reduce capacity payments of its plants to the minimum level, he said. However, the government would pay the loans of its plants and would go for re-profiling of loans the government power plants (nuclear, hydropower, RLNG and coal-based power plants) got from the banks.

The government is also in contact with the Chinese government for re-profiling the loans to increase loans payment tenure from 10 to 20 years. The nuclear power plants are currently charging Rs466 billion annually as capacity charges followed by hydropower plants with Rs450 billion. However, power plants installed under the CPEC umbrella are getting Rs707 billion per annum as capacity payments.

In the recent past, interestingly, WAPDA opposed the proposal to reduce the equity return, arguing that its tariff structure subsidizes the entire energy value chain, reducing overall consumer tariffs. WAPDA highlighted that any reduction in equity return would necessitate commercial borrowing at high interest rates, increasing consumer tariffs.

The WAPDA chairman, in a letter to the finance minister, warned that reducing RoE could negatively impact loan covenants and financial strategies, potentially delaying or making critical projects like Diamer Bhasha, Mohmand dams, Dasu Hydropower Project and Tarbela 5th Extension unviable.

WAPDA has already faced an RoE reduction from 17% to 10% without indexation in August 2020, causing significant financial losses. The chairman requested that WAPDA be excluded from the tariff optimization exercise, emphasizing that further cuts could jeopardize the timely completion of strategically important projects.

The relevant officials said that in February 2021, the government reduced the return on equity of four LNG-based plants from 16 to 12 per cent. Two of these projects of 2,453 MW combined generation capacity are owned by the federal government under the umbrella of National Power Parks Management Company Ltd (NPPMCL) and located at Haveli Bahadur Shah while two other 2,442 MW plants belong to the Punjab government and are located at Sheikhupura and Jhang.

The reduction in the ROE was a part of the government’s decision to reduce capacity charges. On Aug 27, 2020, the Cabinet Committee on Energy (CCoE) decided to reduce the ROE of the state-owned power projects (RLNG IPPs) from 16 to 12pc internal rate of return (IRR) with dollar indexation. Now under the latest scenario, their remaining return on equity would be made zero.