ISLAMABAD: The government has estimated a modest reduction of Rs 0.50 per unit in electricity tariffs for consumers following the revision of agreements with seven Independent Power Producers (IPPs), projecting cumulative savings of Rs 920 billion over the entire lifespan of these IPPs.
These savings stem primarily from reductions in capacity payments to the IPPs. However, they remain modest compared to the country’s total annual capacity payments, which range between Rs 2.5 trillion and Rs 2.8 trillion.
During a public hearing on the revised tariff structure, the National Electric Power Regulatory Authority (Nepra) was informed that consumers would benefit from a Rs 0.50 per unit relief as a result of renegotiated agreements with seven IPPs. These include Nishat Power Limited, Nishat Chunian Power, Saif Power, Sapphire Electric, Engro Power, Norwal Energy, and Liberty Power Tech Limited.
Concerns were raised during the hearing about whether the IPPs were coerced into accepting the revised terms. However, officials from the Power Division strongly denied these allegations, asserting that the agreements were reached voluntarily and without pressure.
They further clarified that some IPPs, such as Orient Power, had declined to join the revised framework and were therefore not included in the current tariff petition. Negotiations are ongoing with other reluctant IPPs, as the government aims to expand the scope of revised agreements. So far, 29 IPPs have signed amended contracts.
Regarding the impact on consumers, officials reiterated that the reduction in tariffs—up to Rs 0.50 per unit—depends on electricity sales volume. If electricity sales are low, the relief may be negligible. Conversely, higher sales volumes could lead to a greater reduction in electricity bills.
Intervenors at the hearing also questioned the rationale behind fixing the price of furnace oil at Rs 165,000 per ton, especially when local consumption is nearly non-existent. It was noted that around one million tons of furnace oil had already been exported by local refineries.
Government officials responded that any reduction in furnace oil prices would be passed on to consumers. They also noted that pricing volatility is now linked to the Karachi Interbank Offered Rate (KIBOR), which has been revised from a fixed 4.5% to KIBOR plus 1%, making future cost adjustments more transparent and market-based.
Concerns were also voiced regarding the International Monetary Fund (IMF)’s stance on passing relief to consumers. Intervenors cited reports suggesting that the IMF had opposed any move to pass on tariff relief resulting from revised IPP agreements.
In a significant concession under the new terms, the seven participating IPPs have agreed to waive a cumulative Rs 11.19 billion in Late Payment Surcharges (LPS), offering further financial relief to the government. The waived LPS includes: Nishat Power Limited (Rs 1.77 billion), Nishat Chunian Power (Rs 1.84 billion), Saif Power (Rs 1.60 billion), Sapphire Electric (Rs 1.39 billion), Engro Power (Rs 1.70 billion), Norwal Energy (Rs 1.50 billion), and Liberty Power Tech Limited (Rs 1.35 billion).
These IPPs had previously received regulatory notices from Nepra over allegations of excess savings. The matter had been challenged in court, but under the settlement, Nepra will now withdraw the notices. In return, the IPPs will repay excess profits earned up to 2023.
According to the application submitted to Nepra, the Operation and Maintenance (O&M) components for Nishat Chunian Power Limited (NCPL) and Liberty Power Tech Limited (LPTL) will be revised as per the amendment agreement. For other IPPs, the Nepra-approved O&M rates for the quarter ending September 30, 2024, will remain in place.
Indexation for O&M costs will be capped at the lower of 5% per annum or the average National Consumer Price Index (NCPI) over the preceding 12 months. While up to 70% of annual PKR/USD depreciation will be allowed in the indexation, 100% of any appreciation will be passed on to consumers.
Regarding the foreign cost of working capital (CWC), the revised structure includes seven days of inventory at a 100% load factor for Residual Fuel Oil (RFO) and 15 days of receivables at a 15% load factor for gas-based plants. The RFO price has been set at Rs 165,000 per ton (excluding sales tax), which will now be removed from the CWC component.
Additionally, the spread over KIBOR for CWC has been reduced from 2% to 1%, with future CWC indexed at KIBOR + 1%. The insurance component has also been capped at a maximum of 0.9% of the allowed Engineering, Procurement, and Construction (EPC) cost.
