The Bank in its 213-page report also noted that overall the Rental Service Agreements (RSAs) (i) are weak in their legal structure; (ii) do not balance the risk sharing between the electricity seller and the buyer and; (iii) have many inconsistencies.
"It may have been possible for the buyer (Pepco) to have gotten better terms if the new package had been put to the market. This, combined with the acceptance of unsolicited bids diluted the transparency, competition and equal treatment than an ICB process is intended to ensure. Against the Nepra rules, Gencos have sought its approval of the power procurement contracts with the RPPs post contract signing, raising questions about the process," the Bank further stated.
According to the Bank, the resolution of SBLC issue has contributed to delays in implementation of the programme and derailed a major objective, which was to have rental power in place by the end of December 2009. In fact, all the RPPs have been commissioned to date.
From the consumers' perspective, the Bank says that under the no-RPP scenario, in FY11 they will face a tariff of Rs 9.23 per unit ie an increase of 67 percent over two years. With 14 RPPs the tariff increases by 80 percent to Rs 9.96 per unit. In case of 8 RPPs, the tariff will increase by 75 percent to Rs 9.68 per unit. The low gas scenario is the worst from the customers' perspective, as tariff in this case will increase by 87 percent to Rs 10.33 per unit with 14 RPPs.
The Cabinet in its meeting on January 27, 2010 approved eight rental power plants on the recommendations of the ADB including Naudero-II besides six other projects at an advanced stage of implementation.
THE EXECUTIVE SUMMARY OF THE AUDIT REPORT IS AS FOLLOWS:
1. In September 2009 the Government of Pakistan (GoP), through the Ministry of Finance, requested the ADB to carry out a third party audit of the power sector including RPPs programme which it has adopted as a strategic tool to meet the country's power shortage in the short term.
2. The government owned power generation companies (Gencos) are the buyers of the power generated by the RPPs and the formal signatory of the Rental Services Agreement (RSA) on behalf of the government, a total of 19 projects with a total capacity of 2,734 MW are in different stages of processing. Of these, 8 projects with a capacity of 1,156 MW are more advanced in contractual commitments by the buyer, while another 6 projects with a capacity of 738 MW have been signed but have not had their down payments made. Five projects are without signed contracts at the moment.
3. The ADB review comprises two major parts: (i) an evaluation of the contractual framework for acquiring the proposed RPP capacity, and (ii) an analysis of the options available to Pakistan to address power demand in the short term, in the context of affordability both from the perspective of the country's financial and economic managers and the power customers.
4. The recent energy crisis has greatly subdued the country's economic growth. For sustainable development, Pakistan needs energy security which requires striking a balance between (i) affordability, (ii) demand and supply options and (iii) load shedding. The relationship between the three components is dynamic, affected by both internal and external factors. Plans cannot be cast in stone and require continuous updating. One of the major issues that requires the government's attention at the highest level is the sourcing and development of the fuels or primary energy sources that are to be converted to electricity.
5. In carrying out this work the ADB has relied predominantly on data and information provided by the GoP and its agencies from which it received good co-operation. Preliminary findings were shared with the GoP during periodic reporting and consultation to confirm the direction of the study, facilitate early awareness and decision making.
CONTRACTUAL FRAMEWORK OF THE RPPs
6. The original framework approved by the GoP/Economic Co-ordination Committee called for acquisition of this capacity through International Competitive Bidding, both by Pakistan Electric Power Company (PEPCO) and Private Power Investment Board (PPIB).
The security package in the Request for Proposal (RFP) envisaged that the Seller would get 7 percent of its total rental payments as an advance payment which is paid at the time of contract along with a confirmed Stand By Letter of Credit (SBLC) to cover the other financial obligations of the Buyer.
However, post opening of the initial bids and after the Buyer had paid 7% in advance it found that foreign banks would charge high cost of 7 to 10 percent to confirm the SBLC issued by the local banks for the Buyer. Since RPPs are emergency measures where time is a premium, it would have been prudent for the Buyer to investigate the cost of confirmation before offering SBLC to the market and definitely before making the down payment.
This weakened the Buyer's negotiating position with the Bidders and a new security package of 14 % advance down payment combined with an annual renewable GoP Guarantee to cover the Buyer's obligations, other than fuel payments which are covered under a separate SBLC was provided.
7. The provision of a GoP guarantee and a high down payment post bid is a major change under any prudent procurement guidelines as it changes the financial, equity and project risk profile in favour for the Seller. It may have been possible for the Buyer to have gotten better terms if the new package had been put to the market.
This, combined with the acceptance of unsolicited bids diluted the transparency, competition and equal treatment that an ICB process is Intended to ensure. Against the National Electric Power Regulatory Authority (Nepra) rules, Gencos have sought its approval of the power procurement contracts with the RPPs post contract signing, raising questions about the process.
8. The resolution of the SBLC issue has contributed to delays in implementation of the program and which derailed a major objective, which was to have rental power in place by end December 2009. In fact no RPP has been commissioned to date.
9. The combination of a Sovereign Guarantee and a high down payment dilutes the value of the Sovereign Guarantee as a risk mitigation instrument and could set a new benchmark for Pakistan not only for RPPs but for Independent Power Producers (IPPs) and other public private partnerships in infrastructure investment.
10. To get the best value for the security package offered and to reduce delays and hence maximise the economic benefits of the program, more upfront work would have been warranted on the contracts before inviting bids.
11. Overall the Rental Service Agreements (RSAs) (i) are weak in their legal structure (ii) do not balance the risk sharing between the Seller and buyer; and (iii) have many inconsistencies.
OPTIONS FOR MEETING DEMAND
THE LEAST COST SOLUTION
12. Prudent economics and the Nepra Act require that the strategy for meeting the demand be based on the least cost option. The Review highlights the need to take an integrated look at the energy sector given that the current crisis to a large extent is a fuel crisis caused by unexpected and unmitigated increase in Residual Fuel Oil (RFO) prices and by delays in finding a substitute for the depleting domestic gas supplies.
The shortage of gas increases the cost of power by increasing dependence on RFO and lowering efficiency and capacity for plants designed to run on gas. The available gas need to be optimised for the maximum economic benefit.
DEMAND SIDE
13. Management such as improving energy efficiency and loss reduction programs which have the least incremental cost are not getting the same priority as new supply side initiatives. The energy saved by the proposed Compact Fluorescent Lamp (CFL) program would reduce generation demand by over 1280 MW country-wide and 1,133 MW in the PEPCO system and so needs to be expedited. Similar programs have been successfully implemented in other countries.
SUPPLY SIDE
14. The Review particularly brings out the need to fully utilise over 500 MW of current installed IPP capacity not being used due to contractual and or administrative reasons and the importance of expediting cost-effective options for expansion or rehabilitation of existing plants.
15. Outside the current programme, Pakistan's first two RPPs were contracted in September 2006. The 150 MW GE plant at Sharaqpur and the 136 MW Alstom plants at Bhikki are gas fired. Due to erratic gas supply, the two plants costing about $6.02 million per month have been practically off line.
The non-availability of this capacity and the cost to the economy raises serious questions regarding the co-ordination between the power and petroleum sectors and underscores the need for an integrated look at the energy issues.
16. The Table 1 shows the comparative incremental cost of the different Options available in Pakistan for addressing the supply gap.
17. From (he international context, RPPs are considered only after potential of other lower cost options has been exhausted.
AFFORDABILITY AND IMPACT OF THE RPP PROGRAMME
18. Pakistan is currently passing through an economic slowdown with industrial output and commercial activity slowing down. The economic slowdown combined with the projected increase in tariffs is likely to slow down growth in demand for electricity. Pepco estimates of demand are based on a fairly constant GDP growth of 7.5-8% in the long term while the IMF projections indicate a GDP growth of 3-4% in the short term and converging to 5.5% in the medium to long term. The two demand scenarios-a High Demand scenario based on Pepco GoP growth estimates and Low Demand scenario based on IMF's projected GoP growth - were used for the Review. Under the Low Demand, demand grows 1,293 MW (6%) less than the corresponding demand in High Demand during FY2010 with the difference widening to 3,929 MW (15%) by FY2013. Similarly the corresponding difference in the two energy projections widen from 12,405 GWh (10%) in FY2010 to 32,555 GWh (20%) by FY2013. Despite the difference in the two demand projections, the country may or may not see a marked narrowing of the supply-demand gap, particularly peak demand, even with the suppressed demand and commissioning of committed capacity in the short term through new IPP and public sector hydel and thermal power plants.
19. The Review evaluated the likely impact of the RPP program on affordability using the PEPCO projected demand as the High Demand case and demand based on the IMF projected GDP growth as the Low Demand case. A total of 17 scenarios of supply-demand combinations were analysed. In running these scenarios it was assumed that capacity blocked due to contractual and administrative reasons is available. Analyses were done with optimal and reduced gas supplies as well.
20. As for the number of RPPs, the Review looked at the base case of no RPPs, installing only the 8 RPPs (1,156 MW) which are in an advanced contractual stage and 14 RPPs (1994 MW) which includes the 8, already signed contracts. A constant RFO price of Rs 44.818/ton and an exchange rate of Rs 83,55/US$ has been used.
21. The Review is focused on the public sector power companies area. The agreed supply of 700 MW to Karachi Electric Supply Company (KESC) has been taken as a fixed demand.
22. SIGNIFICANT FINDINGS ARE:
(i). The proposed 14 RPP program has no significant impact on reducing load shedding in FY 2010 because none of the RPP came on stream before 31 December, 2009.
(ii) The addition of CFLs would reduce the maximum load shedding by 1,133 MW under all scenarios.
(iii) If gas were available for all the gas-based plants, under the High Demand case, with CFLs, there would be less than 850 MVV of difference in Load Shedding during 2011-2013 between the 8 RPPs and 14 RPPs case. On the same basis under the Low Demand load projection there would be practically no difference in the load shedding between the 8 and 14 RPPs cases. The difference is projected to be 563 MW in 2011, and Zero in FY2012 and FY2013.
(iv) In the event of low gas supplies ie where the minimum gas requirements of 100 MMCFD for KAPCO and GTPS Faisalabad could not be met, capacity shortage increases by 700 MW under all scenarios with a negative impact on the cost of service and tariff.
(v) The end year average customer tariff in FY 2009 was Rs 5.54/kWh (6.63 US cents). The tariff at the end of FY 2010 is estimated to reach Rs 7.35/kWh (8.8 US cents) after the agreed increases of 6%+12%+6% and Including the monthly fuel adjustment from November 2009 onwards. The GoP has decided that from FY 2011 there will be no subsidy to the sector and the customer tariff would reflect full cost of service. As a result the Review projects that in FY 2011, under the High Demand projection, with CFL but without RPP the tariff will be Rs 9.23/kWh (11.04 cents), while in this same scenario but with 8 RPPs it will be Rs 9.68/kWh (11.57 cents) and with 14 RPPs it will be Rs 9.96/kWh (11.90 cents). However in the event the lower gas supply scenario prevails this tariff would escalate to Rs 10.33/kWh (12.37 cents).
(vi) From the customer perspective, under the no RPP scenario, in FY20I I they will face a tariff of Rs 9.23 ie an increase of 67% over two years. With 14 RPPs the tariff increases by 80% to Rs 9.96. In the case of 8 RPPs, the tariff increases by 75% to Rs 9.68. The low gas scenario is the worst from customer perspective as tariff in this case increases by 87% to Rs 10.33 with 14 RPPs.
(vii) The addition of RPPs helps to reduce the load shedding but does not eliminate load shedding unless the Low Demand scenario prevails. For the country's economic managers the question therefore is how to strike a balance between load shedding and affordability. The choice is between no RPPs, 8 RPPs and 14 RPPs. Under the High Demand Scenario the differential in cost of service to be borne by the economy would be Rs 49 billion and Rs 79 billion per annum corresponding to 8 and 14 RPPs which translates to an additional customer tariff increase of 8.1% for 8 RPPs and 10% for 14 RPPs respectively. Under the Low Demand Scenario, the annual differential in cost of service reduces to Rs 22 billion and Rs 44 billion for & and 14 RPPs respectively, mainly due to drop in energy generation requirements from RFO based plants. The corresponding increase in customer tariff is estimated to be around 3.7% for8 RPPs and 7.4% for 14 RPPs in FY2011.
(viii) In conclusion, the Review provides an analysis of the comparative cost of different options for narrowing the supply-demand gap as a decision making tool to the country's economic managers to help strike a balance between affordability and loadshedding.
TABLE 1: COMPARATIVE COST OF OPTIONS
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No Options Incremental Capital Total Cost
Cost ($/kW) (Cents/kWh)
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1. Use of Existing Stalled IPP Capacity (Comparator) Sunk cost 12.07
2. Introduction of CFL 28 0.37
3. New IPP Capacity (Gas) 862 7.06
4. New IPP Capacity (RFO) 1,388 17.31
5. RPPs (Gas) 1,020 8.90
6. RPPs (RFO) 1,466 19.46
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Note: Generation costs based on a Power Factor o160 %
Source: PEPCO, PPIB, RPP Contracts.