At the industrial front, the shortages have caused billions of rupees of losses in the form of decreased output, small businesses, unable to cope up with their energy demands, have closed down leading to an increase in unemployment. The trade deficit keeps getting worse with importers opting for other markets that promise a timely supply of goods.
Pakistan has about 20,000 MW of installed power production capacity, but that falls short of demand by roughly 4,000 MW. Instead of planning long term solutions like clearing power projects and big dan projects to boost hydro power; ignoring the much needed investment in existing plant and outdated grids; and failing to resolve massive electricity theft, the present government has brainstormed yet another short term, expensive and inefficient way of dealing with the nation’s energy crisis. At least that’s the stance of the Finance Ministry on Rental Power Projects (RPPs), the new brainchild of this government to solve the country’s energy needs.
RPPs are an attraction for opportunity cost seekers across the world. They guarantee immediate return on investment due to their short span of commissioning. Rental plants are simple cycle plants and consume marginally more fuel than combined cycle power plants which are normally set up as IPPs. RPPs are setup in a period of 4-6 months and have a life span of 3-5 years, as reported by the Ministry of Water and Power. The Government of Pakistan, on the other hand requires these projects for 5-7 years.
Last year, the Economic Coordination Committee set a target of 1500 MW for additional energy generated by RPPs untill December 2009. Since then, the government has issued nine letters of awards to qualified parties. Cumulative production of these power plants is calculated at 1248.8 MW. After the 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. Tthe second round saw approval of further two rental projects: Gulf Rental Power (62 MW) and Independent Power Private Ltd. (200 MW). The third and last round of international competitive bidding resulted in approval of five rental projects with gross production capacity of 550 MW.
The 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 government accepted bids that had a bond of $1,000 MW and awarded projects only based on $5,000 per MW performance guarantee by the sponsors.
The RPP solution has gained a lot of controversy from various sectors of the country. Pakistan Muslim League-Nawaz (PML-N) has plans to issue a White Paper on RPPs and Pakistan Muslim League (Q) is also vocally against the execution of RPPs. Amidst valid concerns of their economic feasibility, kickbacks to the government for their choice remain major national concerns.
RPPs are made up of used or second hand machinery and equipments with short life spans. They cost more, are recycled and tend to enhance losses as soon as their life finishes, or worse, may become unfeasible for use before the objectives are achieved. If we assume the average age of an RPP to be 4 years and the average rental period to be 6 years, the Government of Pakistan will pay the whole mobilization price once again - for half the period which will be 2 years – as the RPP expires in 4 years. Local newspapers claim that the Government of Pakistan is spending Rs 200 billion over the RPPs. If this is true, the government will be at a loss of Rs 100 billion on a very safe side. This claim was denied in a few days by the Ministry of Water and Power. It stated that the whole claim is false and the Government is paying only a little percentage of the total amount. “Originally 7% of mobilization advance was envisaged with a supporting SBLC. Going by the present financial crunch, it was raised up to 14% for all without any discrimination.” There was no mention of an amount in figures, or even an idea of those figures that will be paid by the Government of Pakistan in rupees. No one denies the fact that local investors are paying and risking huge amount to the RPPs.
Critiques say that RPPs are considered most unfavourable mode of adding electricity to the national grid amongst the list of other power generating options because of their exorbitant price and uncompetitive cost of outputs. Their dependency on thermal sources like gas and furnace oil makes them cost-ineffective and would increase the Pakistani power sector’s furnace oil needs by 29%, driving up its import bill and adding to pressure on the rupee and currency reserves. Pakistan currently requires 35,000 tonnes a day to feed its thermal power plants and the installation of the RPPs will increase demand to 45,000 tonnes. Opponents say the mostly second-hand equipment will be less efficient and the tariff will rise. They argue that the government would be better off spending money on upgrading and using idle existing capacity.
On the other hand, supporters of RPPs say that it is the most feasible short-term implementation to meet emergency requirements which will allow flexibility to GOP to opt for long-term hydel, nuclear, coal, other projects. They further state that no capital investment will be required from the GOP on RPPs and it will pay only for electricity supplied. If electricity is not supplied to the grid, no payment is made to the rental plants. There are several other aspects that favour the idea of RPPs. There is no need of large area for their installation unlike IPPs. It takes three to four years for an IPP plant to be set up and generate electricity whereas for a RPP, only six to eight months are required. The contract life of these projects is between 3-5 years, after which the government has no obligation to purchase power from these units.
It is true that India, Bangladesh, US, UK, U.A.E. and many other countries are successfully using RPPs. But the Government of Pakistan seems to overlook the fact that these countries have much bigger economies than ours. If these countries are spending an amount over RPPs, they do not generate the revenue to overcome the loss from the general public. The government officials must understand the message media is trying to convey to them. The media is not against the RPPs if these projects do not end up in a loss to the government or the people of Pakistan.
RPPs are risky short cuts at best. The RPP decision is not one for one individual. This is a government, renting something for the whole country; spending a huge amount when the government and people of Pakistan are surviving a severe financial crisis already. The investments have been made; let us just hope now for the best outcome of a not-so-smart move.
The 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 government accepted bids that had a bond of $1,000 MW and awarded projects only based on $5,000 per MW performance guarantee by the sponsors.
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