Companies to purchase power from small producers

[Lahore_Real_Estate]

ISLAMABAD: With short-term power deficit estimated at 5,000 megawatts, the government has decided to allow distribution companies (Discos) of Wapda to enter into direct power purchase contracts with small independent power producers (SIPPs) of up to 50MW capacity under a crash programme.

Under the new policy likely to be formally approved by the Economic Coordination Committee of the cabinet at its next meeting, smaller local investors will sign sale and purchase agreements with Discos for 25 years.

The contracts will be outside the domain of the National Transmission and Dispatch Company (NTDC), commonly known as the national grid, which purchases electricity from public and private generation companies at varying tariffs and sells at a uniform rate to distribution companies.

This is a major departure from the existing power generation policies of 1994, 1997 and 2002 under which the federal government implements power projects of more than 50MW for public sector power generation companies and independent power producers (IPPs) through its one-window operation -- Private Power and Infrastructure Board (PPIB).

The policy makes another departure from the existing policies under which provincial governments are responsible for executing power projects with generation capacity of less than 50MW.



The new policy will apply to power plants using natural gas, furnace oil or diesel, coal and renewable energy resources, except for hydel power generation which will continue to remain in the provincial jurisdiction.

The ministry of water and power, which will issue “policy guidelines for power generation through small independent power projects of under-50MW capacity, is of the opinion that the departure from the existing policy has been necessitated because the provincial governments have not been able to add sufficient power generation owing to lack of infrastructure and experience to develop and monitor power generation plants.

The ministry believes that an enabling framework through the new policy will aid transformation of the power sector into a fully competitive and privatised power industry.

“These guidelines are aimed at providing a policy framework whereby the private sector is facilitated to establish, operate and manage SIPPs on a commercial basis and through bilateral contracts with Discos licensed by the National Electric Power Regulatory Authority (Nepra),” it added.

The new policy is expected to enable Discos to address capacity shortfalls within their own system instead of allowing the government to look at the capacity addition on a national grid basis and to enhance generation to meet system requirements at the local level.


The government also expects to minimise distribution losses and improve voltage profile, encourage participation of domestic engineering and manufacturing capabilities, tap huge local investment potential available with the local business community and develop power projects within the shortest possible time.

The interconnection under the SIPPs will be at the 132kv voltage level with the Disco network concerned.



Discos will be responsible to design, construct, own, operate and maintain the required interconnection facilities while tariff will be approved by Nepra in the local currency -- unlike arrangements with the existing IPPs which are paid capacity charges and fuel charges in foreign exchange.

The new policy offers the sponsors to submit proposals both for solicited and unsolicited (raw) sites for which no prior feasibility exists. The proposals for raw sites for gas-, oil- and coal-based SIPPs with a capacity below 50MW will be submitted to the concerned Disco in whose jurisdiction the raw site is located.

For solicited proposals, a transparent and competitive bidding process will be followed by Discos in accordance with the procurement laws.



The selection process will involve pre-qualification, issuance of request for proposals (RFPs) and bidding and evaluation in accordance with RFPs.

There will be a pre-announced project implementation process under which the Discos will issue letters of intent (LoI) and Nepra will be required to approve their tariff within three months of the issuance of LoI.



The sponsors will directly enter into contracts with fuel suppliers, which will lead to issuance of letters of support (LoS) by the Discos to be followed up by announcement of financial close within nine months.



The SIPPs will be free to issue corporate registered bonds, term finance certificates and shares at discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk.



Foreign banks will be allowed to underwrite the issue of shares and bonds by private power companies.

The SIPPs will also be offered fiscal incentives, including five per cent customs duty on import of plant and equipment not manufactured locally, and there will be no levy of sales tax on such plant, machinery and equipment to be used in production of taxable electricity.

The SIPPs will also be exempted from income tax, including turnover rate tax and withholding tax on imports, while repatriation of equity along with dividends will be freely allowed. The SIPPs will be allowed to raise local and foreign finance.