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Rental power plants in Pakistan: myth vs reality

By Murtaza Mohsin

In Pakistan, you are damned if you do and you are damned if you don’t. Not always, but more often than not. There is massive power load shedding across the country, factories and plants are closing down, manufacturing businesses and exports are down, unemployment and poverty is increasing, there are riots on the streets, trains and public property are being set on fire. Government’s response? Implement the short-term energy generation project initiated in 2007 through rental power plants to eliminate load shedding by December 2009 and work concurrently on other medium and long term thermal and hydel projects. Sensible indeed but not so to our perpetual doubters.

What is rental power?

Rental power plants are set up to meet short-term and emergency requirements of a country and are typically commissioned within 4-6 months based on available technology. Rental periods are normally 5-7 years depending on the country’s need. Rental power plants have been set up in the US, UK, India, Bangladesh, Kuwait, Sri Lanka, Turkey, UAE, Saudi Arabia, Iraq, Palestine. The concept was introduced in Pakistan in 2007 when two projects were awarded to GE and PPR, both from the US, for 150MW and 136MW each.

Pakistan needs rental power:

There is a deficit of about 5,000MW in the system and this deficiency is primarily a generation deficiency not capable of being met by better augmentation of existing plants or saving of line losses. Better augmentation and line losses can help but not solve the problem. The government has a choice of either providing power or allowing 18-hour shutdowns.

Is rental power more expensive?

Capacity, return on capital, interest on loans and loan repayments, O&M and other variable cost components comprising the rental tariff are lower than the normal IPPs as can be seen from the table below:

Rental plants are simple cycle plants and consume marginally more fuel than combined cycle power plants which are normally set up as IPPs. However, most IPPs normally first start out as simple cycle plants and are then converted to combined cycle over a period of time.

Despite the fact that rental contacts are between 3-5 years and not 20 years (as with IPPs), rental tariffs are low. When lower tariffs to rental plants are taken into account and a further allowance made for higher fuel costs, the difference is almost equal or marginally higher in case of rental plants. Therefore, it is entirely incorrect to suggest that rental power costs are substantially higher than those of IPPs.

Government guarantees repayment of rental power defaults to banks?

This is a completely false impression being created by vested interests. GOP provides no guarantee to cover the rental sponsor’s event of default and the entire risk is assumed by the rental sponsors and their lenders.

The GOP guarantee is provided, like to IPPs, to cover only the event of default of Pepco/Genco, the state-owned entities buying rental power. Sponsors provide their own collateral (first charge on plant and machinery, personal guarantees and additional collateral) to secure loans. The impression that rental plants are being set up with GOP guarantees is completely false.

GOP provides 14% advance deposit as a favour to rental plants?

This perception is entirely incorrect. All GOP contracts are backed with a down payment normally of between 10-15% secured through a bank guarantee. Rental plants are given 14% mobilization advance against a bank guarantee and this amount is adjusted against rental payments owed by Pepco/Genco for power delivered by rental plants to the grid.

Rental plants are inefficient and old and will break down with resultant loss to GOP?

False. Gas-based rental plants require a 92% availability guarantee and RFO-based rental plants require an 85% availability guarantee. Almost all Wapda plants and many of the IPPs do not meet this high availability criterion. Rental sponsors because of their own obligations and in their own interest (especially since the funding is secured against their personal guarantees and assets) have to bring in efficient and robust plants with world class O&M operators to ensure availability and heat rate requirements under rental contracts are achieved. Failure to do so results in heavy penalties payable by the rental plants.

GOP could have set up its own power plants with the same money given to rental plants?

GOP is neither a buyer nor beneficiary in any rental plant. It is only purchasing a service for which it is paying. All rental payments are made 60 days in arrears by Pepco. In fact, rental plants provide a cash float to Pepco. GOP could not mobilize almost $2 billion to set up rental plants which has been mobilized totally by the private sector and without any GOP guarantee or obligations to the lenders for repayment in case of rental sponsors’ default.

Equipment will not last for duration of rental contracts?

Lenders do their own due diligence (technical and otherwise) through independent lender’s engineers on the rental plants being purchased. It is only after the lenders have satisfied themselves of the valuation and technical viability of the plants that they consider funding. Well-designed power plants with world class O&M management can last for 20-25 years. Therefore the satisfactory operation for the 3-5 years rental terms cannot be questioned.

Other advantages of rental power:

> Short-term implementation to meet emergency requirements.

> Short-term GOP commitments allowing flexibility to GOP to opt for long-term hydel, nuclear, coal, other projects.

>No GOP capital investment in the power projects.

>GOP pays only for electricity supplied. If electricity is not supplied to the grid, no payment is made to the rental plants.

>Rental plants serve as an example of efficiency and competence to the country’s other power plants particularly in the public sector.

>The cost of purchase and setting up of power plants cannot be subject of controversy as GOP pays nothing for them and in no way guarantees any repayments to the lenders of rental plants. GOP guarantees that the state-owned entities buying power will be able to pay for them-exactly like the case with IPPs.

Rental sponsors have taken a leap of faith and are investing hundreds of millions of dollars in fast-track development of these rental plants. Sponsors and lenders are uncomfortable that they are being subjected to misplaced, ill-informed media trial sponsored by vested interests who do not want to see power shortages removed on priority and are vocal in their criticism of individuals and companies setting up rental plants, which have been awarded transparently.

GOP has no liability to pay for setting up of rental plants, rental plants are paid for electricity delivered to the grid 60 days in arrears, GOP takes no responsibility for payment of loans taken by rental sponsors, and rental plants are successfully set up in 6-8 months whereas IPPs take 3-4 years. If anyone has better solutions to resolve the power crisis on an urgent basis, they should come forward with concrete proposals for public and government consideration.

Rental Plants Rs/kWh Fuel IPPs Rs/kWh Fuel

110MW Guddu (PPR) 2.2032 Gas Green Power 2.8237 Gas

136MW Bhikhi (PPR) 2.5353 Gas Saif Energy 3.0519 Gas

192MW Multan (PPR) 2.8512 FO Nishat Chunian 3.4727 FO

205MW Korangi (WPI) 3.4587 FO Bestway 3.7432 FO

23 thoughts on “Rental power plants in Pakistan: myth vs reality”

  1. Dear Murtaza

    Please do not misguide people and read Asian Development Bank report dated January 2010, prepared for Government of Pakistan on this issue which is eye opener, you will know what had done
    And at present we are paying rent without getting output, only few are running at less than 10% capacity,

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