Renegotiate IPP Contracts to Save Steel Industry from Closure

Islamabad: Exorbitant power tariffs and imposition of unjustified high-capacity charges have badly affected the steel industry which is heavily dependent on power.

Steep rise in power cost has caused significant rise in cost of production, making it nearly impossible for the industry to operate & survive. A large number of steel units have already closed, and remaining are working on a small fraction of capacities.IPPs May Seek Sovereign Guarantees Due to Payment Delays

This SOS appeal has been made by Pakistan Association of Large Steel Producers which is the leading body representing the steel sector. The statement of the Association added that agreements with IPPs and inefficiencies in the power sector are jeopardizing the future of the industry.

The government should initiate an audit of all power system planners, policy makers and take action against all those who receive billions of rupees monthly for idle power plants, thereby burdening the common consumer.

Also, there is need to renegotiate the contracts of all Independent Power Producers (IPPs) and immediately convert the Return on Equity (ROE) from dollar-based to rupee-based for all four govt owned RLNG plants by locking the dollar rate at less than 200 rupees. Debt restructuring for newer plants, particularly coal plants, whether using imported or local coal, needs to be considered.

These measures will help to reduce the financial burden on consumers and save industry from permanent closure.

It is very startling fact that some IPPs without producing a single unit of electricity are being paid billions of rupees every month for capacity charges.

According to agreements, power plants will be paid capacity charges even if government companies are unable to take electricity supplies from them. During January, February and March IPP plants had given zero supply but still were paid Rs10 billion every month.

PALSP has time and again asked the Government to provide electricity to steel & other industries on reduced rates so that maximum capacity utilization could be made instead of making payments to IPPs even without utilizing electricity.

Given its energy-intensive nature, the steel industry can play a crucial role in utilizing idle power plants. With an annual demand of 4 to 6 million tons, the steel industry can consume approximately 4.8 billion units of electricity annually.

It is very astonishing that annually 2 trillion rupees are extracted from industry and consumers as capacity charges for partial or zero power production, whereas 40% of the industry has already shut down and remaining are operating on very low capacities.

IPP agreements are unsustainable for the country and Govt is squeezing consumers (industry and households) to run the white elephant of IPPs. It is noteworthy that in 2019, the total installed generation capacity was 38.9 GW, with a capacity cost of 504 billion rupees. By 2023, the installed capacity had increased to 45.8 GW, with the capacity cost nearly doubling to 1,002 billion rupees.

Furthermore, the low efficiencies of the older GENCO power plants result in inefficient fuel consumption, leading to increased generation costs. Continuing to operate these inefficient power plants burden the country’s power sector.

It is not advisable to maintain these outdated facilities when there is sufficient capacity for more efficient alternatives. These plants should be retired immediately, with manpower reassigned to NTDC and DISCOs.

Grid station assets can be transferred to the relevant DISCO or NTDC, depending on the voltage levels. It is also noteworthy that charging of illegal 3.23 rupees PHL Financial Surcharge in bills further increases tariffs to uncompetitive levels.