PSO forgoes late payment charges for five IPPs amid power sector reforms

ISLAMABAD: Pakistan State Oil (PSO) has agreed to waive its late payment interest on outstanding fuel supply payments owed by five Independent Power Plants (IPPs). This development comes after the termination of their contracts with the government.

PSO’s decision follows extensive discussions involving the Power Division, a task force, and the affected IPPs.

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The termination of Power Purchase Agreements (PPAs) and Implementation Agreements (IAs) for the five IPPs – HUBCO, Lalpir, Saba Power, ROUSCH, and Atlas Power – was formalised through Negotiated Settlement Agreements (NSAs). As part of the settlement, PSO will receive approximately Rs 14.8 billion in principal payments from the power purchaser, offsetting previously accrued interest from late payments linked to the HUBCO PPA. Additionally, a prior deduction made following an arbitration ruling will be reversed.

A key outcome of these negotiations is the upcoming transfer of the ROUSCH power plant to the government of Pakistan by December 31, 2024. Built under the Build Own Operate and Transfer (BOOT) model, the plant will be handed over for a nominal fee of one US dollar, converted to Pakistani rupees at the prevailing exchange rate. This transfer forms part of the broader government strategy to restructure the power sector.

MAJOR TERMS OF THE SETTLEMENT

The settlements include several significant agreements between the government and the IPPs. Notably, capacity payments will cease after October 2024, leading to considerable cost savings. No termination compensation will be paid under the IA, and past-due capacity charges, energy costs, goods and services tax (GST), insurance, and other charges will be settled in full.

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One of the key concessions from the IPPs is the waiver of late payment interest accrued in the past. Both parties have also agreed not to pursue claims related to expert determinations or arbitration rulings in favour of the IPPs. This mutual waiver of claims under the PPAs and IAs demonstrates a collaborative approach aimed at avoiding prolonged legal battles.

Each IPP has specific conditions tailored to its unique operations as part of the settlement.

GOVERNMENT APPROVALS AND BROADER SAVINGS

The Power Division has briefed the Cabinet on the settlement details, seeking approval for the negotiated agreements. The Cabinet has also been asked to approve the payment of overdue capacity and energy charges to the IPPs, as stipulated in the NSAs. In addition, the Central Power Purchasing Agency (CPPA) and PSO are authorised to finalise agreements to manage PSO’s receivables. The Cabinet also approved a supplementary grant of Rs308 million to cover the task force’s operational costs related to the settlements.

The prime minister lauded the IPPs for voluntarily agreeing to terminate their contracts, a move that will result in significant savings for the government. By eliminating future capacity payments and focusing on actual costs without interest, the agreement is projected to reduce electricity tariffs by approximately 70 paisa per unit.

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The government estimates that terminating these five IPPs will save around Rs 411.16 billion in future payments. Discussions are also underway with an additional 15 to 20 IPPs as part of the second phase of power sector restructuring. The objective is to further cut electricity costs, benefiting the wider economy and promoting growth.

The power minister noted that this settlement is part of a broader strategy to lower electricity prices, including efforts to reduce electricity theft, expedite the collection of arrears, and decrease dependence on expensive imported fuels. These initiatives, alongside the IPP agreements, are expected to contribute to lower electricity costs for consumers, ultimately fostering economic stability and growth.