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Independent Power Producers Concerned Over PNG Power Opening Up Contracts

by PNG Business News - April 12, 2021

Independent Power Producers (IPPs) in Papua New Guinea have expressed concern about PNG Power Limited's (PPL) unilateral analysis and renegotiation of existing contracts and contractually agreed rates to supply power to the grid.

The task of IPPs, according to David Burbidge, Chair of the IP3 Industry Group for Independent Power Producers, is to collaborate with PNG Power to provide affordable and secure power to the grid and thus to end-users and consumers.

“The intention of the Utility to renegotiate the price defined in a contract is problematic for IPPs; it will also have sector-wide ramifications. The price at which IPPs sell their power to PPL is a contractual agreement between the IPP as a power generator and PPL as the Utility, which is captured in PPA – a power purchase agreement. These PPA contracts are generally for a period of 15 to 25 years to ensure both parties know in advance that there is a market for the power generated (for the IPP) and a consistent power supply (for the Utility) at a mutually agreed price level. This gives financiers certainty over the debt repayment and allows the IPPs to recover the cost of capital employed in what has to date been perceived as a high-risk environment,” added Burbidge.

The IP3 Industry Group criticized the way PNG Power Managing Director, Mr Flagon Bekker, framed the subject in a recent statement. 

“We see it as misleading that Mr Bekker speaks of subsidies to IPPs. IPPs are paid a mutually agreed price for the power they provide, just like any other commercial arrangement,” said Burbidge. “IP3 emphasises that the generation industry is open to working with PPL to implement the lowest cost possible for future generation, which will help reduce the major liquid-fuel bill that currently affects PPL’s net revenue. However, PPL also needs to improve its financial position by reducing the major financial losses due to power theft and billing losses, over 20%. The State and other large non-paying customers also need to consistently pay for power used, as this revenue shortfall is directly responsible for PPL’s losses,” said Burbidge.

“Setting the precedent that PPL can reopen PPAs at any time to renegotiate prices will be devastating for the power generation industry in PNG. It will increase the cost of any financing and the future cost of power from IPPs as it creates an environment of major contractual uncertainty and major sovereign risk in terms of all contracts with State-Owned Enterprises in PNG. This will increase the prices offered by IPPs, which is the opposite of what PPL is trying to achieve, and it will not encourage foreign investment in PNG’s energy sector” stresses Burbidge.

“We have seen analysis that reveals the fixed generation costs from IPPs represents less than 20% of PPL’s costs, and a focus by PPL on revenue collection and movement away from expensive liquid fuels is fundamental for PPL to improve its operating position for the short, medium and longer-term.

“As an Industry Group, we also underline and fully endorse the critical nature of transparent and

open tendering for future IPP projects. A number of expensive un-tendered previous PPAs have now expired or will expire relatively soon, they can be replaced by lower-cost IPPs, a number of which have already passed through a transparent tender process.

“We support the statement by the PPL Managing Director that we need a ‘win-win situation for the people of PNG and independent power producers while positioning the sector for lower tariffs going in the future. Unfortunately, the approach taken by PPL cannot be characterised as creating a win-win for IPPs, PPL, customers, and the people of PNG, and is more likely to result in power shortages and high power prices, due to increased diesel usage, or the unrequired commitment to large power generation with major capacity charge obligations over 15 years on PPL of over 10 billion Kina,” said Burbidge.



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