PORT MORESBY, NCD, PAPUA NEW GUINEA
Independent Power Producers (IPPs) in Papua New Guinea have expressed concern over the
unilateral review and renegotiation by PNG Power Limited (PPL) of existing contracts and
contractually agreed pricing to supply power to the grid.
David Burbidge, Chair of the IP3 Industry Group for Independent Power Producers, sees the role of
IPPs to work in partnership with PNG Power to deliver affordable and reliable power to the grid and
therefore to end-users and customers.
“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 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.
Responding to a recent statement by PNG Power Managing Director, Mr Flagon Bekker, the IP3
Industry Group questioned the way the MD framed the issue. “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 nonpaying 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 winwin 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.