The Power of IPPs

In 1997, based on a model employed to encourage energy production in less developed energy-deficient economies, the World Bank advocated that Mauritius should also embark on that model.

This model shifts energy production from inefficient public sector producers to the private sector producers of electricity called Independent Power Producers (IPPs). As far as Mauritius is concerned, the CEB was not an inefficient power producer but the politics nevertheless had the upper hand, making place for IPPs.   

Under this concept, the government signs up a long-term contract, a Power Purchase Agreement (PPA), typically for 20 years, with the IPPs to supply electricity to the public grid. Thus, in our case, the public sector producer, the CEB, was displaced to the benefit of IPPs. The first PPA was signed up in 1997. Six others were subsequently signed up with other sugar-milling companies under new governments, thus extending the scope of the private sector from being a negligible supplier of electricity to the country to come to occupy today 58% of the total electricity generated.

The PPAs are cast-iron contracts which force the CEB to take or pay (even if it doesn’t take) whatever the IPPs produce, leaving the CEB with the residual role to supply the balance to meet demand. In 2015, total electricity sales increased by 2.2% compared with the last year.

Under the IPP arrangement, the IPPs pass on to the CEB, the country’s electricity distributor through the national grid, all risks (such as exchange rate, internal and external inflation, guaranteed return on equity to investors, etc.) and are fully insulated. The CEB passes on such risks to consumers who paid an average price of Rs 6 per kilowatt-hour of electricity supplied to them in 2015, including, amongst others, the cost of insulation from all risks sugar millers grouped in IPPs have been accorded by different governments under the PPAs.

A view has prevailed that the IPP contracts are unduly favourable to investors in the IPPs, namely sugar millers and their foreign shareholders, and that the public pays the price for the protection so granted to them. More recently, there has been a controversy about the low price paid by IPPs to non-miller planters on bagasse, a by-product of cane supplied by planters comprising 16% of total inputs used in the electricity generation process by the IPPs. Data show that there was an increase by 20.4% in the amount of bagasse used by IPPs for electricity generation from 164.9 kilo tonnes oil equivalent (ktoe) in 2014 to 198.4 ktoe in 2015. A low price paid to planters, than what is justified, for this important input in the electricity production process lowers IPP cost of production to the detriment of planters, thus further improving IPP profitability.

Realising the favourable terms on which PPA contracts have been awarded to them, avoiding independent scrutiny of their real cost of production, protecting their shares in the total supply of electricity, when supplying to the CEB – all this had led to a feeling in the country that IPPs would have lobbied hard against other than their restricted group of suppliers entering the electricity supply chain. A victim of such lobbying is CT Power, a potential 110 MW alternative suppler to the CEB, on the grounds that it would have polluted the environment, notwithstanding the fact that the IPPs themselves use over 50% coal in their electricity generation.

It appears succeeding politicians have been gained to the cause of existing IPPs and that their contracts will be renewed for longer terms under much the same cast-iron protections they’ve enjoyed so far. Certain politicians either raise a scare about blackouts or require the CEB to distribute away its windfall gains from recent oil price fall on the international market, apprehending that it might itself employ its surplus reserves arising from conjunctural oil prices, to add to its autonomous production capacity and hence pose a risk to existing IPP suppliers. All is done to stall CEB moving in this direction, same as CT Power was disempowered by engaging it in unduly long court and administrative processes.

Under the 1990s and early 2000s long term contracts binding the CEB irrevocably to IPPs, consumers have been at the receiving end of all added costs/risks encountered by a selective private sector electricity generation IPP club in the country. It looks as if they will, once again, be made to pay the price for IPP protection when existing contracts are renewed or expanded in the face of “emergency situations” created in domestic electricity supply. So long the benefits of an important input, such as electricity, keeps swelling up IPP pockets and makes consumers pick up the bills, the question is who exactly defends the tiny consumer or small planter-supplier-of-bagasse’s interest in the circus being played out.

* Published in print edition on 24 June 2016