Let us proceed step by step in identifying the realities of the power sector that have led to the current crisis and explore remedies in the form of sustainable solutions. The first issue is our skewed power generation mix, where thermal generation, mostly dependent on costly imported fuel, has outpaced the hydel and renewable components. According to energy experts, for power generation to be economical in Pakistan, hydel generation should account for a minimum of 50 per cent. Currently, it stands at only 28.3 per cent. For an oil-importing country with inadequate and dwindling gas reserves, increasing the share of renewables and hydel in the national power generation mix is a strategic necessity.
The second issue is flawed planning and execution on the supply side. Over time, we have based our capacity enhancement on overly optimistic assumptions of economic growth through the Indicative Generation Capacity Expansion Plan (IGCEP). Our power sector's problems stem from poor capacity utilization and inadequate demand, especially in the industrial sector. The IGCEP was based on a 6.0 per cent growth projection, while the IMF now projects just 2.8 per cent. Since the industry has not grown as expected, the installed electricity capacity has not been fully utilized, leading to higher capacity charges. Another issue recently raised by APTMA is the high industrial tariff and the impact of cross-subsidies. The matter of subsidies and cross-subsidies must be viewed holistically. There are direct subsidies provided by the government to poor consumers, as well as subsidies from some consumers to others. Additionally, there are intra-disco subsidies, such as those from LESCO to HESCO and SEPCO. The industrial tariff was reduced by Rs8 in January 2024 by removing a cross-subsidy of Rs7-8 to stimulate demand. To lessen the burden of capacity payments, industrial demand needs to be further increased.
Another pressing issue is the high-capacity charges of IPPs, which were established during a time of acute power shortages when no investor was willing to invest in Pakistan. The ‘Take or Pay’ contracts should not have been agreed upon, but they were introduced under circumstances where Pakistan's single-buyer market compelled Independent Power Producers (IPPs) to maintain the ability to supply power at all times, as directed by the National Power Control Center (NPCC) and Nepra, following the Merit Order Dispatch system. In Pakistan’s power sector, there is a single transmission grid that does not accommodate a multi-buyer market.
Some countries, like China, operate a single-buyer market efficiently, while others, such as the UK and US, run equally efficient multiple-buyer market models. In Pakistan, however, the power sector faces significant distribution challenges. The country suffers from 16 per cent annual T&D (Transmission and Distribution) losses and 11 per cent collection losses, resulting in a combined loss of 27 per cent of the electricity generated. In contrast, the global average for T&D losses is only 10 per cent. To improve performance, Pakistan's DISCOs should be privatized, and a competitive multi-buyer market should be established under the Competitive Trade Bilateral Contract Model (CTBCM).
Pakistan's installed generation capacity stands at 42,131MW, whereas the transmission grid can only handle 29,000MW, currently running at 22,000MW due to technical issues within the grid. The transmission system, particularly the north-south transmission line, faces serious challenges, especially during the winter months. During this time, cheaper power generated in the south cannot be transferred to the north. Additionally, the cheaper power in the south cannot be used as an incentive for the industry in the south because it would disrupt industrial competitiveness between the north and south. Therefore, the problems related to the north-south transmission grid must be resolved. The government should also encourage bilateral Power Purchase Agreements (PPAs) and wheeling agreements in a business-to-business (B2B) model. Developing a north-south gas pipeline should be prioritized to make gas more readily and economically available to IPPs.
Now, turning to the issue of capacity payments, it is important to note that no IPP can operate without capacity payments. This is because IPPs must cover their debts, and fixed maintenance costs to ensure the readiness of their plants and provide returns to investors. The average capacity tariff for imported, Thar coal-based, and RLNG plants with an installed capacity of 11,500MW was less than Rs3 per unit when the tariff was determined in 2015-16. Since then, Rs18 per unit has been added due to lower dispatch and macroeconomic factors. Capacity charges account for only 31 per cent of the total consumer tariff. According to Nepra’s State of Industry Report 2022-23, government taxes, surcharges, and duties collectively contribute an additional 32 per cent to the consumer tariff, over and above the cost of electricity.
The share of CPEC projects, including Thar coal-based IPPs, is disproportionately high in the capacity payment components. Out of Rs2.14 trillion in capacity payments to IPPs, Rs880 billion is allocated to Chinese-owned CPEC IPPs and other coal IPPs, while only Rs130 billion goes to IPPs established under the 1994 and 2002 policies. Therefore, the debt terms with CPEC IPPs need to be renegotiated through government-to-government (G2G) talks, focusing on extending the debt tenor from 10 to 20 years and reducing the debt margin from 4.5 per cent to 2.0 per cent.
Government-owned GENCOs make up 52 per cent of the IPPs; they are inefficient and outdated but are not being retired due to issues related to ex-government employees and pensions. These inefficient GENCOs should be shut down after resolving their human resource issues, while the efficient ones should be privatized to promote greater efficiency. The PPAs with privately owned IPPs, however, need to be renegotiated by consensus, particularly regarding changes to the Return on Equity (ROE) and dollar indexation, wherever applicable.
A forensic audit by Nepra should be conducted to determine any excess profits earned by IPPs in the past due to efficiency gains and O&M savings, with cases referred to arbitration if the IPPs do not cooperate. All imported coal-based IPPs should be converted to Thar coal, and the infrastructure for mining and power evacuation in Thar should be significantly improved. Finally, capacity utilization in the power sector, as per the IGCEP, should be ensured, particularly in the industrial sector, to boost productivity and reduce electricity costs. Unless we address these power-sector realities through a comprehensive and holistic intervention, we will remain stuck in endless debates without real solutions.
The writer is a security and defence analyst. He can be reached at:rwjanjhotmail.com