Many readers may feel fatigued by the ongoing debate surrounding Independent Power Producers (IPPs), but as the saying goes: “Those who forget the past are condemned to repeat it”.
It is a part of our national psyche to create self-inflicted crises, only to shift blame, without acknowledging our own culpability. We gradually accept the consequences and, eventually, resign ourselves to a fait accompli, allowing the cycle to continue.
As Pakistan faces recurring power sector crises, it is essential to revisit the main drivers behind the 1994 Power Policy that led to our current predicament. In 1993, the government set up a prime minister’s task force on energy to assess the sector’s crisis and recommend solutions. The task force portrayed a bleak outlook, citing the poor performance of power and gas utilities, which was illustrated by huge losses, pilferage, delays in project completion, leakages, and slow revenue collection. It also alluded to deeply entrenched issues that required a major change in the corporate and management culture of the said utilities.
The main issues were: bureaucratic red tape, political interference, corruption, lack of technical, administrative and financial discipline, neglect of human resource development, and, above all, the absence of a system of performance targets for which senior management could be held responsible. Three decades later, these issues remain uncomfortably familiar. The task force’s call for bold new initiatives laid the groundwork for the 1994 Power Policy, though some proposals were exaggerated or unrealistic.
In FY1992-93, the total installed capacity of the country was 9,786MW. Peak demand was at 8,611MW, leaving a surplus capacity of 1,175MW. The actual generation was significantly lower at 5,552MW. After system losses, only 4,392MW was transmitted against a transmission capacity of 6,744MW. The task force projected a future demand deficit of 3,700MW by FY1997-98. It, however, inflated this figure to 7,000MW based on subjective reasoning, such as clearing the backlog of shortages and accommodating seasonal water level fluctuations.
Despite knowing that 18 thermal projects (2,401MW) and four hydel projects (749MW) were in the pipeline, they inflated the future demand far beyond actual needs. Amazingly, the 1994 Power Policy went even further in inflating the future demand deficit to 54,000MW by 2018. The reality, however, was starkly different. By 2018, peak demand was at 13,743MW against an installed capacity of 33,433MW, yielding an excess capacity of 19,690MW. In this instance, just 9,762MW actually generated, revealing significant underutilization of the power network. The progression of surplus capacity continues.
The task force’s magnified power demand deficit was used to justify aggressive private investment, thus creating an avoidable number of IPPs and resulting financial strain on the country. The estimated cost for the expansion was Rs319 billion, of which around Rs218 billion was to be financed by the public sector and Rs102 billion by the private sector. This plan emerged amidst a struggling economy with a trade deficit, ballooning national and foreign debt, and depleted foreign exchange reserves. At an estimated cost of $1 million per megawatt, the task force’s projections appeared overly ambitious.
The controversial provision of ‘capacity charges’ covered by sovereign guarantees was added to the policy after the task force submitted its recommendations to the government. The provision did not seem to go through the due process exercised by the task force. There were also other policy provisions such as foreign currency repayments, unrestricted technology selection against the recommended least-cost expansion criterion, open location and guaranteed fuel supply, along with various fiscal incentives.
The irrationality of surplus generation capacity cannot be justified. Instead of contributing positively towards economic growth, this surplus capacity places a financial strain on taxpayers, inflates energy costs, and adds to the economic burden on households and industries. The investment tied-up with IPPs could have been used for productive activities in the economy
Capacity charges are payments to IPPs even when no electricity is generated, insulating them from underperformance. This, along with the sovereign guarantees, places the financial burden squarely on the public. The question is: who enabled this provision into the policy? Your guess would be as good as mine. Incidentally, the fact that the chairman of the task force became one of the earliest IPP owners remains a glaring example of conflict of interest.
The fiasco of magnified demand continued. Fast forward to FY2022-23, and the installed capacity ballooned to 45,885MW against a peak demand of 30,189MW, leaving an idle capacity of 15,696MW. Generation remained at only 15,756MW, which was around a third of the installed capacity. The transmission capacity stood at 22,000MW. For decades, the cycle of surplus capacity has repeated itself as the lessons of the past remain ignored.
Simply, the irrationality of surplus generation capacity cannot be justified. Instead of contributing positively towards economic growth, this surplus capacity places a financial strain on taxpayers, inflates energy costs, and adds to the economic burden on households and industries. The investment tied up with IPPs could have been used for productive activities in the economy.
A question arises: how does Nepra justify carrying out its statutory duty to protect the interests of consumers while allowing the accumulation of excess generation capacity when consumers are already paying oppressive capacity charges? With around 100 IPPs operating in the country, the Senate Standing Committee was told IPPs were paid Rs8344 trillion during the last 10 years and another Rs2.1 trillion will likely be paid in the ongoing fiscal year.
Nepra showed an utter disregard for the prevailing realities. Consumers are hard-pressed to either buy expensive electricity or pay to make ends meet. This trend is already evident, as power demand decreases and consumers increasingly seek more affordable energy sources. Eventually, we will end up in a spiral of increasing electricity prices and lower electricity demand. We have never produced power equivalent to the installed capacity or the transmission capacity. Our electricity transmission capacity is at 22,000MW while our generation capacity is 45,885MW and the gap is yet to be filled.
Nothing seems to be able to make Nepra cease the senseless accumulation of surplus generation capacity and align supply, demand, and transmission capacity. Ironically, history seems destined to repeat itself due to indifference and self-serving interests. Half-measures like merely reducing electricity costs and moving on are no longer sufficient. It is now about preventing a full-blown crisis that could cripple the nation’s future. Pakistan must act decisively to overhaul its energy strategy. The state cannot afford to continue burdening its citizens with the costs of excess generation capacity that they neither need nor can afford.
Immediate reforms are needed, including imposing a moratorium on new power projects for at least five years or until Nepra records a generation of 40,000MW (90 per cent of the installed capacity in FY2022-23), enhances transmission capacity above 22,000MW to match generation, and ensures efficient, consistent delivery to consumers. We should proceed only with projects that have initiated physical site work (a bitter pill to swallow) and ground the power demand drivers in the country’s realities and not expectations.
In particular, the philosophy of pivoting to peak demand creates inflated power demand expectations. For example, a family cramped into an air-conditioned room during the peak summer heat is not representative of residential consumer energy demand in the country. We have dug ourselves into a hole of magnified demand, endless surplus and oppressive capacity charges. Now is the time to stop worsening an untenable situation.
The writer is a chemical engineer.