The problem with power

Pakistan’s power sector currently faces a severe crisis owing to multiple reasons, right from generation to transmission and distribution. Circular debt is at its peak and apparently seems insurmountable.

This sector has never been in such bad shape as it is today. Inefficiencies, political interference, and outdated infrastructure, along with soaring fuel costs, are some of the problems being faced by the sector. The root cause of this crisis lies in the inconsistent policy framework, which changes from time to time, and allied governance issues.

Independent power producers (IPPs) have marred the system, making it impossible for ordinary Pakistanis to pay their dues, especially due to their ever-increasing capacity charges. These charges have touched the Rs2.5 trillion figure, which is the main reason for a hike in electricity charges. The IMF programme also emphasizes reducing circular debt by reforming the power sector, for which necessary steps need to be taken by the Ministry of Power.

Power generation companies (Gencos) and distribution companies (DISCOs) need to undertake reforms at the earliest, right from their infrastructure development to distribution losses and theft, which is common in far-flung rural areas. The National Transmission and Despatch Company (NTDC) also needs to be reformed, as it cannot take on the load of the installed generation capacity due to its old infrastructure.

Inconsistent power policies have made a mess. The 1994 Power Policy introduced the concept of IPPs, affecting electricity tariffs due to fluctuating oil prices in the international market. The departure from hydel power development was the first unfortunate step towards creating difficulties for people, as we had the potential to create cheap hydel power by building dams in Pakistan.

The second power policy, in 1998, introduced competitive bidding among IPPs along with pre-determined tariffs; this was a relatively better proposition than the first one. The third policy was introduced in 2002, underscoring the concept of renewable energy. The fourth such policy was introduced in the backdrop of CPEC to attract investment in this sector.

Issues in the regulatory framework have also shaken the confidence of investors as well as consumers. Nepra policies have also been inconsistent when it comes to determining tariffs and taxes. Power bills now carry multiple taxes due to these issues. The concept of public-private partnerships (PPPs) is another issue affecting the power policy framework.

There should have been a consistent regulatory framework while determining tariffs and taxes for IPPs, Wapda-related hydel projects, and renewable energy projects. Now there is a lot of confusion regarding power tariff distribution.

There has been no investment in the transmission and distribution (T&D) network maintained and looked after by the NTDC. T&D losses and theft have been a permanent problem, ranging from almost 20-30 per cent. The NTDC’s T&D infrastructure cannot afford a load of more than 25,000MW, while we have an installed capacity of around 42,000MW.

That is one of the reasons we are paying capacity charges to those IPPs that are not producing electricity. That is ridiculous. We need investment to develop and strengthen the NTDC infrastructure.

Pakistan uses power from the non-renewable energy mix produced by IPPs running on furnace oil and LNG. Equity charges, besides capacity charges, are also our concern, which need to be negotiated with IPPs working for the last 25-26 years. They have already earned a lot of profits due to a favourable power policy framework. The PTI government tried to renegotiate these contracts, and there was some sort of compromise. While CPEC projects could not be renegotiated owing to multiple reasons, there was some progress with other IPPs. The only solution now for the government is to renegotiate with IPPs to reduce the burden of capacity charges.

There are also governance issues. Some CEOs of DISCOs are political appointees working on an ad-hoc basis, which has marred the system. This is a big reason for rampant inefficiencies, low recovery of electricity bills, and continuous theft and leakages causing high losses. Circular debt is ballooning due to these inefficiencies, hindering economic activities and breaking investor confidence. Circular debt could have been avoided if we had successfully utilized our full generation capacity. Similarly, this would have led to economic growth had we managed to develop special economic zones (SEZs) in the next phase of CPEC.

Initially, 27 SEZs were proposed, of which nine priority zones were to be developed for the possible relocation of Chinese industries. The installed capacity of CPEC-affiliated IPPs was initially enhanced to be utilized for these relocated industries in SEZs. Unfortunately, these industries could not be relocated until today due to the unavailability of the required facilities at these SEZs. This is why we are paying capacity charges to IPPs, facing the burden of price hikes.

The power sector’s crisis is exacerbated by multiple power policies that offer a high rate of return to IPPs, along with dollar indexation. Power plants run on imported oil with fluctuating prices and exchange rates, raising the cost of production. On top of it, there are capacity payments; all in all, this makes a disastrous policy decision. These power policies do not seem to be well-thought-out and are tilted towards IPPs. A return of 25-30 per cent on top of capacity charges is again disastrous. Some argue that political appointees made such decisions in exchange for personal favours, completely neglecting how this could impact the entire nation.

There are also other issues affecting people at large, especially tariffs and taxes being passed on to end consumers. Decision-makers are the direct beneficiaries of the system, so they do not bother to think about the suffering of the poor, who are left to bear the brunt of price hikes and high inflation. Incompetence is the hallmark of political appointees, and they often express their lack of knowledge about tariffs and taxes proposed by Gencos and DISCOs owing to multiple unaccounted-for losses resulting from an old and obsolete T&D infrastructure.

Pakistan needs hydel projects, as it has an electricity generation capacity of about 150,000MW from hydel. The power produced would also be cheaper. But the government has failed to develop and construct dams for water and electricity needs, which is unfortunate. Without wasting any more time, we must move to other sources of renewable energy like solar and wind.

Solar energy has a lot of scope in Pakistan, where the sun shines brightly for long hours. This can contribute a lot to meeting our energy needs. At present, an unfortunate situation is that China seems reluctant to shift its industries to Pakistan due to various factors, especially the security of Chinese nationals, which is why the hope of utilizing the full capacity of plants installed by IPPs is diminishing.

What the country currently needs to do is renegotiate with IPPs on multiple points, including, but not limited to, their heat audit, fuel cost consumption, and real generation capacity. The discussion should also move to power plants that are producing and supplying no electricity but receiving hefty capacity payments.

We must renegotiate with IPPs today to resolve the issue, lest it become the cause of our economic meltdown.

The writer is a former additional secretary and canbe reached at: hassanbaig2009@gmail.com