Circular debt at Rs2.467tr threatens power sector sustainability

ISLAMABAD: Power sector’s circular debt ballooned to Rs2.467 trillion or 3.8 percent of GDP and 5.6 percent of the country’s total debt in the outgoing fiscal year, the Economic Survey for FY2022 showed, posing a serious threat to the fiscal sustainability of the sector.

Over the years, the debt fast increased in size. In 2008, it was Rs161 billion, in 2013, it was at Rs450 billion then reached Rs1.148 trillion in 2018. The Pakistan Economic Survey 2021/22 while quoting the Central Power Purchasing Agency (CPPA) data said that by end-March 2022, the debt now stands at Rs2.467 trillion.

The survey warns that if the circular debt grows at the same pace and is not muzzled, it is estimated to reach Rs4.0 trillion by 2025. This demands the urgency of reforms in the power sector.

At the same time, the gas sector’s circular debt is also increasing. Dependence on liquefied natural gas (LNG) has increased in recent years due to depleting indigenous natural gas deposits. Over the past three years, the stock of the circular debt in the gas sector has nearly doubled to Rs650 billion increasing from Rs350 billion in 2018.

“The inappropriate response of the government created problems in the import of LNG by the private sector, which led to gas crisis in the country, especially in winter. This led to a suspension of gas supply to the captive power plants industries and CNG (compressed natural gas) stations,” it said.

It is to be noted that each year, hundreds of billions of rupees’ capacity payments are made to the independent power generators. But at the same time, besides capacity payments, the inefficiencies of the power distribution companies (DISCOs) are a major drag on the sector’s financial health owing to high losses and low recoveries.

The power transmission and distribution inefficiencies are hampering the sustainable deliveries of energy services, leading to higher energy prices and increased costs of doing business.

Installed electricity generation capacity increased 11.5 percent (4,296MWs) in July-April 2021-22 to 41,557MW from 37,261MWs in the same period of last year.

The percentage share of hydel generation in total installed fuel-wise capacity has marginally reduced to 24.7 percent during July-April FY2022 as compared to its share in FY2021. The contribution of RLNG in the installed capacity has increased to 23.8 percent in July-April 2022 from 19.66 percent. The percentage share of coal remained the same, although there is an increase in the installed generation from 4,770MW during July-April 2021 to 5,332 during July-April 2022. The percentage of contribution of gas declined from 12.15 percent during July-April 2021 to 8.5 percent in July-April 2022. There is an increase in the percentage share of renewable energy, which is a good sign for the economy as well as for the environment. The percentage contribution of nuclear power generation has increased to 8.8 percent during July-April FY2022 from 6.68 percent during July-April FY2021. The share of wind power increased from 3.31 percent to 4.8 percent, while the percentage share of solar power increased from 1.07 percent in July-April FY2021 to 1.4 percent during July-April FY2022.

In terms of the energy mix, Pakistan’s reliance on thermal power generation, which includes imported coal, local coal, RLNG, and natural gas has been decreasing over the last few years, but its share is still the largest in the energy mix. Its percentage contribution has declined from 62.5 percent during Jul-April FY2021 to 60.9 percent during Jul-April FY2022.

Similarly, the percentage contribution of hydel in electricity generation also reduced from 27.8 percent in Jul-April FY2021 to 23.7 percent during July-April FY2022. The percentage share of nuclear increased from 7.2 percent during Jul-April FY2021 to 12.35 percent during July-April FY2022. The contribution of renewable sources in electricity generation increased from 2.4 percent during Jul-April FY2021 to 3.02 percent in the first ten months of FY2022.

Historically, Pakistan’s economic growth is constrained by bottlenecks in the energy sector. Pakistan’s energy requirements are increasing and demand for energy in the coming decades will rise substantially. Energy demand on this scale will put increasing pressure on energy resources and distribution networks.

A fundamental transformation of the energy system is the need of the hour, as dependency on the dominant fossil energy resources, especially oil is risky. Energy security is essential because the kind of disruptions seen is a potential threat to our economic well-being. Exploration of the more indigenous and renewable resources is key to energy security.

Pakistan is actively following the policy of a shift from conventional sources of energy to the utilisation of indigenous renewable and environment-friendly clean energy generation resources.