Pakistan's Power Puzzle
Business
Power Sector Quagmire: Saga of Circular Debt, Rising Mountain of Capacity Payments to IPPs
By Javed Iqbal
LAHORE: Ignoring Kalabagh and other dams was a massive misstep in Pakistan’s history. But what about signing contracts with the Independent Power Producers (IPPs)? That's an even bigger blunder!
In a labyrinth of challenges, Pakistan's power sector finds itself entangled in a web of crises, prominently characterised by the burgeoning circular debt as a result of past contracts with IPPs having sovereign guarantees.
Unbelievable 28-72 model, capacity payments
As a result, 28 percent go for electricity charges, while an overwhelming 72 percent to capacity charges, irrespective of actual electricity consumption. This led to unaffordable electricity, theft and line losses resulting in poor growth, poverty and dependence on foreign loans.
Huge Circular Debt
Due to the absence of affordable hydro-power plants, the Pakistani government resorted to contracts with the IPPs to address the rising electricity demand. Regrettably, blunders in contract formation occurred, including the government becoming the sole buyer without competition, providing a sovereign guarantee, and leaving the dollar uncapped.
Consequently, these power companies reaped substantial profits, contributing to economic turmoil and making it challenging for even domestic consumers to afford electricity.
To mitigate the electricity burden, the government found itself entangled in a web of circular debts, further worsening Pakistan's financial troubles. Currently, this debt has risen Rs2.31 trillion as of June 2023.
Integral to the power sector's woes are the (IPPs), a phenomenon that ushered in promises of energy abundance but also tethered Pakistan to foreign fuels and led to substantial capacity payments. The dependence on imported fuels has been a consistent strain on the economy, making it vulnerable to global market fluctuations.
As the circular debt continues to escalate, the government's approach to solving the crisis raises eyebrows. Hiring consultants for even minimal studies prompts a critical examination of the decision-making process within the Power Division.
To chart a path forward, Pakistan must explore sustainable solutions. Rethinking the reliance on IPPs, diversifying energy sources, and investing in domestic capacity building are essential steps.
Embracing renewable energy options and fostering a conducive environment for indigenous innovation could not only reduce the circular debt burden but also steer a more resilient and self-sufficient power sector.
It is to be recalled, that three years ago, a nine-member committee during the PTI era, under Asad Umar’s supervision, had highlighted issues, but no action followed.
Power Play Perils
A report reveals a staggering Rs64 billion spent on fuel, with futile attempts by the Asian Development Bank to rectify the situation. The Pakistan government pledged Rs209 billion for fuel three years ago, yet little progress has been made in the system.
Read more: Energy crisis – is there light at the end of the tunnel?
IPPs Dilemma and Startling Solutions
The government instead of addressing the real issues indulged in multifaceted fragmentation of the once-unified Water and Power Development Authority (WAPDA) in the 1990s. The intricate tapestry of departments and companies that WAPDA had evolved into demands scrutiny, raising questions about whether the restructuring was a strategic move or a political one. Above all what was the result of all this futile exercise?
Questions on Nepra's Regulation
WAPDA's split into various entities, including the Private Power and Infrastructure Board (PPIB), the Central Power Purchasing Agency (CPPA), and the National Transmission and Dispatch Company (NTDC), has left many pondering its true purpose.
Nepra was established to regulate but an official questioned its capacity crisis and failure to regulate the gigantic power sector.
Adding to the complexity, government-owned nine distribution companies (Discos) and others operate in tandem with the aforementioned entities. The Discos are politically backed.
The power secretary, tasked with tackling mafias or apprehending major power thieves, gets ousted, as recently Rashid Mehmood Langrial faced the same fate. His activism against the power thieves became one of the reasons for his removal, revealed a source. Langrial could not be reached for comments.
A former senior official of the Power Division asserted that contracts with Independent Power Producers (IPPs) formed the foundation of this disaster. He highlights significant World Bank involvement leading to the establishment of private power plants in Pakistan.
More IPPs under CPEC?
Expressing concern over successive governments perpetuating the flawed IPP model, including projects under CPEC like Sahiwal Coal Power and Port Qasim, he suggested immediate cessation of impractical contracts through negotiations and the opening of the market to foster competition.
He proposed nationalising the IPPs as one solution and advocated for controlling the escalating dollar rate to ease the financial burden on the public.
The official further recommended promoting solarisation and other renewable energy sources to reduce dependency on government-supplied electricity, breaking free from the influence of the IPPs.
He revealed past efforts of the Power Division to negotiate with these companies, expressing frustration due to the vested interests of influential families invested in the power sector.
PIDE's Research
PIDE's Afya Malik underscored the dilemma of developing an energy model with market-determined rates. A NEPRA and ADB-approved consultant introduced a new model with a future market development plan, focusing on financial viability for buyers and sellers.
However, significant buyers such as Discos face limitations in open market dealings. The inclusion of long-term contracts with Discos, which too supported by government guarantees, would introduce additional complexities.
Why despite the presence of numerous universities and think tanks, international consultants are hired for even minimal research?
From IPPs to Solution
The solution lies in a holistic review of our energy strategy, embracing local expertise, and fostering a culture of accountability. Pakistan's power sector must undergo a paradigm shift to break free from the shackles of circular debt and the shackles of IPPs.
Privatisation is not a solution, as people in power corridors recommend.
The need is a political will with true leadership that depoliticises the energy sector altogether especially Discos. Only these steps may pave the way for a brighter, more sustainable energy future that guarantees businesses and prosperity.
