Capacity payments: back to square one?

Power outages are a thing of the past. According to government officials at least and it’s best to take these claims with a big pinch of salt. They’ve moved on to more important things which in the recent past have included changing the nature of contracts for independent power producers.

The main alteration has been to abandon “take or pay” contracts for IPPs, instead shifting them to a “take and pay” mode and discontinuing long term power purchase agreements. Policymakers have apparently taken this step in order to deal with the “capacity trap”. This is where guaranteed capacity payments are provided to power producers even when they are not providing electricity to the government.

Now here’s the interesting and rather ironic part. This change in contract mechanism is not applicable to public sector power projects as well as CPEC projects. The largest and mind you, most inefficient player in the power sector of Pakistan is the government itself. So, as usual a carte blanche for promoting its own inefficient role while discouraging private sector investment especially when it comes to renewables. Recall Nandipur as a classic example.

Most energy experts this column has talked to have shown apprehension about the proposed changes. Talking to BR Research, Muhammad Anwar Ul Haq, former Chief Strategy Officer at Quaid-e-Azam Solar Power (Pvt.) Ltd, was of the view that preferential treatment to government power projects while removing incentives from private sector players would not bode well for the energy sector of the country.

“This same government made an identical move back in 1998. A similar rhetoric of an imminent “capacity trap” was sold by policymakers and the majority of IPPs were shut-down in view of surplus power. The result was almost twenty years of load-shedding which still continues to haunt us. Therefore building investor confidence is essential before taking it towards a competitive market” says Anwar.

Knee-jerk reactions by the incumbent PML-N government are frequent. Just only days ago, it halted furnace oil based power generation. After realising the impact it had on the whole oil and refinery sector, they were brought online as quickly as they were shut down.

This column is also all for eventually moving to a market based system based on competitive bidding for trading electricity. But that effort requires planning first and foremost. A thorough demand analysis needs to be taken into account in addition to upgrading tariff mechanisms. And of course it goes without saying that a competitive system would be useless where the most dominant player is the government itself