Another month, another blatant violation of merit order. It so appears that the power producers, the purchasers, and aggregators, do not think much of rules. The September power purchase data is out, and the furnace oil keeps its position out of merit, in the power generation order. For the fourth month running, FO based power generation has crossed 5 percent of the total pie.
Now, 5 percent of total as FO based generation may not seem that high, especially given the past, when FO used to be single largest contributor. But living in the past and glorifying it is not enough. The realities of the power sector generation have changed, which says there are more power plants that are available at most time, running at cheaper fuels, and sitting higher in the merit order, decide by none other than the NTDC. But that continues to be mocked.
And it is not that the merit order is being violated and no one has noticed. None other than the vigilant power regulator, Nepra, has time and again warned the NPCC and CPPA, only for it to be reduced to provisionally allowing the FO based amount, with stern warnings of correcting the mess. Rest assured, it continues without any corrective measures, and provisional allowances keep building up.
Now coming back to the generation fuel mix itself, which remains identical to the same period last year. This is not necessarily a good or a bad thing in insolation. Compare it with two years ago, and it will look fantastic. But the problem is that there are no brownie points for living in and comparing with the past. Ever since the fuel price adjustment freeze ended, there have been three consecutive instances of upwards adjustment at an average of Rs1.2/unit.
That is because the power purchase price keeps adjusting for expected generation mix. Mind you, the PPP assumes crude oil at $60/bbl., and the actual impact of FO on FCA has been on an oil price averaging $40-45/bbl. They will keep telling the elephant in the house is the capacity payment. Which it is, but there is not much you can do about that. But there is a lot that could have been and still can be done to take care the other part of the equation.
The reason why time and again the system must fall back on furnace oil is embedded in poor planning of yesteryear. Those who rightly take credit for installing power plants, must not shy away from taking the due blame for not simultaneously installing the required transmission capability to evacuate the power from those fancy, state-owned, high on capacity payment RLNG plants.
When RLNG plants cannot be operated on full throttle, it means the base load has to be shared by the expensive FO based generation to keep the system running. This means that inefficient plants are being operated at the cost of cheaper fuel, and also that more capacity payment per unit is paid on account of RLNG plant availability regardless of actual generation.
All that because the RLNG plants running at full steam is too hot a case to handle for the fragile transmission system. There is a risk of nationwide system tripping, if efforts are made to evacuate power from RLNG plants running at full capacity. The lesser evil is chosen – so as to ensure the system keeps running.
The power sector already has one ill too many. There is no easy way to fix it. But it cannot forever remain price and revenue centric. And there is nothing written in stone that says reforms at different tangents cannot be taken up simultaneously. Or else, keep burning the furnace oil, keep paying higher prices to plants who can but do not generate more power, keep billing the customers higher amount, keep missing the targets, keep piling up the circular debt. It is a rabbit hole.
Violation of merit in Pakistan hardly makes news. Not even in Naya Pakistan. The complex web that is the power pricing has a component called “merit order” which is one of the simpler things to understand. Yet, it is hardly ever followed in letter and spirit. That said, it does not go unnoticed in the eyes of the vigilant regulator i.e. Nepra. But it indeed does go largely unpunished.
For the third fuel charges adjustment decisions running, spanning over ten months dating back to November 2019, Nepra has not been offered a satisfactory, or even an unsatisfactory answer to what was asked of the two key power agencies involved in power purchase, NPCC and CPPA.
Back in November 2019, Nepra had raised concerns over the violation of merit order, and had asked CPPA and NPCC to submit detailed responses justifying the use of RFO and Diesel over cheaper available fuel sources, along with the financial implications of the actions. Rest assured, the responses never quite arrived, and the November adjustment excluded the relevant costs from the final decision.
Then came the price freeze, which meant no FCA activity happened between November-June. The latest FCA decision pertaining to July 2020, has the exact same wordings copied in lieu of the non-compliance by CPPA and NPCC, which can be raced in the combined Nov-Jun adjustments and the one made for September 2019.
It reads something on the line of how more efficient power plants were not utilized fully and instead energy from costlier RFO and HSD was generated, in an obvious violation of the NTDC’s merit order (which is issued at least twice every month). On both last occasions for FCAs pertaining to July 2020 and Nov 2019-Jun 2019, the NPCC and CPPA were duly reminded that they have failed to provide complete justification and were directed to the same.
The justification never arrived. But the adjustment was allowed on a provisional basis. You may give the benefit of doubt for the first time, but when it happens in quick succession, without the previous condition being met and data being provided, you have to question the sanity of “provisional basis”. No wonder, one provincial member refused to buy in the decision, and instead wrote a clear dissent note.
It must be remembered that furnace oil-based generation in July 2020 was the highest in 18 months. The power purchase prices with distribution companies surely have very little allowance for FO based generation. Even with extremely low oil prices, FO then becomes a massive drag in terms of adjustment with the reference cost. This will not persist beyond September as demand starts to taper off, and all the merits of following the merit order will be forgotten.
The technical explanation to why FO-based plants are run in peak demand is very much out there. And that explanation is no less than a problem statement. The three RLNG power plants (3600 MW) have been connected to 500 KV transmission lines, which require transformation to 220 KV and then to 132 KV. But the transformers do not have the capacity to accommodate maximum generation from the three RLNG plants.
So basically, you have the three RLNG plants fully available to produce power with a cheaper fuel source, but you can’t produce to the maximum, because the supporting infrastructure is not there. If you do that, it will lead to more technical losses and tripping of transmission lines which could be a bigger issue. The RLNG plants remain available, do not produce at the fullest, claim more in capacity charges per unit, the load shifts to inefficient and expensive FO because that is connected to 132 KV.
And then winters arrive.
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