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Growing circular debt harming financial viability of power sector: Nepra

  • In its State of Industry Report 2021, authority says biggest challenge is the high cost of electricity for which there are several reasons
Updated 01 Oct 2021

ISLAMABAD: National Electric Power Regulatory Authority (Nepra) Thursday said increase in the circular debt is detrimental for the financial viability of the power sector and T&D losses of Discos, lower recovery of the billed amount and non-payment of subsidies in time are the major causes of circular debt accumulation.

Nepra in its State of Industry (SoI) Report 2021 said that growing circular debt in the power sector is worrying not only for the power sector but for the whole economy. The circular debt as on June 30, 2021 stood at Rs. 2.280 trillion as compared to Rs. 2.150 trillion as on June 30, 2020.

The FY 2020-21 has been yet another challenging year for the power sector of Pakistan. The biggest challenge currently faced by power sector of Pakistan is the high cost of electricity for which there is no single reason. The unutilised ‘Take or Pay’ power generation capacity, impact of ‘Must Run’ power Plants, old in-efficient power plants, increasing capacity payments, whopping circular debt, weak transmission and distribution system, lack of coordination among relevant power sector stakeholders, improper planning, poor governance, use of primitive technology, taxes, fees and levies in electricity bills etc. are amongst the factors making the price of electricity unaffordable for consumers. The issues faced by the power sector of Pakistan persist for the past many years.

Nepra faces criticism from Karachi power consumers

To arrest the pace of accumulation of circular debt, necessary measures, including but not limited to, increase in electricity sales, ensuring optimum utilisation of efficient electric power generation plants, converting the tariff from ‘Take or Pay’ to ‘Take and Pay’ wherever possible, retiring the old GENCOs plants with very low efficiency and utilization, converting the tariff of old power plants of Wapda Hydroelectric from ‘Take or Pay’ to ‘Take and Pay’ basis, retiring the IPPs having completed term of their licences, improving governance of Discos to curb T&D losses, enhanced recovery of the billed amount and timely payment of subsidies etc. need to be taken immediately.

On its part, the Authority has decided to convert the tariff of all old blocks of GENCOs from ‘Take or Pay’ to ‘Take and Pay’ basis in a bid to reduce capacity payment obligations. Accordingly, during FY 2020-21, the tariff of old blocks of GENCO-III has been converted from ‘Take or Pay’ to ‘Take and Pay’. Further, Nepra has also engaged Wapda Hydroelectric to convert the tariff of their old power stations from ‘Take or Pay’ to ‘Take and Pay’ basis.

The government, wary of the high cost of electricity, seemed attentive to lower down the prices of electricity in the short run as well as future development of power sector for sustainable and affordable provision of electricity in the country. With the efforts of the government, the operational private and the public sector power generation companies agreed to lower tariffs on account of Return on Equity (RoE), Operation and Maintenance (O&M) cost, Insurance Cost, etc.

Accordingly, their tariffs were revised downwards by Nepra through modified decision/ determination. Further, as an immediate relief to electricity consumers, the government has also been providing subsidies to various categories of electricity consumers.

The approval of much awaited and needed National Electricity Policy 2021 (NEP-2021) by the Council of Common Interests (CCI) during FY 2020-21 is a major development for the power sector. NEP-2021 is centered on the broader goal of access to affordable, secure and sustainable energy. It provides principles for integrated planning in the areas of generation, transmission and distribution, market development, improving efficiency and good governance which are all necessary to ensure healthy and balanced growth of power sector. The NEP-2021 stipulates that expansion in generation capacity shall be only on competitive and least cost basis except for strategic projects which will be approved by the Government in consultation with the Provincial Governments on case-to-case basis and the relevant sponsoring government/provincial government shall provide the funding to bridge the incremental cost beyond least cost of any such project. The NEP-2021 serves as the overarching umbrella for reforms development, improvement and sustainability of power sector. The availability of electric power at an affordable price is a basic requirement for economic progress of any country and uplift of the living standard of its citizens. Pakistan’s per capita annual electricity consumption is much lesser than world average.

Access to affordable electricity is a necessary condition to raise the living standards of people and accelerate the economic progress of the country. The affordable power supply gives rise to demand for electricity which induces investment in the power sector and helps drive the country on the path of economic progress. Encouragingly, the economy of country took pace and GDP growth of 3.94% has been recorded during FY 2020-21. Further, the large scale manufacturing witnessed 8.99% growth during July-March of FY 2020-21.

To boost the industrial activity in the country, the Federal Government introduced an Industrial Support Package (ISP) to give discount to industrial consumers on electricity consumption. The Package was initially for a shorter period from November 01, 2020 till April 30, 2021.

Subsidies, inefficiencies blamed for power sector circular debt

Although the ISP comes with the additional subsidy which was borne by the government, however, based on the result of this Package on industry and economy, the government has extended this package up to June 30, 2022 with budgeted subsidy of approximately Rs. 26 billion for extended period. The package was extended with the subsequent re-evaluation in May, 2022. Besides the ISP, Federal Government has already been providing subsidy to Zero rated industrial consumers against the electricity supplied to such consumers.

During the FY 2020-21, the power sector of Pakistan has witnessed a positive impact on the ISP in terms of increased demand of electricity. The increased demand for electricity in response to lower prices reveal the sensitivity of demand to changes in prices of electricity. Thus, the surplus capacity appears to be an issue of suppressed demand on account of high cost of electricity.

Additionally, the unserved demand on account of pending new electricity connections and the load management towards existing electricity consumers are other reasons for under-utilisation of existing generation capacity. The reduction in price through measures like ISP may stimulate economic activity in the short run, however, for sustainable economic growth, there is a need to curb the inefficiencies in the power sector with proper planning and timely execution of the approved plans so that the cost of electricity for end-consumers could be reduced without burdening the exchequer.

During the FY 2020-21, the electric power generation segment continued to face the challenge of capacity payment for unutilized ‘Take or Pay’ power generation capacity. The power generation capacity can be broadly placed in two categories: the first category comprises of those power plants whose electricity generation is intermittent in nature which include hydel, wind, solar and bagasse based power plants, while the other one comprises of conventional baseload thermal power plants including RLNG, Coal, Gas, RFO and Nuclear.

The combined installed capacity of intermittent nature electric power generation plants and conventional baseload thermal power plants, including Nuclear Power Plants as of 30-06-2021 remained around 12,062 MW and 27,711 MW, respectively.

The utilisation factor of intermittent nature power plants and baseload thermal power plants remained around 41% and 45% of their respective combined dependable capacities. The intermittent nature power plants enjoy the priority dispatch condition and in case of non-evacuation of available power from these plants, they are entitled for payment on account of Non-Project Missed Volume (NPMV). Further, due to ‘Take or Pay’ contracts, the power plants despite their low utilization factor qualified for capacity payments against their full available capacity. The capacity payments to the power generation companies, as verified by CPPA-G, during FY 2020-21 stood at Rs. 613,923.55 million as compared to Rs. 611,561.40 million during FY 2019-20.

During the FY 2020-21, the power sector witnessed the under-utilization of most efficient RLNG power plants and some other cost-efficient power plants. Under-utilization of these power plants i.e. operating these power plants on part load is reducing their efficiency and increasing Energy Purchase Price (EPP) on one hand while on the other hand, unutilized capacity is increasing their per unit capacity payment. Evidently, the underutilization is not solely for the reason of lack of demand in the system; the pending new electricity connections, load-shedding despite the availability of electric power generation capacity, non-availability of fuel, weak transmission & distribution system as well as poor governance were some major contributing factors for lower utilization of efficient power plants. Under-utilization of efficient power plants is one of the major causes of increase in consumer-end price of electricity. Therefore, determined efforts are needed to remove all constraints leading to under-utilisation of available efficient generation capacity.

During the FY 2020-21, the power sector also witnessed the challenge of fuel supply.

During the period, the System Operator (SO) reported that it had been conveying its demand for RLNG to concerned quarters well before time but still it could not get the required volume of RLNG and resultantly, at occasions, various RLNG power plants were either unutilized or under-utilized. The RLNG is an imported fuel and its supply is controllable through proper planning/scheduling coupled with efficient supply chain. Therefore, efforts should be made to improve the supply chain of RLNG so that non-utilisation and/or under-utilization of efficient RLNG power plants could be avoided. In case of RLNG, the firm Gas Supply Agreement needs to be signed between the parties with back-to-back agreements so that burden of non-supply of gas could not be passed on to the electricity consumers.

Nepra further stated that induction of power generation capacity under ‘Take or Pay’ and ‘Must Run’ regime is cost sensitive and needs to be made not only after careful consideration of the accurate load demand but also taking into account the load management policies. Induction of power generation capacities in accordance with load shed free scenario while operating the system under load-shedding policy results in increase of consumer-end tariff on account of more unutilized ‘Take or Pay’ power generation capacity; the situation which power sector of the country is facing now.

Load management/load-shedding to the tune of around 2,500 MW to 3,000 MW on daily basis in CPPA-G System was noted during FY 2020-21. K-Electric Limited (KE) is also carrying out the load shedding in its service territory.

Copyright Business Recorder, 2021

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