AGL 38.40 Increased By ▲ 0.55 (1.45%)
AIRLINK 142.85 Increased By ▲ 0.38 (0.27%)
BOP 8.95 Decreased By ▼ -0.06 (-0.67%)
CNERGY 6.69 Increased By ▲ 0.97 (16.96%)
DCL 9.45 Increased By ▲ 0.21 (2.27%)
DFML 39.50 Increased By ▲ 0.06 (0.15%)
DGKC 89.70 Increased By ▲ 0.39 (0.44%)
FCCL 38.84 Increased By ▲ 0.30 (0.78%)
FFBL 78.35 Increased By ▲ 0.91 (1.18%)
FFL 13.46 Decreased By ▼ -0.16 (-1.17%)
HUBC 109.75 Increased By ▲ 0.46 (0.42%)
HUMNL 15.17 Increased By ▲ 0.04 (0.26%)
KEL 5.85 Increased By ▲ 0.07 (1.21%)
KOSM 8.37 Increased By ▲ 0.17 (2.07%)
MLCF 45.00 Increased By ▲ 0.47 (1.06%)
NBP 75.00 Increased By ▲ 1.38 (1.87%)
OGDC 192.40 Increased By ▲ 0.64 (0.33%)
PAEL 28.61 Increased By ▲ 0.90 (3.25%)
PIBTL 8.02 Increased By ▲ 0.03 (0.38%)
PPL 168.00 Increased By ▲ 0.83 (0.5%)
PRL 27.45 Increased By ▲ 0.62 (2.31%)
PTC 20.50 Decreased By ▼ -0.19 (-0.92%)
SEARL 97.01 Decreased By ▼ -0.52 (-0.53%)
TELE 8.15 Decreased By ▼ -0.06 (-0.73%)
TOMCL 35.20 Increased By ▲ 0.20 (0.57%)
TPLP 10.19 Increased By ▲ 0.29 (2.93%)
TREET 17.55 Increased By ▲ 0.20 (1.15%)
TRG 61.95 Increased By ▲ 0.95 (1.56%)
UNITY 31.94 Increased By ▲ 0.30 (0.95%)
WTL 1.49 Increased By ▲ 0.03 (2.05%)
BR100 11,158 Increased By 61.6 (0.55%)
BR30 33,466 Increased By 211.5 (0.64%)
KSE100 104,137 Increased By 862.1 (0.83%)
KSE30 32,177 Increased By 207.8 (0.65%)

The matter of increased capacity payments to power plants has sparked a heated controversy. In recent years, these payments have more than doubled, from 1,082 billion rupees to nearly 2,153 billion rupees, according to data from the electricity ministry.

The increase in capacity payment is mainly due to the rise in the dollar value from PKR 100 to PKR 300. The impact of the depreciation is seen in the per unit capacity payment, which has increased from PKR 10/unit to PKR 19/unit.

To keep their power plants operational and accessible to provide electricity at all times, including during periods of low demand, generation companies charge capacity payments as a fixed fee. These payments are crucial to the economic survival of power plants.

The citizenry, however, is increasingly worried that these payments are swallowing a more significant percentage of the country’s finances. Numerous specialists believe that the solution lies in renegotiating contracts with generation companies to reduce monthly expenses and avoid over-capacity in future. Escalating electricity costs are causing rising tensions, with IPPs being held primarily accountable.

Rather than oversimplifying the topic, adopting a balanced approach that considers all critical perspectives is essential. Only then will we be able to grasp the complicated issue of over-capacity and growing capacity payments.

Historically, the discussion has tended to be cursory, lacking a thorough evaluation of the interplay between macroeconomic variables, contractual commitments, and the difficulties of long-term generation planning. It is vital to recognise that too simplistic explanations risk ignoring crucial practical elements that control the operation of large-scale infrastructures.

When analysing the topic of capacity payments, it is helpful to draw parallels to fixed-cost frameworks that consumers encounter regularly. Numerous services in our personal lives depend on stable funding sources to operate without interruption.

Internet service providers typically charge monthly fees to maintain infrastructure and ensure network reliability. Mobile network operators also rely on steady subscription-based revenue to keep coverage that allows for continual mobile communication.

Broadcasters, such as Netflix, are another example - solid money streams from subscription fees support complicated systems delivering a variety of entertainment alternatives to homes across the globe.

There are core economic reasons why generation companies insist on capacity payments instead of energy payment models alone. The most important of these factors is the recovery of substantial up-front capital expenditures necessary to construct large-scale infrastructure projects. For IPPs, significant costs create the groundwork for plants to provide power regardless of fluctuations in short-term demand. IPPs invest billions in building facilities with capacities surpassing peak demand to ensure adequate supply even in emergencies. Recouping such major expenditures takes many years.

During cost-recovery stages, charging variable rates per unit would leave generators vulnerable to all economic shocks. The usage-based revenue stream proposed through the energy payments gives rise to uncertainty of meeting the fixed costs, debt repayments and equity return.

Multilateral development banks and commercial banks provide approximately two-thirds of the required capital for constructing these power plants. The unpredictability of debt repayment with energy payment schemes prevents these banks from financing the projects.

Similarly, the sponsors would not proceed to invest billions in an uncertain endeavour. If there is a mechanism (such as a must-run condition) that guarantees fixed cost recovery, debt payments and equity returns, it is akin to capacity payment.

By the sheer nature of infrastructure investments, generators must recover their capital expenditures, financing costs, and agreed-upon returns within realistic timeframes.

Without capacity payments that account for fixed operating demands irrespective of usage volume, IPPs would be justified in incorporating additional recovery risk premiums straight into per-unit prices.

This risk premium will undoubtedly lead to higher electricity bills to compensate for the lack of stable, guaranteed revenue streams.

Regardless of the billing method - fixed capacity fees or consumption-based charges - all system expenditures must be collected from consumers. Therefore, the question is not about total costs but their distribution over time. Mechanisms for capacity payments offer more consistent and predictable pricing throughout the year for households and businesses.

In contrast, energy-only models may see cheaper costs during off-peak seasons but greater volatility and the possibility of rate shocks when demand peaks.

Concerns about capacity payment regimes include asserting that they incentivise generation capacity above real needs. Overcapacity presents serious issues, but pinning exclusive blame on IPP contracts risks oversimplifying a complex subject.

A more rigorous approach acknowledges that generation planning results from multiple projections, ranging from short-term demand forecasting to long-term macroeconomic modelling subject to policy changes.

In the case of Pakistan, periodic shifts in sectoral priorities and regulations under successive regimes have frequently upset prior estimates of infrastructure growth, investment, and demand. The absence of a consistent strategic vision makes accurate modelling exceedingly tricky.

A simple and recent example is the IGCEP 2022-31, where generation planning is based on average GDP growth of 4.30 percent per year for the following ten years; however, the next IGCEP anticipates this value to be in the range of 3 to 4 percent per year. The generation planning was flawless, but the economic downturn invalidated the earlier planning.

Although overcapacity and growing capacity payments are reasons for concern, the challenges at hand necessitate a cautious evaluation of factual evidence instead of hasty diagnoses.

As with any large-scale infrastructure endeavour, attaining error-free generation planning across decades-long time horizons is hampered by constant changes in macroeconomic conditions and policy antecedents.

Concurrently, we must recognise that IPPs must promptly recoup their capital and financing expenses to continue incentivising vitally important power growth.

The optimum way ahead is not through retaliatory blaming but through constructive conversation between all stakeholders to balance these interests through flexible contractual frameworks responsive to emerging conditions.

Copyright Business Recorder, 2023

Asim Javed

The writer is a chartered management accountant working in the power sector for 23 years. He can be contacted at [email protected].

Comments

Comments are closed.

AAN Oct 19, 2023 11:49am
It seems writer is the representative of IPPS we should keep in mind that the capacity payments and plants efficiency both are inversely proportional. For example what if power plant capacity is reduced with the passage of time however government is not asking to operate at full capacity will have different results. My suggestion is to check each plant at full capacity like at least a month or so in order to check that we need to pay them capacity payments or we penalize them There are lots of solutions provided to check these under the microscope with no sympathy at all with IPPS However I agree with the writer that all things shall route through the signed contract and not the will of masses.
thumb_up Recommended (0)
faisal Oct 19, 2023 12:40pm
Power companies will be in surprise in few years. Even if they generate electricity at 0 cost still transmission cost will be greater than roof top solar systems. Large scale era of energy is over. Once consumers install solar companies will fall.
thumb_up Recommended (0)
Dr. Shahid Rahim Oct 19, 2023 07:47pm
Objective and insightful. Many people, even some in the power sector, feel that “take or pay” contracts with IPPs was a blunder of the sitting government of time and they should have opted for “take and pay” contracts as if it were merely fixing of an editorial lapse. No investor would risk investing in capital- intensive infrastructure without solid guarantees. The idea of “take and pay” (also called “merchant” plants) sounds good to ears but couldn't take roots even in countries that have established legal, regulatory, and financial frameworks. Unless we have solid evidence of any underhand deal among the parties to the IPP contracts, we should treat these just another business deal in which each party negotiated in good faith and to maximize their gains. Had we focused more diluting the negative impacts of these contracts in managing the power sector instead of reopening the issue every now and then, we would be much better off than the mess into which our leaders have led us.
thumb_up Recommended (0)
Adnan Zafar Oct 19, 2023 08:44pm
We cannot stop solar especially off grid due to increasing tariff and decreasing PV costs. Therefore as per National electricity plan, fixed capacity charges should be billed and two part tariff introduced at the earliest to avoid disaster.
thumb_up Recommended (0)
Ashraf Oct 19, 2023 09:06pm
A very comprehensive write-up. I suggest you look into consumption patterns as well. Approximately 51% of electricity consumption is in the domestic sector we cannot overcome the energy crisis without significant curtailment in the domestic sector. Interestingly simple solutions are available but not explored.
thumb_up Recommended (0)
Kashif ALI Oct 20, 2023 12:41am
@AAN, After reading your first para, I am sure you are Absolutely wrong. Better learn first, then to think before commenting. Your last para negates you. If you don't know about the topic, you should not have the right even to comment on such topic. This is the core of issues of all Pakistanis( especially, hard core illiterate politicians). After 25 or 30 years, they get to learn the two words CAPACITY and PAYMENT and start talking nonsense.
thumb_up Recommended (0)
Kashif ALI Oct 20, 2023 12:45am
A well articulated article, especially when I have been personally responsible for managing the PPAs, Capacity and Energy payments and also Conflicts and Dispute resolutions with CPPA-G and NPCC. The writer has made a good effort to create awareness in masses. I would again repeat, I don't prefer that the ignorant or least-knowledgeable public should have the right to speak or comment on such topics. Such people are a major distraction and waste of time.
thumb_up Recommended (0)
Khawar Oct 20, 2023 07:51am
This is the first article rightly describeing the capacity payment concept. The following factors contribute the cost: * Imported spares, technical support etc * Non availability of Tarrif based accounting system and Audit * Conventional type Accounting and audit fails to confirm the fairness of the capacity claim *. Grid issues and line losses * Imported fuel
thumb_up Recommended (0)
Orion Oct 21, 2023 06:58am
An IPP sympathiser. Making a case for continuing with the mad circus. We are reaching a point where the middle and poor classes are struggling to pay electricity bills. A civil disobedience scenario that may unhinge the state order.
thumb_up Recommended (0)
Zafar Abbas Oct 21, 2023 07:25pm
@Orion, if you don’t want to live in reality it’s up to you. Give an alternative solution instead of just criticising the author.
thumb_up Recommended (0)
Fakob Oct 24, 2023 08:52pm
Although I am not an expert on this topic, but after reading this article, it clearly states that the author is writing for the IPPs. He has given arguments in all high sounding English in favour of IPPs. I don't know what to do with 20-30 years old plants still not able to recover their investments and we still have to pay for capacity charges for those old investments. Further, if we can't use their capacity then why we are getting them installed at first place!!?? Then someone already highlighted that we don't have any reliable audit system to verify their actual production capacity?
thumb_up Recommended (0)