Energy sector

EDITORIAL: The energy crisis in the country continues to remain a challenge with no end in sight. At its core, the issue stems from excessive government involvement, leading to poor planning and suboptimal execution. Regulatory bodies and the government failed to conduct proper studies to assess demand and plan accordingly.

Instead, decisions are often driven by whims and criminal negligence such as adding power plants to the system without improving transmission and distribution systems, which disrupts the entire value chain. The recently released Nepra’s State of the Industry Report underscores this dysfunction.

Despite an installed capacity of 46,000MW, annual utilisation is just 33 percent. This massive underutilisation exacerbates the ballooning capacity payment problem, as two-thirds of the installed capacity remains idle. These inefficiencies highlight the long-standing issues of flawed planning and unrealistic assumptions.

The problem is further compounded by the push for cleaner sources of energy such as solar and wind that is increasingly adding to the reduction in demand of energy from the installed fossil fuel-based energy generation plants.

The power sector shows a glaring lack of adaptability and foresight in responding to evolving demand scenarios. Flawed decisions, based on equally flawed data, have compounded the sector’s challenges. The naivety of so-called power sector experts is evident in their rationale for rapidly expanding capacity between 2015 and 2018.

This expansion was driven by an overly optimistic assumption of a sustained 6 percent GDP growth rate — a target that had never been achieved in the country’s history and was rightly dismissed by independent economists at the time.

Despite these warnings, the government proceeded with aggressive capacity additions, resulting in significant underutilisation that confronts us today.

This surplus capacity, left idle due to poor planning and unrealistic projections, has rendered the sector financially unsustainable. The burden of unutilised capacity is now a major contributor to the industry’s current unviability, demanding urgent corrective action and more realistic planning frameworks to prevent further deterioration.

Transmission constraints have further intensified inefficiencies in the power sector, preventing the optimal utilisation of low-cost fuel plants. While the majority of demand lies in the north and with much of the low-cost generation capacity — such as nuclear and local coal — being added in the south, the absence of adequate transmission lines connecting the north and south is a major obstacle that is hindering the efficient transfer of electricity to major load centres.

This bottleneck persists largely due to the high cost of building transmission networks and the challenges of recovering these costs through already unaffordable tariffs.

A potential solution to this issue lies in moving away from a unified tariff structure across the country. Globally, energy tariffs often reflect regional generation costs. For instance, electricity in the US is cheaper in Texas compared to California, and similar models exist in India and other countries as well. Introducing a region-specific tariff structure, with lower rates in the south where low marginal-cost plants are concentrated, could encourage better utilisation of these resources.

However, political and economic complexities have consistently prevented the implementation of such reforms, rendering the system inefficient and inequitable.

The issue of uniform pricing is similar in the petroleum sector where petroleum product prices are the same nationwide despite varying costs.

The gap is bridged through the Inland Freight Equalization Margin (IFEM), a system that has been grossly misused and abused to plunder the exchequer for decades, yet the practice persists. Similarly, gas sector pricing is suboptimal, driven more by political considerations than by economic and efficiency factors.

Currently, indigenous gas production is deliberately reduced to accommodate woefully expensive imported RLNG. Simultaneously, domestic consumers face forced load-shedding during peak winter months because gas companies are unable to recover their full costs.

The utility companies in the power and gas sectors do not operate on a commercial basis. They lack incentives to increase sales and are not penalised for poor recovery rates. The regulators assume a 100 percent recovery rate, which is a grossly unrealistic expectation in our operating environment.

When distribution companies (Discos) fail to recover costs, the shortfall is added to the circular debt and ultimately passed on to consumers. The sole exception is KE, the only privatised entity in the sector, where private shareholders absorb the cost. This situation hampers the much-needed corporatisation and privatisation of other utility companies.

The sector cannot sustain itself as long as efficient entities are forced to subsidize inefficient ones — whether industrial consumers, well-paying households, or private, efficient distribution entities. Commercial entities must be supported with sound policies and incentives to encourage investment and improve efficiency.

However, the persistence of administered pricing, coupled with a lack of accountability and responsibility in public-sector utilities, will keep the energy sector reliant on crutches, with meaningful reforms remaining elusive. Continuously swimming against the tide can only lead to fatigue and failure.

Copyright Business Recorder, 2025