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Power sector is by far the most poorly performing sector of the economy – a sector that compromises the competitiveness of our industries, those that cater solely to domestic consumption as well as those engaged in exports, undermines the quality of life of the general public and last but not least is a major contributor to the burgeoning government debt.

One International Monetary Fund (IMF) programme after another, and the country is currently on its twenty-fourth programme (on average three years each) as well as after numerous multilateral sectoral loans and technical assistance estimated at billions of dollars the power sector remains in dire straits.

Approval of contracts by civilian administrations (Benazir Bhutto as well as Nawaz Sharif) and Musharraf’s military government, envisaging capacity payments, repatriation of profits as well as import of fuel by private sector independent power producers (IPPs) has added more fuel to the blazing fire of appalling poor sectoral management.

Additionally, without considering the sector holistically, the idea of clean and cheap energy (solar/wind) was seized by successive cabinets who proceeded to provide monetary and fiscal incentives to mainly middle to upper middle income earners who set up solar panels on their rooftops.

This reduced demand for electricity from the national grid, thereby raising the IPP capacity payments, necessitating higher tariffs for consumers reliant on the national grid.

The Fund documents dated 10 October 2024 maintain that the stock of power payment arrears – circular debt (CD) – stood at 2.794 trillion rupees (2.6 percent of GDP by end March 2024) while the government pledged to “keep energy tariffs in line with costs while we implement fundamental reforms to ease price pressures and shore up viability over the medium term.”

A structural benchmark for the ongoing loan is net-zero CD flow by the current fiscal year-end through a combination of measures that include tariff increases, targeted subsidies and cost reducing reforms – tariff increases which erode the value of each rupee earned for the consumer, the lower the income the greater the impact, subsidies still not targeted with 558 billion rupees budgeted as tariff differential including for Azad Jammu and Kashmir.

There is no question that the government is engaged in cost reducing reforms that include decline in electricity tariffs in November 2024 of around 75 paisas per unit (hearing by Nepra on December fuel charges adjustment is expected to lead to a further reduction in energy charges by 1.03 rupees per unit).

And the winter incentive package announced for December, January and February, with approval from the IMF, will be at the rate of 26.07 rupees per unit for all categories of consumers on incremental consumption – a package targeted to raise consumption, lower the capacity charges payable and thereby reduce the pressure to raise tariffs further to achieve full cost recovery.

Federal Minister for Power Leghari maintained this Tuesday past that demand has risen by 7 percent partly due to the winter package and is proposing to extend this to the industrial sector for three years (excluding the summer months when demand peaks at 29000 MW).

Two days later on Thursday, Nepra during a public hearing revealed that the winter incentive package increased electricity consumption by a mere 1.5 percent with an additional 226 units consumed, including in the K-Electric jurisdiction.

There is talk of slashing taxes, estimated at around 40 percent of per unit tariff, but this may disable the government from meeting the IMF’s fiscal deficit target which would be deeply concerning if the Fund staff refuses to grant a waiver that may lead to a suspension of the next tranche release.

Be that as it may, the proposal being considered is a 3 rupee per unit reduction in tariff. Another option would be to dedicate all taxes collected in the bills to meeting the circular debt till such a time as the debt is cleared.

Leghari also claimed this Tuesday past that the establishment of Competitive Trading Bilateral Contracts Market (CTBCM), earmarked for this year, would make tariff differential subsidy redundant – a budgeted item that accounts for nearly half a trillion rupees per year. However, this focus ignores three major concerns.

First and foremost, the buyers, bulk buyers, would be able to purchase electricity from any distribution company (which assumes that the more efficient one would be preferred) yet the transmission system will remain under the control of NTDC, operating under the Ministry of Energy, and this is expected to add transport charges that may make the per-unit cost higher than the price quote by the less efficient distribution company operating in the buyer’s location.

However, the government is gung-ho about starting the CTBCM on a pilot basis, though it is unclear how it intends to proceed to test the efficacy of the system and deal with kinks in its implementation that are sure to erupt.

Second, the national transmission network is weak and as past precedence has shown again and again any public sector engagement in a process leads to decisions taken that may not be in the best interest of the consumers.

Third, eight out of ten distribution companies are earmarked for privatization, so stated the Minister of Energy, in collaboration with the Privatisation Commission (whose recent foray into privatising PIA led to insurmountable embarrassment). It is also pertinent to note that RLNG based 1223 MW Balloki and 1230 MW Haveli Bahadur approved for privatisation by successive administrations since 2013 have yet to be sold.

The apex committee of the Special Investment Facilitation Council (SIFC) requested a review of potential privatization of these two entities by a ministerial committee and its findings were that it is not advisable at present due to the poor investment climate in the country (which is even more dire today), and instead rightly emphasized future potential gains from tariffs estimated at 130.8 billion rupees, a clean book payout of 264 billion rupees and profits of 153 billion rupees.

Leghari revealed that the burden on consumers due to net metering (relating to solar power) is around 100 billion rupees, an amount expected to rise to 500 billion rupees over the next five years unless buyback rates are adjusted.

He hinted at a rate of 10 to 12 rupees per unit. Meanwhile, the chief ministers of Punjab and Sindh are promoting solar panels for the poor as a means to lower electricity costs. There is a need for a holistic approach, with both the federal government and its federating units discussing and agreeing on the way forward.

The government is also engaged in re-negotiating contracts with IPPs, a policy that began during the Khan administration and was successfully implemented with assistance from the premier intelligence agency whose influence over local owned firms was considerable however, as expected, not with foreign IPPs.

Renegotiations with local IPPs are expected to reduce per unit cost by 2 rupees per unit however with the Chinese IPPs debt re-profiling is under consideration and there is a projected further 6 rupees per unit reduction, though the agreement has not yet been signed.

To conclude, the power sector remains a source of serious concern not only to multilaterals and bilaterals but also to all consumers’ groups within the country.

What is required is a holistic approach that must first allow sector experts, as distinct from well-meaning but ill-informed politicians or those selected by the stakeholders, to look at the macro-picture and determine a short to medium to long term strategy. Once the sector experts have formulated a plan, only then must it be presented to the council of common interests (CCI) to get across the board approval of members of federal and provincial governments.

Copyright Business Recorder, 2025

Comments

200 characters
KU Feb 03, 2025 05:36pm
Not reported is the interests of choir-boys in power sector, nor any definitive explanation on how/where is IMF loans spent or benefit. One thing is certain, costly power is shutting down economy.
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