"Total power sector payments to be north of Rs5 trillion in 2025’

An interview with Dr Fiaz Chaudhry, Director Energy Institute LUMS

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Dr. Fiaz Chaudhry is the former Managing Director of the National Transmission and Despatch Company (NTDC) and the current Director of the Energy Institute at the Lahore University of Management Sciences (LUMS). He has over 35 years of power sector experience in more than 10 countries and has led the global power system business of Hatch, a Canadian consulting firm for 15 years. He has a PhD in Electrical Engineering from Purdue University in America. Dr. Fiaz has seen it all when it comes to the power sector in Pakistan. In this candid interview, he gives his views about the challenges being faced by the power sector, the history of how we got into this crisis in the first place and the way forward.

Below are edited excerpts from the interview.

BR Research: As far as one can recall, Pakistan’s power sector has been riddled with problems. There was a time when we had surplus electricity and then the past decade saw a crippling power shortage. Please explain to us how this came about.

Dr. Fiaz Chaudhry: The deterioration started in the nineties. For any utility there are three basic functions namely generation, transmission and distribution. Before 1994, all generation plans were the responsibility of WAPDA, and it used to assess the demand to plan generation accordingly so that a balance was maintained.

Around that time, there was increasing interest in unbundling the generation component in many countries around the world including the US. Unfortunately, the Benazir government at the time also made a decision to separate generation from WAPDA and open it to the private sector. But we were not ready for that.

The Power Policy 1994 was introduced, which I call a procurement policy rather than a planning policy. Investors were getting lucrative returns and there was presence of vested interests that led to the planning process being bulldozed and unnecessary megawatts being added to the system. This led to over-pricing, and because all risks were borne by the government meant everyone wanted to put up a power plant. The result was an additional 2300MW of installed capacity more than what was required at the time in 1994.

While the world used competitive bidding to set tariffs, we introduced upfront tariffs, which were loaded with incentives. The decision making process was compromised by appointing junior officers lacking integrity who ceded to pressure by these vested groups. The generation is there now but it was neither bought nor sold. How can the money be recovered and where will the capacity payments be paid for? This is what has been happening throughout the history of Pakistan.

Then during the Musharraf era from 1999 to 2005, there was hue and cry over the surplus power which had been installed in the previous governments. This led to the accumulation of circular debt for the first time as capacity payments for many power plants had to be paid. The contracts were take or pay in nature so capacity payments were guaranteed even if there was no off-take by the government. We tried to export to India but they were producing at a much cheaper rate and refused to buy from us. The government at the time hurt the investment environment by discouraging new investment and a lot of effort was directed towards recovery. The same mistake is being repeated by this government.

Back in 1999, WAPDA wrote a letter to the government that warned that load-shedding will start in 2005-6 and highlighted the need to set up more generation. However, as there was plenty of surplus power in 1999 the government did not heed the advice. The result was a deficit from 2005 to 2013 and constant load-shedding took place.

BRR: Lets’ talk about circular debt in more detail. Recent estimates put the figure at Rs1.5 trillion. When the PML-N government came into power they cleared more than Rs400 billion circular debts but it is now more than triple that amount in less than six years. Why does it keep ballooning?

DFZ: The circular debt came into the equation when the planning process was disregarded and power plants were set up without following any processes and proper demand forecast. A major reason has been non-compliance of the NTDC’s Grid Code 2005, which gives detailed instructions on every aspect of the power system and can be considered as the bible for the power sector.

There has been an absence of a power generation plan by NTDC and no monitoring from the side of the regulator. In such a situation everyone becomes a generation planner and lobbies rule. This leads to sub-optimal generation resources and the induction of wrong technology with high capex costs.

This drives the tariffs up as there is no reference or least-cost option available from the NTDC plan. The end result is creation of potential capacity trap with huge volume of capacity payments. There is also the risk of early retirement of value generation assets due to underutilization. In addition, as transmission is largely ignored, this leads to higher losses that again lead higher transmission tariffs. All of the above is a vicious cycle and leads to circular debt.

BRR: What is the solution to these problems then?

DFZ: The power sector needs to be structured correctly first and foremost. There needs to be a merger of some power sector entities to create a new organisation called “Independent System Operator” to avoid duplication of efforts and conflicts. On the other hand, the NTDC needs to be tasked with the planning task and develop an Integrated Energy Plan (IEP) for at least 20 years.

The Private Power Infrastructure Board (PPIB) along with the Alternative Energy Development Board and the provinces need to procure generation capacity and energy needs only according to the developed IEP plan. The NTDC’s role should be that of the market operator and to promote an efficient and openly competitive market for electricity.

The NTDC’s grid code needs to be followed while simulation studies need to be conducted to assess the need for the type of generation projects, their utilization and fuel usage. This will avoid idle capacity and must run energy payments. The existing power purchase agreements (PPAs) need to be renegotiated with the Independent Power Producers (IPPs).

BRR: You have run the numbers on the financial impact of the power sector from 2019-2025 in collaboration with LUMS. Please share some insights from your analysis.

DFZ: Let’s talk about the capex requirement first, which is about $65 billion from 2015-2024 out of which $50 billion is required in generation and $15 billion in the transmission and distribution network. This is a serious undertaking and amounts to doing the work that we have done in the past seventy years in the next five years.

The total power sector payments including generation, distribution and transmission components would amount to roughly Rs5 trillion in 2025, which is around Rs2.5 trillion for this year. To put this in perspective, our defence budget and foreign debt servicing combined for this year equals close to Rs4 trillion.

In the normal demand scenario that we modelled, the capacity payments will increase from Rs773 billion to Rs1,610 billion (over 200 percent increase), while the capacity payment ratio in the basket price changes from 50 percent to 70 percent by 2025.

The energy payments for “must run” plants will increase from Rs322 billion to Rs523 billion (over 162 percent increase) and this will cause the competitive market available to shrink drastically. The energy payments for power plants under competitive bidding will decrease from Rs427 billion to Rs204 billion essentially becoming less than half.

BRR: The baseload is only 8000MW meaning that this is the amount we use more or less throughout the year except for peak demand in summers. However, installed capacity is now close to 35000MW. What should be done to utilize the excess power?

DFZ: The need is to increase the base load from 25-40 percent of peak demand in the next three to five years by encouraging and facilitating local manufacturing. This is inevitable for sustainability of the power sector.

The special economic zones (SEZs) should be established where existing transmission lines are available and connections can be given immediately. International manufacturers must be encouraged to establish manufacturing facilities in Pakistan. This will allow us to sell the excess electricity that we are producing.

There is also a need to encourage electric vehicles (EVs), which is a great flexible load for the grid. Moreover, indigenous research and development in the energy sector needs to take place by engaging universities.

BRR: Despite a ban on imported fuel power plants, a fourth R-LNG power plant of 1263MW has been approved for Punjab. What is your view on this?

DFZ: I opposed this decision when I was head of NTDC, and it is against the recommendations of the Demand-Supply Analysis 2018-2025 report. According to the financial impact analysis this will result in Rs85 annual financial commitment for 15 years as part of the fuel supply agreement alone. If this power plant would not have been procured, it would result in savings of Rs5.5 billion in 2020 all the way to Rs41 billion in 2025.

BRR: What are your thoughts about the regulation in the power sector?

DFZ: There is an inherent design flaw in Nepra. Members are nominated from provinces on quota basis but what regulatory experience or technical skillset do they possess? This leads to these members relying on the technical input of junior staff, which results in poor regulation. It also means it is easier for the regulator to succumb to pressure from lobby groups.

The NTDC grid code was never followed and it was Nepra’s responsibility to have the grid code implemented. If it had been followed in letter and spirit, the power sector would not have been in this mess. When has NEPRA ever written to NTDC that it is supposed to submit a power generation plan to the regulator in the past 15 years? This happened because there is compromised leadership in both institutions. The result was a demand supply gap that led to interventions by bureaucrats and political government. Unfortunately, Nepra became a licensing authority rather than a regulator.

BRR: There have been proposals of decentralising the power sector to provincial level following the 18th Amendment. Do you think it is feasible to do this?

DFZ: No. It will only exacerbate the mess in the power sector. The federal government was unable to handle the planning process and coordination amongst the 14 departments, which came about as a result of unbundling of WAPDA. Imagine the coordination and effort required to manage 14 departments in each province that will add up to a total of 64 departments. How do you expect the provinces with their current institutional capacity to undertake such a mammoth task?

BRR: Please tell us about the initiatives at the LUMS Energy Institute.

DFZ: We have undertaken a comprehensive study of electricity demand and supply scenarios with a focus on capacity and financial impact from 2019-25. We have also come up with electric vehicle policy recommendations, which utilize excess electricity, improve the environment and reduce the fuel import bill. There has also been an assessment of competitive electricity markets.