Pakistan’s Power sector debt and prices continue to be one of the key challenges facing the coalition setup in its attempt to revive the struggling economy of the country. Along with issues of tax collection growth, managing the country’s external and internal debt, boosting exports and GDP growth it is one of the five key issues that plague the economy. In this article we focus primarily on electricity component of the issue since power sector consists of two components: Gas and Electricity. Starting in 1990s the government embarked on an ambitious program to end the issues of load shedding and unavailability of electricity by inviting Independent Power Producers to setup plants in Pakistan in exchange for favorable deals backed by sovereign guarantees. Similar policies then continued in subsequent years, though Dams and nuclear based plants were also added to the mix of Gas and coal fired plants that were part of the initial policy. By 2013 Pakistan was facing a severe power crisis with load shedding in major cities touching 16 hours leading to acceleration of such plant setups. Though successful in reducing the power crisis and increased households with access to electricity, since then energy costs have soared at an alarming pace and are currently a huge issue both politically and economically for the country with the past six years having been particularly tough for households and industry alike.
Electricity component of circular debt as of January 2024 stands around 2.635 trillion rupees. Power purchase Prices (PPP) depend upon two components: Capacity purchase price (CPP) and Energy purchase price (EPP). CPP is paid to coal and gas plants mostly setup by Independent private producers (IPPs) for their “availability” where as EPP consists of operational costs and fuel procurement. For fiscal year 2024 CPP is 2.11 trillion where as EPP is 1.048 trillion which is 67 and 33 percent of total cost respectively. Over the last four years capacity payments have more than doubled from 860 billion in Fiscal year 2020 whereas EPP costs then were 621 billion showing almost 70% increase in four years. The major cause for the massive surge in CPP is due to rupee dollar parity since per unit price to be paid to IPPs have been fixed in dollars and there has been doubling of Dollar price in this time period. Furthermore capacity payments continue to increase regardless of consumption or production since agreements with producers stipulate payments on basis of capacity rather than production and installed capacity has increased to 46,000 MW compared to 26,000 in 2015 with IPP’s playing a role. Increased coal and RLNG prices which are imported for fuel production along with weaker rupee has similarly fueled EPP leading to overall expensive electricity for both industrial and individual consumers. To top it off there are also power theft and distribution losses due to inefficient transmission systems that also end up adding onto the circular debt and bills of consumers. 476 billion rupee worth of electricity was reported stolen in last fiscal year. All these factors led to Pakistan now having the second highest rates for energy prices after Srilanka for all consumer slabs. Industrial consumers per textile manufacturers association, though reliant on primarily gas for energy, are also getting grid electricity at 16.7 cents per KWh compared to 8.6 and 6 cents per KWh for Bangladesh and India respectively.
To address these challenges if fiscally prudent government could increasingly subsidize those using below 200 units to help lowest strata of society. For current fiscal year 579 billion has been budgeted, 310 billion of which is earmarked for IPP’s, and 315 billion for K-electric consumers. 55 billion has also been arranged for power sector subsidy for Azad Jammu and Kashmir. However increased subsidies, given Pakistan’s fiscal position and opposition from International Monetary Fund (IMF), are difficult and have been cut compared to last fiscal year as well. Secondly attempt is being made to shift to Hydroelectric, Nuclear and local coal supplies for energy production since these are cheaper compared to imported fuel running plants. For March 2024 hydroelectric produced 27.6% of electricity and was number one on the list followed by nuclear which accounted for 25.6%. Future increased production from local coal based plants as well as construction of new dams and nuclear plants should be focused on to reduce cost of production. Cost per unit for hydroelectric is 5 rupee per unit compared to 78 rupee for a thermal based IPP for example for last fiscal year showing stark difference. Lastly capacity payment charges need to be addressed since they are 67% of total cost and any major reduction requires them to be addressed more than any other factor. As an example ironically if capacity issue isn’t resolved stopping theft will just lead to similar costs under the head of capacity charges rather than line losses. One approach is to wait until these contracts come up for renewal and negotiate better terms. Another is for government to immediately begin talks on renegotiation for better terms. However our history with such action normally ending up challenged in international courts with heavy penalties imposed may have led to the government not following through on such action. Lastly transmission systems have to be upgraded to reduce line losses as well as action taken to curb power theft via legislation and action.
With the country now caught in a cycle of rising energy prices one thing is certain that in the short run there are no quick fixes that can be implemented but in the long run local energy production, renegotiating our capacity payments, increased subsidies for the lowest strata and reducing theft and line losses can be used to give some relief to the nation. It is hoped that this relief will be materialized sooner rather than later.a
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