Power sector transformation — reality or myth?

Given the interdependence of overall economic output to the provision of energy, it was no surprise that the power sector’s transformation weighed in heavily on the development agenda of the incumbent government. With the country now in an election year, a critical analysis of the government’s performance in a sector which it claims is a cornerstone of its successful governance is warranted.

When the incumbent government took over, the sector’s outlook was bleak with low levels of generation capacity, high transmission and distribution (T&D) losses and monstrous circular debt. Specifically, the country faced a peak demand shortfall of almost 7,300MW, with average T&D losses of 21% and a circular debt of almost Rs500 billion.

The performance of the government at this critical juncture must therefore be judged against the same indicators in order to draw an unbiased conclusion. The said indicators in turn also present a holistic picture of sector performance given that they cover the entire value chain for the sector, ie, generation, transmission, distribution and collection.

In terms of power generation, the government adopted a two-pronged strategy of enhancing capacity utilisation factor of existing facilities, simultaneously with the installation of new power plants enhancing the overall generation capacity in order to bridge the overall energy shortfall. In this regard special consideration was given to power projects under CPEC and projects worth $22 billion were designated as energy priority targeting to add almost 11,000MW to the system.

A thorough analysis of published figures for power generation indicates that the government has achieved significant success with generation capacity predicted to reach almost 28,000MW by the end of this year with a resultantly negligible energy deficit. Similarly, the capacity utilisation factor, a major indicator of the sector’s efficiency, is expected to remain around 78% — a remarkable uptake from 50% utilisation of 2013.

Another key aspect for performance analysis in terms of power generation involves evaluation of power generation cost trends. Generation cost for Gencos has experienced an increase of almost 11% averaging at 10.50 Rs/KWH in 2017. The increase was experienced despite development of new presumably more efficient plants, the government’s initiatives to shift power generation away from furnace oil and introduction of RLNG-based power plants. The observed increase raises serious questions with regard to success of the government’s policy initiatives and priorities within the power generation component of the sector.

In terms of transmission infrastructure, major investments were made under both CPEC and non-CPEC initiatives aiming to both curtail transmission losses and enhancing transmission capacity. On both these fronts the government was able to make significant forward strides with the transmission down to their lowest levels in eight years at 2.31% and an increase in the country’s transformation capacity to 93,224MVA at the end of 2017.

With regard to power distribution, government policy measures and initiatives remained ineffective and the performance of distribution companies remained unimpressive. Average distribution losses remained above global averages and below Nepra target levels whereas recovery ratios too remained below targets set by Nepra. Particularly disturbing is the fact that the declining trend for distribution losses observed in the first three years of this government underwent a reversal with losses increasing to 17.09% in 2017. The government further failed to bring in much needed investment to the distribution infrastructure, prime example of which was shelving of a $5 billon advanced metering ADB project.

The disappointing performance however was not limited to distribution companies and the government’s management of circular debt too remained questionable to say the least. Specifically, circular debt which was paid off by the government following its first budget stood at almost Rs440 billion in January 2018, excluding loans worth Rs400 billion pertaining to the Power Holding Company Limited. Reemergence of such circular debt is destined to counter gains made by the government in power transmission and generation for without sufficient financial liquidity; ability to fully utilise enhanced generation capacity is compromised. Such a reemergence of circular debt is a direct consequence of incoherent governance and lacklustre recovery of billed electricity.

The government may be given fair credit for its performance in terms of enhancement in overall power generation and transmission infrastructure. However major failures within power distribution and overall management of sectors operations and liquidity mean that the sector’s outlook, albeit better than when this government took over, remains gloomy.

Published in The Express Tribune, March 25^th, 2018.

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