Capacity payments projected at Rs1.5tr

Pakistan is likely to pay Rs900b in capacity charges to power producers in FY20

KARACHI: The annual capacity payment for not utilising surplus power plants is projected to soar to an unsustainable level of Rs1.5 trillion over the next two years as Pakistan continues to add more dirty and expensive capacity, mostly under the Thar coal and CPEC projects.

“Capacity payment to power generators can reach to an unsustainable level of Rs1.5 trillion ($9 billion) over the next two years,” Australia-based Institute for Energy Economics and Financial Analysis official Simon Nicholas said at the launch of a study titled “Thar Coal: Locking Pakistan into Unsustainable Capacity Payments” on Friday.

In other words, the projected capacity payment of Rs1.5 trillion will be equal to 75% of the existing circular debt of around Rs2 trillion in the energy sector.

“With electricity demand growth slowing even before Covid-19, Pakistan is faced with the increasing financial burden of power capacity payment and overcapacity risk at a time when renewables (wind and solar) are the cheapest source of energy,” the study found.

Two more Chinese-financed coal-fired plants had achieved financial close (having arranged financing for the projects) so far in 2020 with more in the pipeline intended to meet the overestimated demand growth projections, he said.

High capacity payments to thermal and coal-power generators, coupled with surplus installed generation capacity, had been adding to the increasing cost of electricity and worsening power sector’s circular debt, he said.

“The government of Pakistan has now asked China for easier repayment terms on 12GW of CPEC (China-Pakistan Economic Corridor) power projects, with total investment of $30 billion,” he said.

“Sindh province has the potential to pave the way for the country to steer out of the financial crisis in the power sector by building renewable energy projects like wind and solar,” Nicholas emphasised.

Pakistan is estimated to pay Rs900 billion in capacity charges to power producers in outgoing fiscal year 2019-20 compared to payment of around Rs650 billion in previous fiscal year 2018-19, it has been learnt.

The FY19 capacity payments were almost 60% higher than FY18, which kept power prices on the higher side for end-consumers despite a notable drop in fuel cost, according to a State Bank of Pakistan’s (SBP) report published in July 2019.

Wood Mackenzie Power and Renewables senior analyst Sohaib Malik said capacity payments had already grown to unsustainable levels and they would become problematic in the future.

“IPPs (independent power producers) are alive on the ventilator of subsidies provided by the government. They will collapse once they are removed from the ventilator,” he remarked.

Recently, the federal government has taken notice of the growing capacity payments to power generators and has brought them to the table to ease the chronic financial stress. These payments have kept power tariffs on the higher side and remain a hurdle to reducing the cost of doing business in Pakistan.

World Wind Energy Association (WWEA) Operations Manager in Pakistan Zeeshan Ashfaq said the Cabinet Committee on Energy had abruptly banned the development of renewable liquefied natural gas (LNG) projects and set its focus on coal-energy projects in December 2017.

He urged the federal government to announce the renewable energy goal as power tariff of wind and solar plants was cheaper than hydel power in the country. “They (wind and solar projects) make economic sense,” he said.

Some 2,100 megawatts of thermal (oil and coal-fired) electricity is going to retire by 2025. “The government should replace the retiring capacity with renewables,” he stressed.

“Others (developers and operators) should follow in the footsteps of the Sindh government, which will add 400 megawatts of solar capacity, courtesy the World Bank, by 2023,” he said.

Published in The Express Tribune, June 27^th, 2020.

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