Undertaking power sector reforms
PHOTO: REUTERS
The government has taken two major steps with remarkable degree of success – report on independent power producers (IPPs) and the follow-up agreement which will reduce power generation costs by a whopping Rs1 trillion over the next 10 to 20 years, provided all generation companies including government and CPEC ones are included.
If implemented finally, it would be a major achievement. Secondly, the government is finally going for revival of Pakistan Electric Power Company (Pepco) in the form of a managing agent, although a holding company could have been a better choice, which would separate policymaking role of the Power Division and keep it away from day-to-day involvement in the running of companies.
Pepco was made dysfunctional in the hope that distribution companies’ (DISCOs) boards would be more effective than Pepco. This has not happened. Appointments on boards could not be merit-based and a two-hour board meeting of unqualified and disinterested directors could not achieve much.
It is hoped that the government would be able to equip the reorganised Pepco with competent people – some through transfers from DISCOs and some from the open market.
We have elaborated on it in an earlier article. We will briefly touch upon other steps the government should take in order to bring about the required change and impact in the power sector.
Surplus capacity and rising capacity charges are contributing to circular debt. More capacity is coming in while demand is not increasing. About 25,000 megawatts of new capacity is under various stages of implementation.
People are nervous as to how capacity payment would be made. Circular debt is being projected to go as high as Rs4 trillion. One solution is to slow down the capacity buildup as much as one can. All interested parties are trying to push their projects, lest their projects are dropped.
Lower tariffs
Tariff reforms are badly needed. The other approach for slowing down the accumulation of circular debt is to increase demand – easier said than done. But it is possible.
There is a known and accepted negative relationship between price and demand. Demand can increase with lower prices and tariff. When fixed costs are high, increased demand at lower prices can increase the contribution to overheads, if not profit.
However, there are several provisos to it. One, the price reduction has to be in paying sectors and not in the subsidised sector, which is already a loss sector. Two, the industrial sector can definitely expand, if electricity prices go down. New products and industries can come up. Products which, hitherto, are not viable can be introduced. Industries can be encouraged to add third shifts.
Three, the IT industry can expand and become competitive, if tariffs are low. Exports can increase. Four, there is much less electricity demand in the night and a special night-time industrial tariff could be introduced.
Five, winters may have a reduced tariff to encourage people to switch from gas where a shortage is being forecast for the next two years. Some steps have been taken in this respect but these were based on mediocre calculations. A scientific study would be required.
Six, there are other areas which should be looked into. Currently, even well-to-do are benefiting from the consumption-based tariff.
Competition
Market and competition should be another focus of reforms in the power sector. Immediate possibilities are in the area of wheeling and competitive bidding for new projects.
Unfortunately, the National Electric Power Regulatory Authority (Nepra) and Private Power and Infrastructure Board (PPIB) are continuing with the traditional system despite their avowed commitment to competitive tariff at least in the area of renewable energy like solar and wind.
We have seen how competition brings down prices in the case of Asian Development Bank (ADB)-funded coal power plant vs other projects. A new framework is under process, called Competitive Trading Bilateral Contract Model (CTBCM). It has to be revised to make it more purposeful.
Currently, it is focused on bilateralisation of generation companies (Gencos) and DISCOs, which will create electricity pricing disparity – something the government is combating in the gas sector in the form of weighted average cost of gas (Wacog).
CTBCM, in many ways, is almost the same as the current merit order. It does propose wire-only DISCOs and a retail electricity competitive regime, which is perhaps its only positive side.
The issue is from where the free electricity will come for competition. All capacity and even new capacity would be bound under long-term “take-or-pay” contracts.
The market can be brought about gradually. Initially, both competitive and regulated sectors would co-exist. A voluntary market exchange should be organised wherein captive power plants and the to-be-retired power plants can trade and compete.
Some portion of take-or-pay contracts may be allowed to be traded. Some new plants may be encouraged to get into the market on a take-and-pay basis. Theoretically, it is possible to pay off the present value of take-or-pay contracts to developers and issue bonds, adjusted through income, under the new market.
But it is highly complicated. A beginning has to be made as it is said that a thousand miles journey starts with the first step.
DISCOs’ reforms are essential. Privatisation has been on the agenda but does not happen for one reason or the other. Wire-only has offered a new opportunity for reducing DISCOs’ risks in the public sector.
In the second stage, DISCOs could be privatised under the leasing model. An immediate step for improving DISCOs’ efficiency would be to divide large DISCOs into smaller ones, especially the ones spread over large geographical areas such as Pesco, Hesco and Mepco.
For reduction in theft and technical loss, the discussion may become lengthy. We would emphasise the redesign and revival of the smart meter programme, which has the potential of controlling theft.
The current programme is purposeless and not feasible. If implemented throughout Pakistan, it would take more than seven years and almost 10 years.
A redesigned programme focused on distribution transformers would be cost effective and can be fast-tracked and completed in two years. Priority should be given to high-loss DISCOS like Pesco, Mepco, Hesco, etc where initial grounding already exists through the earlier US-aided pilot projects.
Finally, Nepra reforms should be on top of the agenda. The IPP report and the subsequent agreement have made it clear that Nepra has been a partner, by design or by default or due to sheer ignorance and lack of capability.
IPP agreement terms should be adopted by Nepra by toning down financial parameters, based on which it has been awarding high tariff, high capex, escalations, high return on equity, interest rates and cash flow-based tariff spread over shorter debt period.
Cash flow-based tariff increases the initial tariff for first five years by 25%, making it even worse.
A formal external review of Nepra is highly desirable. Its members should be appointed on merit rather than on the current provincial representation, which promotes nepotism.
If the Oil and Gas Regulatory Authority (Ogra) can have a merit-based system, why shouldn’t Nepra have the same? It is a separate matter that some provincial enthusiasts want to bring Nepra system to Ogra.
A supervisory board, however, could be introduced in both the regulatory bodies to take care of provincial interests. An appellate tribunal, which has long been opposed by Nepra, has now become a reality under the Supreme Court order.
It should be established as early as possible. Later on, the oil and gas sector should also be included in the tribunal.
The writer is former member energy of the Planning Commission
Published in The Express Tribune, October 5th, 2020.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.