Electricity: how to make it affordable?

Govt should make policy decisions to end power supply uncertainty in summers

ISLAMABAD:

On privatisation of a public sector entity, the consumers expect – and in many cases, also experience – an improvement in services and prices.

Not always though, and especially not when the element of competition is missing in the transformation from public to private sector.

So, whenever the governments, in their rush to privatise, miss to put in the critical element of competition in their privatisation process, the consumers end up with a private monopoly, which at times is far more disadvantageous than a public sector monopoly.

When power sector reforms were prescribed in the 1990s, the unbundling of Water and Power Development Authority (Wapda) was said to be critically important to disentangle multiple layers of inefficiencies in generation, transmission and distribution. Hence, 17 power companies were created out of the power wing of Wapda.

How those responsible for privatisation chose to ignore the multiple layers of monopolies and inefficiencies in KESC and allowed it go to the privatisation hammer without unbundling it, defies any logical answer.

The result is that we have K-Electric – a private sector power company which is not only a distribution company (DISCO) holding a monopolistic licence for the Karachi Division and Dhabeji and Hub areas, but also holds monopoly generation and transmission licences for these areas.

Being a monopoly entity having a large captive consumer base, it had no incentive to generate and distribute power competitively. Even after 15 years of privatisation, K-Electric is generating the costliest electricity in the entire country, using power plants of 30-35% efficiency.

Such plants have mostly been decommissioned in the public sector (ex-Wapda) Gencos (generation companies), which now have some of the most efficient plants in the world at 52-63%.

The fuel cost that K-Electric would have charged for such inefficient generation from electricity consumers of Karachi, Dhabeji and Hub, was double the rest of the country in 2018-19.

In terms of total generation, the rest of the country’s system, which was deficient by around 5,000 megawatts in 2015, is now in surplus. On the other hand, K-Electric, which was deficient by 1,250MW in 2015, will still remain deficient in 2021.

It partially meets the shortage out of units borrowed from the National Transmission and Despatch Company (NTDC) system (800 MW). That also helps reduce its generation costs.

When the federal government, in order to help reduce the electricity chaos last year, decided to further increase its supplies to Karachi, it was revealed that the K-Electric transmission system was not capable of receiving any further electricity from the national grid.

There has not been much improvement in the distribution system as well. K-Electric’s distribution losses are still at around 20%, which was supposed to be brought down to 15% as a privatisation commitment when it was allowed a favourable multiyear tariff regime that allowed it to pass on all losses and inefficiencies to its consumers for several years.

The rest of the country experiences an average of 18% in distribution losses despite all sorts of difficult areas. This seems pathetic when compared with only 8.8% losses in IESCO, 9.8% in Fesco and 13.2% in Lesco.

The saving grace for Karachi’s power consumers and its industry has been the federal government’s uniform tariff policy. While the National Electric Power Regulatory Authority (Nepra) determines separate tariffs for all DISCOs and the less efficient DISCOs (such as K-Electric) get higher tariffs for their consumers, the government extends the lowest tariff of the most efficient DISCOs such as IESCO to the entire country.

This policy provides relief to the consumers but also covers the inefficiency of low performing companies. The federal budget pays a subsidy of around Rs120-150 billion every year to cover such inefficiencies.

The burden of K-Electric, ranging from Rs20-40 billion every year, has been the highest in comparison to only 13% of the total electricity in the country that it distributes.

Domestic and industrial consumers of K-Electric would have paid 50% higher tariff than the rest of the country had it not been given extra power supplies from the NTDC system and K-Electric not provided high subsidies every year out of the federal budget.

Is it a sustainably affordable model? Doesn’t it keep the K-Electric consumers at a higher risk than the rest of the country, if some government in future decided to pass on Nepra tariffs to all power consumers; or K-Electric’s continuous failure to increase generation capacity is not covered by the national grid?

Is this a viable approach – to keep Karachi, the economic lifeline of the country, under such vulnerable power supplies?

There is a way out though, for all the three stakeholders whose finances are at high risk under the prevalent K-Electric structure: consumers, federal government and K-Electric itself.

The solution is simple - undo the folly of 2005. K-Electric should be unbundled before it is sold to another private entity. The generation part of K-Electric should become another independent power producer (IPP) and sell its electricity to the national grid as per policy rather than to K-Electric consumers. K-Electric consumers or the federal budget won’t pay for its inefficiencies.

K-Electric should become a distribution company getting cheaper electricity from the national grid pool, like any other DISCO of the country. Hence, domestic and industrial consumers in Karachi, Dhabeji and Hub will have access to the electricity which is 30-40% cheaper than the current K-Electric generation costs.

Hence, K-Electric’s consumer tariff will come down and so will its cost to the national exchequer in the form of tariff differential subsidies. This will also have a positive impact on the tariff of the entire country, bringing about a reduction in capacity charges.

As regards increasing electricity supply to Karachi, the NTDC be tasked by the federal government to upgrade and manage the transmission system from the national grid to Karachi, on an urgent basis, to ensure sufficient supplies during summers of 2021.

Regarding distribution efficiency and price competitiveness, the K-Electric area should be declared a non-exclusive and open region from 2023, when the company’s licence expires.

The government should announce and implement these policy decisions before any new buyer for K-Electric enters the arena. This will also help remove the uncertainty regarding power supplies for Karachi in coming summers.

K-Electric should now begin a new phase of supplying electricity at a good price with a reliable system under a competitive environment, where its consumers enjoy the fruits of good services from a professional private sector company.

The writer has served as federal secretary for finance, water & power, commerce and housing

 

 

Published in The Express Tribune, January 4^th, 2021.

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