Power industry – need for fresh reforms

Reforms should be reviewed to see whether they will address challenges or aggravate them

ISLAMABAD:

Misaligned and reactive policies have perhaps been the greatest woes for Pakistan’s power sector.

Be it the 1994 and 2002 power policies, which rightly incentivised the generation business but failed to build a consumer protection mechanism over the years based on past learnings, or more recently, the proposed changes to the sector’s landscape without effective consultation and impact analysis, potentially benefiting only a handful at the cost of masses, the sector calls for holistic and comprehensive reforms, rather urgently.

Revelations made in a 278-page inquiry report on the power sector released last year have unarguably raised many eyebrows. The report questions blind continuation of policies, despite realisation in the late 1990s, which enabled independent power producers (IPPs) to continue to make billions over the last two decades and locked the government of Pakistan into expensive deals.

The only positive side of these expensive contracts is that the current situation with respect to availability of power shows a marked improvement from the past.

A closer and deeper analysis of the sector reckons that the real, and perhaps much bigger, problems lie in the transmission and distribution (T&D) segment, requiring immediate intervention.

Lack of policy incentives to attract private investment, regulatory uncertainty and inconsistency along with governance issues have marred the T&D business. As a result, the sector continues to suffer from network constraints and high AT&C losses, which translate into distraught consumers faced with unreliable power supply and regular upward revisions in tariff.

Over the past 18 months, the consumer end-tariff for DISCOs has been revised upwards thrice with an average increase of 14% and another increase is on the cards.

Despite a significant capacity addition on the generation front, we still have load-shedding in many parts of the country and around one-fourth of the country’s population lacks access to grid electricity.

Clearly, the issue is not just about incentives given to the generation segment, resulting in high and lucrative returns for the IPPs, rather compounding the injury are inadequate incentives for T&D and the over-regulation of these segments, which has led to most of the players either under-performing or not being adequately rewarded or compensated for doing well.

Based on available information, seven out of 10 state-owned DISCOs had cumulative losses of over Rs200 billion in FY18 alone. Calling for policy and regulatory reforms, the Asian Development Bank (ADB) has also recognised that Pakistan’s power sector needs major overhaul, highlighting inadequate tariff and the existing subsidy model to be among the underlying causes of continuous piling up of circular debt.

Furthermore, according to the ADB, while Pakistan has made significant efforts in recent years to expand its electricity generation capacity, the country is yet to overcome the challenge of inefficiencies, distortions and uneven reform progress in the sector.

With such pressing challenges faced by the T&D segment, one fails to comprehend how the recently proposed reforms towards an open market model and exclusion of standard costs and cross-subsidy from wheeling charges are in the interest of the sector at large. These appear to be misaligned with the state of power sector today and look to incentivise certain high-end consumers, leaving the cost of these challenges to be borne by the masses.

If these imported reforms are allowed to be implemented, these would have a catastrophic impact on the already fragile power sector of Pakistan. This poses a serious threat to the country’s stability by accelerating further the continuous increase in circular debt, which has already reached alarming levels of around Rs2.3 trillion.

Ergo, instead of blindly following the reforms initiated in 2015, the need of the hour is to have an independent holistic review of the reforms agenda to see whether they would help address these challenges or aggravate them.

Counter-productive

Power sector representatives believe that in view of availability of surplus power, such reforms are counter-productive and are not the need of the hour.

With surplus power, all stakeholders should align to strengthen the T&D segment as without fixing this segment, there will be no improvement in the overall sector, which is already crippled by circular debt. If DISCOs continue losing money and their good consumers are allowed to leave, this will further hamper their ability to invest in power infrastructure, eventually culminating in further increase in losses of these public sector entities and a threat to reliable supply of power.

There is a pressing need to incentivise greater utilisation of the national grid instead of allowing consumers to choose their suppliers, privatise DISCOs, provide a multi-year cost-reflective tariff with targets for improvement and phase out subsidy from power tariff for targeted cash support programmes. Lastly, for the sustainability of the sector, the role of regulator is of paramount importance.

However, speaking of the local power sector, there is definitely room for a lot of improvement to strengthen the stakeholder consultation process and Nepra must make strides towards ensuring effective stakeholder consultation while recognising the peculiarities of the power sector and balancing the interest of all stakeholders. Let us hope that sanity prevails and instead of continuation of the past agenda of providing incentives to a few, reforms are modified and directed in the best interest of the nation while understanding intricacies of the power sector.

The writer is an MBA from Insead Business School in France and has worked in leading Pakistani banks. He has an interest in power sector policies that affect the economic outlook

 

 

 

Published in The Express Tribune, January 25^th, 2021.

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