Capacity payments trap

Fresh electricity rate hikes are increasing anger and frustration among citizens, with the impact of the new rates made even worse by the fact that the peak summer months have just begun. Nepra’s decision to hike rates by up to Rs3.76 per for the third quarter of FY25 unit aims to squeeze another Rs46 billion out of consumers in the third quarter of the fiscal year, mainly to punish the public for the malfeasance of the government and power distribution companies.

Over 60% of the projected new revenue will be allocated towards capacity charges, which are payments to independent power plants (IPPs) that have not produced anything in the mentioned time period. These payments are necessary under the extremely favourable contracts that were thrown around by previous governments to encourage investment in IPPs, since the government could not afford to quickly set up enough generation facilities to meet demand. Capacity charges were a non-issue when we had widespread shortages and most plants were operating near capacity. Unfortunately, now that we technically have excess capacity, the government doesn’t need to buy anything from many of these plants, especially if they are relatively inefficient or otherwise expensive. However, the plants still need to pay staff and other expenses, which justifies the capacity charges. Worryingly, the government has been paying capacity charges in dollars, even when the investment is made in rupees. And despite rising capacity payments, more IPPs are going online, with three more being activated in recent weeks.

This is reflective of the kind of poor planning that created the country’s power crisis and the mountain of circular debt in the first place. The impact of these electricity rate hikes is felt across all segments of society, amplifying the financial strain on households and businesses. The malfeasance that led us here merits an investigation into whether the current crisis was caused by a lack of due diligence, incompetence or outright corruption.

Published in The Express Tribune, June 6^th, 2024.

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