Untangling the power sector marred by capacity charges

Is there a way to implement instant cost-cutting in Pakistan’s power sector? Perhaps, but let us first review the industry in general.

The debate over exorbitant profits by Independent Power Producers (IPPs) rages on, with attention fixed on the staggering payments, particularly capacity charges, to the IPPs. Bureaucracy has masterfully diverted attention away from its professional incompetence, personal gains, and willful collusion in extracting trillions of dollars since the 1994 power policy inception. So, who is the real culprit: the IPPs, bureaucracy, or both?

Data suggests the latter is more plausible based on the power sector’s evolution since the unbundling of Wapda — separating generation, transmission and distribution — in 1998. Until then, Wapda managed tariff determination, power generation, transmission, distribution and revenue collection. Instead of improving and strengthening Wapda, functions are now divided among 23 entities, including over a dozen distribution companies (Discos), NEPRA, NTDC, PITC, CPPA, PPIB, etc.

Despite unbundling and creating hundreds of executive jobs, the power sector is in an irredeemable mess. The circular debt has ballooned above three trillion rupees, primarily due to capacity charges from idle plants. These companies, instead of improving reliability, sustainability and efficiency, have ruined the sector.

Let’s look at some figures to explain the root cause of the crisis. Pakistan has an available electricity generation capacity of approximately 42,000 MW. The maximum transmission capacity on a given day is 23,000 MW at the most, whereas daily demand has dropped below 15,000 MW even this summer. The grotesque irony is that consumers still pay for the roughly 20,000 MW in capacity charges to idle plants because power purchase agreements guarantee it.

Despite numerous tax exemptions and other fiscal incentives under the 1994, 2002 and the still valid 2015 Power and Transmission Policies, all power companies enjoy hefty profit margins between 15% and 29%, depending on the technology and energy policy. This all adds to the high electricity costs that poor consumers have to pay through their noses. Cumulatively, the IPPs and power sector bureaucracy, in collusion with respective ministers, have landed the country in dire straits — energy security risk and ultimately default.

Capacity payments mean all power plants — both IPPs and government-owned — charge capacity costs even if not producing a single unit. This implicates state power projects as equal culprits responsible for high electricity costs. The situation for IPPs will worsen and further complicate capacity payments by 2028 when over 11,000 MW worth of hydel power stations — Dasu, Bhasha, Munda, Kohala, Neelum Jehlum, inter alia — come online, adding to capacity payments. If the exchange rate declines at the same pace and no curative measures are taken, end consumer costs may rise to Rs150 to Rs200 per unit.

Now, let’s examine the total capacity of plants owned and run by federal, provincial and AJK governments and WAPDA with up to 20,000 MW generation capacity. These projects earn as much profit as the IPPs. Equally worrying is the high-cost dimension of all state-run power sector companies; officials and board members (usually ministry secretaries, additional and joint secretaries) draw heavy salaries and board meeting allowances under Corporate Governance Rules. For example, a Central Power Purchasing Agency Guarantee Limited (CPPA-G) Manager (BPS-19) earns around Rs650,000 per month excluding medical and bonuses, while the CEO of CPPA-G and MD of the Private Power Investment Board (PPIB) cost the national exchequer up to Rs5-8 million per month excluding other benefits. Recently, NEPRA approved Rs674 million (Rs2.06/kW/Month as market fee for CPPA-G for 2023-24, despite the agency having only 234 employees. This cost is also passed on to consumers. Why?

Simply put, not only the IPPs but the government itself is an equal contributor to the high cost of electricity. Conservative estimates suggest that state-owned companies pocket Rs150 billion per year in profits at the cost of helpless consumers.

Now, what should be the way forward?

Suspending payments to IPPs and thus inviting international arbitration at the London Court of International Arbitration (LCIA) would leave Pakistan with bleak chances of getting any relief. The Supreme Court should intervene to: Stop the Government of Pakistan from charging Return on Equity, Return on Equity during Construction, and Return on Assets/Investments by all federal, provincial and AJK-owned entities, including projects owned by establishment entities, for at least 10 years until the economy stabilises and exchange rates and fuel prices decrease.

Ask the government to stop hefty payments to officials and board members of all 23 power-related companies (NEPRA, NTDC, PPIB, Discos, etc) as most of these officials are public servants (secretaries, additional and joint secretaries) and are double-charging the government through these power companies while in office with no additional effort or time invested.

Introduce a uniform pay structure for officials of all these entities to prevent discrimination. Taking appropriate action could provide much-needed relief to consumers.

Renegotiate with Pakistan-based IPPs to index the payments to the rupee instead of the dollar.

The responsibility for high energy costs cannot be ascribed to IPPs alone. It also stems from the worsening dollar-rupee exchange rate, fuel prices and inflation. Additionally, the demand for grid power has declined over the past few years, making even available electricity redundant. The unbundling of Wapda has been disastrous. Only a radical rethink on how to run the power sector may save the country from collapse.