Power sector challenges and way forward

The government has estimated an increase of 18 per cent in power purchase price — from Rs22.95 per kilowatthour (kWh) in FY24 to Rs27/kWh in FY25. Since FY2018, power purchase price has increased by 30 per cent — from Rs11.72/kWh to Rs27/kWh.

It is pertinent to mention here that there are two major components of the power purchase price — the capacity charges and the fuel cost. In recent years capacity charges have remained a major contributor to power purchase price. However, according to Nepra, in FY22 the contribution of capacity charges to the power purchase price was 40 per cent, which increased to 62 per cent in FY24 and is projected to increase to 65 per cent in FY25. In absolute terms, the total cost of electricity has increased by 22 per cent — from Rs2,572 billion in FY23 to Rs3,127 billion in FY24. The government has estimated a further increase of electricity cost by 11 per cent in FY25 to reach Rs3,484 billion.

It is interesting to note that the increase in capacity charges has outpaced the increase in total electricity cost. These menacing capacity charges have increased by 46 per cent from FY23 to FY24, whereas the total increase in electricity cost is around 22 per cent.

However, fuel cost has declined by 4 per cent from FY23 to FY24. For FY25, the government has projected an increase in capacity charges by 18 per cent and fuel cost by 1 per cent respectively. Growth in the capacity component would start tapering off once old agreements reached with the Independent Power Producers (IPPs) expire in the next 10 years.

An analysis conducted by the Policy Research and Advisory Council on Nepra’s quarterly adjustment notifications FY24 for capacity payments has revealed that power plants having less than 25 per cent plant factor contribute 29 per cent to the total capacity charges; power plants with a plant factor ratio of 25 per cent to 50 per cent contribute 25 per cent; and power plants with a plant factor ratio greater than 50 per cent contribute 43 per cent to the total capacity charges. About 56 per cent of the total capacity payments are being contributed by power plants having a lower than 50 per cent plant factor ratio. The plant factor, also known as the capacity factor, calculates the difference between the amount of electricity a power plant actually produces over a certain period of time and the maximum amount it could create if it ran continuously at its rated capacity during that same time. Therefore, due to the ‘Take or Pay’ agreements with IPPs, capacity charges are also being paid to those power plants which operate even on 50 per cent or less of their actual output.

Therefore, the policymakers should adhere to the recommendations given by the Policy Research and Advisory Council such as conducting a forensic audit of all IPP plants by independent auditors to assess their set-up costs, equity value, net dependable capacity at the time of their commercial operation date and then subsequent annual NDCs, fuel efficiency, fuel procurements, profit and return on equity, etc. They should then take a legal action through NEPRA.

The Council has further recommended to the government to renegotiate power purchase agreements with IPPs. This involves:

= Converting dollar indexation to local currency indexation and extending debt-repayment periods to curb the escalating capacity component in power purchase prices.

= Establishing a power exchange to eliminate the government as the sole buyer and introduce a more potent multi-seller and multi-buyer market.

= Implementing the Competitive Trading Bilateral Contract Market (CTBCM) and wheeling policy at international rates immediately.

= Initiating gradual privatisation of the state-owned power distribution network to facilitate the expansion of the wholesale electricity market. Distribution companies should primarily focus on their core line business, while the potential for establishing small franchises for supply and distribution can be considered in the future.

Besides, UK’s restructuring model can be applied to revive the electricity supply chain which includes vertical de-integration of generation, transmission and distribution; horizontal de-concentration of the power generation stage; a power pool to coordinate transactions between generators and customers; entry into generation and new local supply arrangements; and privatisation of all entities but one in the industry.

The reforms discussed in this brief would help ease Pakistan’s electricity crisis. IPP reforms would encourage domestic investments and enhance industrial production, thereby boosting much-needed exports. Tariff rationalisation would create industrial competitiveness, generate employment and induce long-term economic growth. The measures highlighted here can make a significant headway toward resolving Pakistan’s immense energy shortages.