Messy business: A dark, black market in the private power sector

Corrupt govt officials receiving fake capacity payments, contributing to circular debt.

ISLAMABAD:

A black market is said to be working in the private power generation sector in connivance with corrupt government officials who are receiving fake capacity payments amid the authorities’ inability to determine the actual efficiency of each power plant.

The incompetency on part of the government agencies and syndicated corruption is not only contributing to circular debt, a significant chunk of it said to be fake, but is also adding to the cost of power generation, which the consumers have to pay through their noses, revealed background discussions with key government functionaries, former officials and independent energy sector experts.

“A significant part of the Rs480 billion circular debt payments that the PML-N government cleared was on account of idle capacity payments,” said the Ministry of Finance officials.

But no one was sure how much of it was actual and how much was fake capacity claims. The Rs480 billion payments did not include Rs23 billion disputed claims.

Officials, however, admitted that Rs270 billion payments that the government made to 26 independent power producers (IPPs) on account of circular debt could have been far lower, had the government paid according to actual efficiency and got verified capacity claims from a truly independent auditor.

“This black market dates back to the time when these IPPs started producing electricity,” according to a senior government functionary who is among the top five decision-makers but spoke on condition of anonymity. He said the IPPs were overcharging the government through fake capacity payments.

How the black market works 

Under the agreement, the government is bound to pay capacity charges to the IPPs, if it decides not to purchase the electricity, due to any reason. The corrupt elements in the Central Power Purchasing Agency (CPPA) exploit this.

Every power plant has to be available for generation for 91% of the total time, according to officials. When power plants are not available due to any reason, including maintenance, the management asks the corrupt officials not to place demand electricity, which makes the government liable to capacity payments, said a leading energy sector expert who worked with the previous government.

“The corrupt elements agree to the idle capacity payments without verifying whether the plant actually has the capacity to produce that amount of power,” said the officials.

Abdullah Yosuf, chairman of the IPPs Advisory Council, maintained that capacity payments are determined on the basis of a fixed formula, which includes the cost of running a power plant, rate of return and interest payments.

Heat rate testing

Another issue, which is bigger than fake capacity payments, is heat rate testing of the plants, which determines the efficiency, according to officials of Ministry of Water and Power. They agree that no payment is transparent until the heat rate of each plant is known. The efficient plant will consume less amount of fuel for power generation, which will lower the cost of generation. But most of these power plants are running below the standard efficiency rates, admitted officials.

“Another grey area is that some power plants have better efficiency but, on paper, they have shown less efficiency, claiming more fuel for power generation,” said the officials. To unearth the scandal, it is easy to determine actual efficiency of each plant by comparing fuel consumption with dispatched electricity, said an energy expert.

Fuel makes about 70% of the cost of generation and the cost of inefficiency is increasing the cost of generation, which the government is unable to pay that also contributes to the circular debt.

The Economic Coordination Committee, the Asian Development Bank and the World Bank have made attempts in the past to determine the heat rate of every plant but all such efforts were foiled by these vested interests.

Abdullah Yusuf said determining heat rate was the responsibility of CPPA and the regulator, the National Electric Power Regulatory Authority.

After clearance of Rs480 billion, the circular debt has again piled up to Rs225 billion, which also includes fake capacity claims.

“The only way to break this mafia is to redo the whole system and separate the CPPA and appoint experts from the private sector to run it,” added the officials.

Probably sensing deep-rooted corruption, the IMF has imposed a condition to separate the CPPA from the National Transmission and Dispatch Company. “A transparent settlement system will allow future wholesale trading of electricity,” said the IMF in its recent report.

The IMF also seemed skeptical about the credibility of the Rs480 billion circular debt payments. It has asked the government to hire a firm to conduct technical and financial audit of the system to identify the stock and flow of payables at all levels of the energy supply chain.

The spokesman for the Ministry of Water and Power was not available for comments despite repeated attempts.

Published in The Express Tribune, January 12^th, 2014.

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