NationalVOLUME 15 ISSUE # 20

NEPRA punches power sector’s lights out

The National Electric Power Regulatory Authority (NEPRA) has painted a gloomy picture of Pakistan’s power sector. It has pointed out flaws which it has been identifying for almost two decades, but successive governments have failed to rectify them.

Past governments in Pakistan have intentionally avoided fixing the inefficient and corrupt power supply chain because of political expediencies. Instead of reforms, they pass the losses on to the people. In November last year, the Pakistan Tehreek-i-Insaf (PTI) government approved an increase of 1.75pc in electricity prices for consumers using more than 300 units a month to recover an additional Rs25 billion. It was the fourth hike in 11 months of Prime Minister Imran Khan’s government. The result is that power tariff has almost doubled in the first year of the government. Despite it, circular debt has jumped to almost Rs1,600 billion.

The circular debt continues to rise due to inefficiencies of generating companies, distribution companies’ inability to achieve targets for transmission and distribution losses and recovery ratios. In its State of the Industry Report for 2019, the power regulator found that distribution companies failed to reduce receivables from their customers during the period under review, which swelled by Rs248.85 billion. As on June 30, 2019, the overall distribution sector receivables stood at Rs1,145 billion whereas the receivables at the start of the current financial year were Rs896.15 billion. Overall, the distribution companies showed only 0.62pc improvement in losses over the last year. The reduction in losses for all distribution companies combined translated into savings of around Rs6 billion. The circular debt is a major issue confronting the power sector, which has been aggravated by high transmission and distribution losses for distribution companies.

The failure of distribution companies to show any improvement in their actual level of losses viz-a-viz the authority’s allowed target resulted in an annual loss of around Rs30 billion based on the tariff that remained notified during the period under consideration ie FY 2018-19. A low recovery ratio of distribution companies added to the circular debt. The actual reported recovery by distribution companies remained at around 90.25pc for 2018-19, as per distribution companies’ performance statistics published by Pakistan Electric Power Company (PEPCO).

The impact of low recoveries resulted in an annual shortfall of around Rs130 billion. Although over the past many years power generation capacity has increased, yet some key issues, like high costs of energy could not be resolved. With the exception of a few new power plants, public sector generation companies, with drastically inferior efficiencies, which under some cases have deteriorated to about half of their designed values, have not been taken out of the system against the recommendations of the regulator. Domestic gas, which is one of the scarce resources in the country, is being provided to captive power plants, which use it for running small-size machines with very low efficiencies. If gas is diverted to efficient machines, the cost of the supply to the grid may be brought down. Similarly, long-term contracts for re-gasified LNG import have added to constraints on the system operator in operating it optimally.

The NEPRA observed that centralised governance models for distribution companies failed to bring any noticeable improvement over a period of more than 15 years. It noted that 12,000MW electricity was added to the national grid in the last three years but transmission and distribution sectors were completely ignored.

Pakistan’s installed power generation capacity as of June 30, 2019, stood at 39,145MW. Of it, 36,061MW is connected to the NTDC system whereas 3,084MW is connected to the K-Electric system. About 1,700MW of thermal capacity was added to the PEPCO system during the period, an increase of 7.3pc over the last year. About 1,100MW of hydro-based capacity was also added to the system during the period. The installed capacity does not fully contribute to energy production due to various factors, like auxiliary consumption, impact of site reference conditions and seasonality effects on renewable and large hydroelectric power plants. After accounting for the factors, the capacity, known as the generation capability, is effectively used for meeting electricity demand.

The report noted that the installed capacity of K-Electric’s own generation fleet during FY19 was 2,294MW, the same as compared to FY18. K-Electric’s inability to effectively increase its generation capacity has made it dependent on external power sources, including import from the NTDC system.

The regulator recommended the government consider retiring or replacing public sector generation companies as they were contributing to expensive energy production due to their inferior efficiencies. It also recommended the federal government carry out a thorough analysis of any requirement for the import of additional power by K-Electric from the NTDC system.

The last PML-N government ignored the constant warnings of experts that building capacity without carrying out power sector reforms would only increase consumer prices and the state’s liabilities in the form of inter-corporate debt, though it must be credited for ramping up generation in its five-year tenure as well as the establishment of three efficient RLNG-based power plants. The state-owned oil-based generation plants are least efficient and in dire need of new investment. Professional management is required to eliminate the losses. The country needs to move away from inefficient, centralised power distribution from the national grid to smaller, smarter grids. The smarter generation-distribution model will make it easier for the authorities to find partners to the effort to improve governance of the state-owned power companies.

The power sector can make or break the economy. Unless radical policies are implemented to create an independent, competitive energy market in the country, the government will continue to hike electricity prices and borrow more to pay the producers for the system inefficiencies of the sector without any significant increase in generation.