Two Years of PTI-Led Government: "Power sector: The road less travelled"

ARTICLE: The second year in office was surely much better than the first for PTI, in terms of performance on the energy front. "Much better" it is, but far from satisfactory. This is how deep the energy sector mess has been. Starting with the positives will help. For one, the government should be rightfully credited for its achievements. And two, there are not many.

The single most important achievement to PTI's credit in the energy sphere has been bringing the power producers on the negotiation table. Recall that the government has been very vocal in criticizing the predecessors for the lopsided IPP projects during the regimes which have led to expensive power. That was fair criticism, and the government's effort to engage the power players in a meaningful dialogue must be appreciated.

What the negotiations and the resultant MoU with the IPPs pertaining to 1994 and 2002 policies have done is set good precedence and solid foundation for years to come. While the impact of the first phase of negotiations with private power producers of yesteryears is hardly significant, considering the share of generation in total pie, and the respective stages of investment some of these power plants are in, the stage it sets for future negotiations holds more importance.

Convincing investors to change the returns indexed in dollars to rupees would not have been easy. The bigger challenge now awaits as the focus will shift towards government's own power projects, and most importantly, the CPEC power plants. That is where the meat lies, as that constitute a larger chunk of the generation pie, and the savings on debt and ROE components can be much more sizeable. Even more importantly, the template can be used for all the later stage power plants that are still away from financial close. Well done on this. Now, move onto other matters. From controlling T&D losses to billing collection, from unfunded subsidies to rising circular debt, and from the inability to pass on the prices to unrealistic demand forecast - the list is long. And worse still, the list is age-old, which is more worrisome and tells why the energy problems today are bigger and more complex.

The power generation capacity today stands at around approximately 40,000 MW. That is comfortably higher than Pakistan's current peak requirement at 27000-28000 MW, which does not last for more than a few weeks. The credit largely goes to the previous PML-N government for installing (more than) enough power plants to cater for the country's demands. Power generation capacity is not a problem today.

But power demand is surely an issue that needs fixing. Not entirely for the government's own fault, but a problem nonetheless. Having more power in the system than needed at most times, essentially means having excess power that is available but not produced. That means the capacity charges keep on adding to the power tariff, for power that never stands a chance to get generated.

The country's power demand is by and large a good reflection of the economic activity - and the last three years have seen 120 billion units generated per annum. There has been zero growth in power demand in the last three years. The generation capacity has gone up by 10,000 MW. Do the math, why the capacity payment component today is 70 percent of the power purchase price - with over Rs1,000 billion per annum, from less than Rs300 billion four years ago.

And then the 120 billion units produced become a little over 100 billion consumed. The transmission and distribution losses at 18 percent continue to date. The T&D losses in FY15 were 19 percent. Plans were put (on paper and not in place) to bring the losses down by 1 percentage point every year. By that token, the losses should have been 14 percent today. But they continue at a level seen five years ago.

The regulator allows T&D losses in tariffs at 15 percent, which is already higher than all acceptable standards, and even that has not been met. This alone adds Rs30-40 billion in losses than are not incorporated in the tariffs. The uniform tariff policy across the country means the under-par performance of one disco becomes a burden on the consumer of a better performing one.

There is no incentive for a disco to perform better, and under-performance is not penalized, rather it is indirectly incentivized. The technical capacity handicap of discos is another area where the government has completely failed to even initiate a process that could be termed "reform". An even bigger issue has been Discos' billing collection stuck at 90 percent for five years. Unlike T&D losses, billing collection is assumed at 100 percent by the regulator in tariff determination. This gives rise to another Rs100-120 billion to the hole that is circular debt. The government's inability to timely decide on tariffs, in passing quarterly adjustments, and overrunning the subsidy amount have also added to the woes. Other than the commendable negotiations with the IPPs, there is nothing in the reform basket of the energy sector. The government would do well to think beyond pricing alone. Structural reforms and price rationalization can be done simultaneously too. The sooner the government gets on with the reform process, the better. Two years may not be enough time to end all the ills, but it is good enough to start a process. Maybe year three is when the PTI walks the talk and start the much promised energy reforms.

Copyright Business Recorder, 2020