Smoke and mirrors

Pakistan’s energy sector is in a peculiar mess. On paper, the electricity supply is sufficient at a lower energy cost compared to the past. However, the total power purchase price has become unaffordable.

Demand is falling due to price increases, and even with constrained demand, the actual supply is insufficient to provide power across the board.

Lately, frustration has been directed at Chinese investors, while the core problems are the overly generous sovereign contracts made by successive governments, inadequate transmission and holistic planning, and poor governance.

Pakistani authorities perhaps do not consider the long-term implications when making international contracts.

The shortcomings could be due to incompetence, corruption, or both. Numerous examples illustrate this issue, such as the mining contract in Reko Diq, rental power plants, the Iran-Pakistan pipeline, Independent Power Producers (IPPs) during different tenures, and long-term RLNG contracts.

We sign these contracts and later realize they are not in the country’s best interest, then criticize them in the media. Sometimes courts intervene, and in other cases, the government attempts to renegotiate. In some instances, negotiations succeed, while in others, we face international arbitration.

The latest obsession concerns Chinese IPPs. There is no doubt that the growing capacity payments on IPP debt (where Chinese financial institutions have the lion’s share) are unsustainable.

BR Research has been the biggest critic of having too many power plants under very little time and has been forewarning about the capacity trap since 2015. Now, the chickens are coming home to roost.

However, the blame lies with successive governments for making sovereign contracts and pushing the Chinese to install numerous plants. Lenders were reluctant to approve imported coal plants, especially in Sahiwal.

However, Pakistan’s government at the time pushed for it by offering lucrative returns and expensive insurance to cover the risk. The same people in power today blame the Chinese for their own wrongdoings.

“There are three kinds of lies: lies, damned lies, and statistics.” Media personnel use statistics for their own convenience to make points. Let’s clarify some numbers. The power purchase price was Rs876 billion in FY15 when the PKR/USD exchange rate was 101.4, and it’s expected to be Rs3,358 billion at an assumed PKR/USD rate of 300.

Since almost all contracts are in USD and most debt payments are in USD, the price is three times higher in PKR due to currency depreciation. The increase is a mere 30 percent in dollar terms over the last ten years. The capacity payment has grown tenfold in PKR from Rs246 billion in FY15 to Rs2,090 billion in FY25, and the growth is 2.9 times in USD.

This could have been lower had rational decisions been made during 2015-18. The question is when the government-owned nuclear plants financed by the Chinese were conceived, four RLNG plants with mostly local debt were in process by federal and Punjab governments, hydro expansions were underway, and China was investing in Thar coal under CPEC, why did the government push for numerous imported coal plants?

Even with all these mistakes, the power purchase price could have been lower today if transmission and distribution constraints and contractual obligations had not been hurdles.

For example, the fuel cost of imported coal is estimated at Rs16.7/unit in FY25, while its implied utilization is a mere 17 percent for producing 6.5 billion units. The capacity payment stands at Rs395 billion, and due to low utilization, it converts to Rs60.5/unit, making the power purchase price a whopping Rs77.7/unit. The capacity must be paid for at 50 percent take-off, and in the absence of this, payment must still be made.

The question is why the dispatch from imported coal is kept low. This is because higher dispatch from RLNG plants must be assured, as RLNG is imported from Qatar under long-term contracts, and there is no other demand other than for power plants. Interestingly, the fuel cost of RLNG is estimated at Rs25.4/unit for producing 25 billion units.

Another 3.1 billion units are produced on furnace oil (RFO) at a fuel cost of Rs35.6/unit.

Assuming imported coal operates at 75 percent utilization by reducing production from expensive RLNG and RFO, the overall cost saving would have been Rs220 billion or Rs1.7/unit. However, we cannot do this due to the contractual obligation to buy nine LNG cargos from Qatar.

Then the merit order is not being followed due to transmission constraints, especially in winter when cheap power from nuclear (fuel cost Rs1.8/unit) cannot be dispatched to the north, and expensive RFO (fuel cost Rs35.6/unit) is used instead.

Non-recovery from discos adds further to the cost. The gross revenues (including all taxes) of the NTDC system are around Rs4,500-5,000 billion, and 10-12 percent is not collected, costing Rs450-500 billion, which is eventually billed to consumers. T&D losses are at 17 percent versus NEPRA approved 11 percent, causing another Rs220-250 billion deficit.

Adding all this, the cost overrun stands at Rs800-1,000 billion (Rs6-7/unit). No one holds press conferences on these extra costs, which impact us more than the ballooning capacity payments.

That said, we should attempt to lower the capacity payment issue, and it is not impossible. We have already done it twice and may do it again, saving around Rs2/unit but not solving the problem of unaffordable power prices.

China has already agreed to a moratorium on nuclear power plant principal debt repayment for two years (FY24 and FY25), potentially saving Rs100 billion (Rs0.75/unit) annually. However, Nepra is yet to incorporate the same in the tariff. The question is why Nepra is not doing it.

The bottom line is that a country extremely starved for investment should not vilify investors who came to invest when no one else was interested. We should negotiate the debt carefully and ask for a similar moratorium on debt principal payments for CPEC projects, as did for nuclear. Moreover, we should revisit our RLNG contracts with Qatar, where both long-term contracts have price reopening in 2026. Meanwhile, the government should work on solving the core problems of transmission and distribution constraints and deregulating the energy market.

Copyright Business Recorder, 2024