The power sector challenges

Due to a significant economic downturn and resentments in public, the government had no choice but to implement important reforms in power sector by engaging in renegotiations with Independent Power Producers (IPPs) first. As a result of these negotiations, a certain percentage of the IPPs agreed to modify their contracts in a way that is mutually beneficial.

However, the situation was complicated by the fact that at least four of these IPPs had not generated any electricity at all in the previous year.

Despite this lack of production, agreements were still reached that included capacity payments for these non-producing IPPs, amounting to around Rs. 72 billion.

Many people raised their eyebrows, particularly those who have been facing hardships from rising electricity costs. In stark contrast to this situation, a small number of IPPs responded with threats of legal action if the government proceeded with its proposed plan. This response showed a complete disregard for the struggles of everyday citizens.

Let us delve into the reasons behind these reforms and government’s negotiations with IPPS. In the 1990s and the years that followed, the Government of Pakistan entered into agreements with IPPs to address a pressing need for electricity. During that time, there was a remarkable rise in the demand for power as more industries developed and the population grew.

This surge in energy consumption led to a significant imbalance between the supply of electricity and the growing demand for it. In response to this challenge, decision-makers in the government offered very attractive terms to these private companies to encourage them to generate the required power.

However, the problem arose when conditions set in these agreements turned out to be burdensome and did not align with the best interests of the country. This situation led to a growing concern among policymakers and the public, as the initial intentions of securing a reliable power supply were overshadowed by unfavorable contractual terms that were increasingly hard to manage.

Pakistan accumulated a significant number of power plants over the years. The main reason for this large investment was to get ready for future growth in the economy. However, the expected economic expansion did not take place as planned. As a result, the country ended up with more electricity generation capacity than it actually needed, costing the economy billions of dollars.

Many of these power plants were constructed under the CPEC initiative, relying on expensive imported coal and liquefied natural gas (RLNG) as their primary fuel sources. It involved entering into long-term contracts with Qatar that operated on a take-or-pay basis.

The combination of excess capacity, high operational costs, and reliance on expensive fuel sources resulted in a challenging environment for the economy, affecting both businesses and vulnerable communities across the nation.

The depreciation of the Pakistani rupee against the US dollar significantly boosted the profits of IPPs because the financial structures that had been set up were linked to the value of the US dollar, resulting in higher financial burden on the government. Few reports indicated that IPPs had been receiving yearly payments exceeding Rs. 2 trillion.

In Pakistan’s energy landscape, people shift to gas for winter heating decreasing the demand for electricity to 12,500 MW,as compared to peak demand of 30,000 MW in summers. Whereas, the country’s installed generation capacity stands at approximately 44,943 MW.

The government has contract obligations that require them to maintain and pay for the entire installed capacity even when it is not in use.

It is crucial to understand here that the recent adjustments made with IPPs will lead to a reduction in costs for consumers by approximately Re. 0.70 per kilowatt-hour. While this may seem like a modest decrease when considered individually, but will save Rs. 400 billion over the duration of existing contracts.

The willingness of IPPs to engage in this arrangement highlights its economic benefits for all involved parties. This collaboration ensures that resources are utilized more effectively and the costs remain manageable.

These renegotiations mark the beginning of a long and intricate reform process that is vital for the future of the energy sector. The era of government support and guaranteed profits is coming to an end. Instead, IPPs must now embrace competition and work to improve their services and reduce costs.

The reforms also include changes in the transmission and distribution value chains. One initiative is the restructuring of the National Transmission and Dispatch Company (NTDC) and establishment of an Independent System and Markets Operator to create a foundation for competitive electricity market where multiple buyers can connect with various sellers.

The most crucial aspect is the transparent privatization of Distribution Companies in accordance with basic economic principles in order to motivate them to perform better and offer lower prices.This diversity allows consumers to select from multiple service providers.

Additionally, privatization must ensure that the governing bodies are given authority to minimize line losses and work on tightening the acceptable limits of these losses.

Anything beyond the standard practice, whether losses are technical or non-technical, should not be tolerated. Establishing a robust governance framework is crucial to achieving these goals. This framework will guide the actions of service providers and regulators to reduce losses and foster a competitive market environment.

The power sector is a highly intricate system. There are both intended and unintended consequences arising from decisions made within this sector. Because of this complexity, it is critical that policy options are continuously reviewed and adjusted to achieve best possible results. This reform process has already begun with the renegotiation of existing contracts and is expected to move forward with additional structural reforms. Although there will be individuals who oppose these changes and others who will express criticism, the primary focus must always remain on achieving better and more sustainable outcome for the consumers.

Even those who are skeptical should prioritize the well-being of the public.

Copyright Business Recorder, 2024