K- Electric (KE) has been in hot waters in the recent past. The critics have expressed their discontent over the poor infrastructure of the company leading to power outages, long lead times for ratification of faults, frequent break-downs, excessive billing and safety issues amongst many other things. Couple of months back, hearing a petition against unannounced load-shedding in the city, the honorable Supreme Court’s three-member bench also took a serious exception to the performance of KE. Also, the idea of allowing more companies to enter the power distribution area has been floated.
A glance at the past and an analysis of the present situation give a meaningful perspective of the state of affairs of KE. A review of the accounts and key performance indicators of the company over the past several years reveal that the company has come a long way since its privatization. Most of the benchmarks and yardsticks against which one can gauge its efficiency, show marked improvement over the years.
Prior to its privatization, KE was one of the most inefficient power generation and distribution companies in the country. Since its privatization, the company has increased its gross self-generation capacity by around 60-65% (addition of around 1,057MW), and a further 900MW is in the pipeline, which is expected to come online during 2021, taking its self-generation capacity to around 2,750MW. Owing to the addition of modern and efficient plants to its fleet, the overall thermal efficiency of the fleet has increased from 30% at the time of privatization of the company to 38% at present, and with the further addition of highly efficient 900MW RLNG plant, the fleet’s efficiency is expected to improve to around 45%. The addition of the new capacity will also help alleviate the perennial load-shedding problem faced by the residents of Karachi.
Since its privatization, the number of its grid stations has increased from 52 to 70, and is expected to touch the 80 mark in the next couple of years. The transmission capacity has risen sharply from around 3,500MVA to around 6,300MVA. The number of feeders has almost doubled, and likewise the distribution capability of the company has also followed a similar trajectory. The number of PMTs has also increased from 9,000 to 28,500. The remarkable development on this front is the significant optimization of line losses (the power lost owing to the old power infrastructure and thefts). Over the years, the company has undertaken targeted loss reduction initiatives, including installation of Aerial Bundled Cables (ABCs), which has massively reduced the thefts via kunda system. The company has converted around 30% of its PMTs into ABCs, and this process continues. Since its privatization, KE has reduced its Transmission & Distribution (T&D) losses from 34% to 20%.
All of these improvements have been possible due to the massive investment in the infrastructure of the company on all fronts. Since its privatization, the company has made a cumulative investment of over PKR 300 billion. KE has ploughed back all cash-flows and profits in the company to bring about this turn around in operational efficiencies.
There are, however, areas of concern that need to be looked into and fixed. First and foremost is the age-old phenomenon of load-shedding that is still prevalent in the city. The company is under-utilizing its own generation capacity, which the company attributes to supply and gas pressure issues which are beyond its control. System reliability is another problem besieging the network, with total transmission outages and total duration of outages remaining elevated. System constraints need to be improved such as overloading of transmission/distribution lines, insufficient transformation capacity, and outages of transmission lines due to tripping. Another cause of concern is the relative under-performance of its generation fleet with respect to heat rate/efficiency and auxiliary consumption. Lastly, the number of complaints pertaining to excessive/detection billing, delay in provision of new connection, replacement of defective meters, low voltage problem, non-receipt of electricity bills, and excessive/un-scheduled load-shedding need to be brought down significantly.
KE remains the sole supplier of electricity to Karachi and other neighboring areas, and conventional wisdom says that bringing in more companies would increase competition that will eventually lead to improvement in overall service and enhance efficiency, but there are other important considerations as well.
Firstly, we have seen that despite the absence of any competition, the company has still considerably improved its operating performance on almost all benchmarks and other yardsticks, as discussed earlier. Secondly, it is important to note that a fair competition would only be possible when there is a level playing field for all the players. KE remains obliged to service the entire area, including the high loss areas. It sells at regulated tariffs across all areas, maintains the vast network and deals with all the related challenges. If the competition has no such obligations to build and maintain a network and is relying on KE network, then this will not solve the problem, and may exacerbate the issue at hand. It will not lead to any improvement in network and system reliability.
Moreover, if the new entrants can pick and choose their areas and customers, and can sell at negotiated tariffs, KE would be at a disadvantage as it would be left with servicing of high-loss areas which will lead to an increase in overall tariff of the remaining regulated customers. After all, there is cross-subsidy model across the country and KE network. If large number of low-loss consumers walk away, electricity will become more expensive for the remaining consumers. With such an unsustainable model, the company will not be in a position to carry out all the system upgrades, capacity enhancements that are essentially required. Consequently, the demand and supply situation will worsen further.
Lastly, consistent policy frameworks are crucial to mitigate investor risk. Policy changes before the stipulated periods and unilateral revocation of contracts violate the investor rights, create regulatory uncertainty, and damage Pakistan’s position as an investor-friendly destination. KE has exclusive rights to sell power till FY2023, and any amendment in the contract by the government or NEPRA, or premature termination of contract will shake investors’ confidence and raise the regulatory risk for any new entrant. It might also put in jeopardy the potential sale of KE to Shanghai Electric. Power sector reforms are a part of the government agenda, and should be done in a well thoughtout, smooth and predictable manner.
(The above article reflects the personal views of the writer, Dr. Amjad Waheed, CFA. It does not necessarily reflect those of the newspaper).
Copyright Business Recorder, 2020
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