The FCA conundrum

Power regulator Nepra’s recent approval of a Rs 7.1308/unit tariff hike under Fuel Adjustment Charges (FCA) has sent shockwaves across consumer sections in the country. The Feb-23rd hearing on the matter showcased the public sector agencies volley the blame consistently on grid constraints for utilizing a costly mix of RFO/RLNG/HSD power plants.

The Authority’s direction of establishing an inquiry committee post approval of the FCA failed to convince the experts and consumers who minced no words calling into question the massive adjustment in the consumer prices. Generally, the FCA deviates due to fluctuations in fuel prices or altering fuel mix. However, this increase comes in lieu of the inexplicably high energy purchase price of a costly fuel combo for January 2024 which as per CPPA-G data hit Rs 116 billion despite the actual generation being within the projected range of 8.019 billion units. Among the various reasons being cited, unfortunately, little attention is being paid to the real elephant in the room; the deteriorating utilisation of an already constrained & congested grid network.

Much of our power sector ills stem in a fashion akin to our economic crises. We keep producing babies without having adequate resources likewise, we keep creating electrons (generation) without having enough grid capacity & demand to liquidate. The fact that we still adhere to the Transmission Performance Standards of 2005 is enough to gauge the seriousness of the governments on the matter. No wonder the grid condition mirrors the effort. The Circular Debt continues to pile up (Rs 2.3 trillion) while we juggle between short-term & short-sighted debt reduction plans that in terms of impact, remain whispers.

While most grids are built as perfect mesh structures in a closed-loop system with cross-border connectivity for additional stability, decades of negligence have exposed our national grid to frequent blackouts on more than one occasion. Frequency variations & turbine glitches in the North or transmission overloading events on the Southern Grid have aggravated into cascaded failures nationwide as the AC-circuits running parallel to the HVDC system (North-South) are incapable of handling additional load during trip events. This is exacerbated by increasing distortions in the grid, e.g., consider this, while Nepra’s SOI Report puts the impact of T&D losses for FY 2022-23 at Rs 191.2 billion, the budgetary requirements presented in the transmission investment plan for FY2024-25 amount to Rs198 billion.

Furthermore, the major load centers of the country are located in the Northern half (Faisalabad, Lahore, Gujranwala, etc.) while the generation epicenter lies in the South (KANUPP, Coal & Wind). HVDC line augmentation in the South, though beneficial, faces low utilization due to the reactive power requirements on the subsequent AC circuits as it is the distribution structure that primarily liquidates the generated electrons. Severe congestion on the Jamshoro grid plus PPA obligations of thermal capacity payments result in continued curtailment of the ‘must run’ Jhimpir wind corridor, consistently gnawing at investor confidence & profitability. To add salt to injury, low credit rating & volatile geo-political situation mean a perpetually bleak investment outlook has kept our grid isolated from regional connectivity. The generation in the South cannot compensate the hydropower dips during winter due to the North-South congestion, thereby forcing deviation from the economic dispatch to an expensive substitute of Thermal plants (Bhikki Balloki, etc.).

January 2024 is flagged for a sharp spike in FCA; notably, because of expensive plant operation due to North-South congestion. However, the constraints are nothing new and can be easily factored in the Power Purchase Price (PPP) forecast from the beginning of the fiscal year, allowing the FCA to spread over a longer period avoiding the instantaneous hit on the consumers.

For FY 2028, the projected generation of NTDC (National Transmission and Dispatch Company) stands at a surplus of 8,742 MW against the demand of 34,438 MW (SOI report). Interestingly, FY 2022-23’s demand growth for domestic, commercial, industrial, agriculture & other sections is stated at -12.87%, -3.84%, -9.23%, -14.45% & -13.94%. To reverse this on a firefighting basis, the electricity-to-gas price parity should be modeled on the Weighted-Average-Cost-of-Gas (WACOG) to encourage transfer of heating load to grid during winters. Additionally, diverting domestic gas from inefficient captives to RLNG power plants will lower the overall fuel cost of generation while pushing the captives to the grid. Pending applications for 150,000 connections with Discos can also be expedited to boost a further 550MW to the system demand. Besides these, tax shift from energy to non-productive sectors (real estate) can incentivize incremental consumption, ultimately lowering the tariff on a per kWh basis providing immediate relief to the consumers.

For the next 2 years at least, Pakistan must channel investments towards grid overhaul instead of generation. The structural reforms required are not about re-inventing the wheel but immediate and consistent action.

Copyright Business Recorder, 2024