This is not the first time that electricity sector is shaping up the political sphere in Pakistan, and not the first time it is being given considerable airtime on national TV either. Previously, it used to be the electricity shortfall, these days it is the unaffordability. IPPs are the villains again and capacity charges nearly a sin. From former caretaker ministers to industries’ associations of all kinds suddenly want the capacity payments to stop. Some even want the government to go as far as stop paying the IPPs and default on payments.
First things first. Pakistan’s electricity tariffs are exorbitantly high, and status quo will further cripple the system. How we reached here is well-documented and the seeds were sown in and around the CPEC bonanza. Back in the day, this space had highlighted on numerous occasions how capacity expansion will lead to a crisis like situation in the years to come. And here we are today. Back then, it was almost sinister to even objectively criticize anything related to CPEC.
It is no secret that the ballooning capacity payments were brewing trouble all those years.It feels much worse today because the demand has not kept pace with projections and capacity expansion. How we got here is not material today. How we get out of it is. And not honoring the sovereign backed contracts is surely not the way.
Take-or-pay is not a Pakistan-specific clause. IPPs in Bangladesh in the last decade have mostly been built on the same dollar-indexed take-or-pay models. But the key differences are a growing economy and better fuel consumption planning. In Pakistan, coal plants are not being run despite availability because the government has a long-term RLNG G2G deal, and contractual obligation means RLNG off-take has to be ensured at all costs.
Port Qasim and Hub Coal plants for instance get a lot of flak for the capacity charges – but they sit higher on merit order than even the most efficient RLNG plant of HBS. If it wasn’t for RLNG contractual obligations, the roles would be reversed, had merit order been strictly followed. There is no other taker for RLNG than the power sector. Imported coal plants are not being run despite lower marginal cost because RLNG has to be consumed thanks to the long-term G2G LNG contracts.
This is not to say efforts should not be put in to negotiate with power producers wherever and however much possible. Elongating the debt payment tenure on IPP contracts from 10 years to 15 or 20 is indeed a good effort, although it may not offer a massive relief given the extent of the problem. More can be done regarding the public sector generation companies’ contracts, where dollar-based return could be altered to local currency. Not renewing IPP contracts from 1994 and 2002 policies should also be a must, in addition to strategically phasing out inefficient public sector Gencos.
The transmission sector upgradation was ignored and lagged capacity expansion in the previous round. That should not be the case anymore. Even the IMF, in its last press release on Pakistan stressed on not expanding the generation capacity unnecessarily. The distribution woes are very well-known, and the solution rests with privatization. Opening up the market for fair competition by moving on from the single-buyers model is imperative.
Distribution companies have been on a rampant PR campaign telling why commercial based load shedding is imperative for the health of the system and why the feeders with high losses cannot be provided electricity at all times. It is 2024 and we should be talking about transformer based load shedding instead of feeder based and also talk about smart meters at least in metropolitans. Penalizing honest payers because they happen to be in a bad neighborhood is unfair and also adds to the woes in terms of average tariffs – as less power is evacuated from the grid due to constrained demand.
And then come the taxes. The government’s perennial inability to collect taxes from more avenues means the onus falls on the easiest target i.e. electricity bills. A significant portion of electricity bills consists of taxes, duties and surcharges. Advanced income tax on electricity bills, in some cases, makes up to 10 percent of the total bill. In a country where people live in rented properties and change of address is a cumbersome exercise, levying such a tax is akin to robbing people off. Every now and then, a new surcharge pops up, as the government pays interest on debt created due to its own inefficiencies. Surcharges, of late, have been making up around 8-10 percent of the bills. It would not hurt to let go of some of these taxes on electricity bills. It is both counterproductive and unjust.
Here is hoping concrete steps are taken to lower tariffs and increase demand – without which propaganda campaigns will attract needless ears and eyes.
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