IPPs and capacity payments – how to deal with the challenge

This is a follow-up piece. The first part appeared on 1st August 2024. Both may be read together. Let us explore potential solutions and actions that can be taken by the State of Pakistan to mitigate the losses or, more fundamentally, address the challenge of significant capacity payments. We may even convert this challenge into an opportunity, for both the challenges and opportunities come together.

Privatise Discos: Several successive governments have discussed privatizing the distribution companies. The sooner we do it, the better. We are already late. Select feeders can be privatized as the first step, with buyers incentivized to reduce losses. This would create a mutually beneficial transaction.

There has also been a discussion about handing over these companies to the relevant provincial governments. However, I do not believe this would solve the problem; it might instead exacerbate it.

Improve recoveries with the help of provincial governments: It is an open secret that there is chronic electricity theft in the country. Additionally, certain consumers including some public sector entities do not pay their bills regularly.

Without the support of provincial governments, these issues may not be resolved. These governments could be offered a share in the recovery or even some free equity in the distribution companies to make them stakeholders in the viability of these entities.

Extend loan tenors: All lenders, both local and international, should be approached with a request to extend loan tenors to match the remaining terms of the relevant PPA and EPA agreements. The good news is that Chinese loans are the elephant in the room, meaning significant relief can be obtained by negotiating with the Government of China alone.

Policy rate reduction: A substantial portion of debt is lent by local banks, and KIBOR has skyrocketed in recent years. It is astonishing to see such a high policy rate for so many years when the government itself is by far the largest borrower. A reduction in the policy rate would reduce the capacity payment burden. Our policy rate must be in single digit.

The good news is that inflation has reduced to a single digit after 34 months. In any event, there are other ways to address inflation. Keeping the policy rate high for so long does not make sense for Pakistan; it is like shooting oneself in the foot.

Incentivise electric bikes, rickshaws, and public transport: Incentivizing the manufacturing and use of electric bikes, rickshaws, and eventually buses and trucks would substantially increase electricity consumption and save precious dollars spent on importing fuel.

Exclude governmental taxes: There are several taxes, duties, and levies added to electricity bills. These must be excluded. The State cannot increase the capacity payment burden by adding taxes and then start complaining about a problem that it, at least partially, created.

Solarisation: Public sector institutions that consume energy but do not pay their bills should be solarized to reduce the capacity payment burden.

Retire old GENCOs, the 1994 IPPs, and the 2002 IPPs with mutual agreement: Projects deemed unnecessary according to the latest iteration of IGCEP or otherwise, or those not dispatched due to high costs, should be terminated with mutual consent. Public sector projects can be terminated overnight, while private sector projects can propose options. I have no doubt that the parties can find a mutually acceptable solution to part ways amicably.

Electrify motorways and highways: We do not have electricity available on our motorways and highways. A substantial amount of capacity can be utilized by providing electricity throughout our motorways and highways on a 365-day basis. Travelers can pay extra tolls to account for the electricity available on the road. Brighter roads would make their journeys safer and more enjoyable.

Pay subsidies directly via the Benazir Income Support Programme (BISP): We should remove the inefficient subsidy system within our electricity bills. Instead, ‘lifeline consumers’ should be helped and compensated via social programmes such as BISP.

Provide cheap electricity to industries that earn foreign exchange, such as IT and textiles: New and existing industries that either replace imports or increase exports should be incentivized to use more electricity.

No captive power plants: Captive power plants using local fuel, whether subsidized or not, should be encouraged and incentivized to draw power from the national grid instead of generating power independently.

Improve the transmission and distribution network: No power plant should remain unutilized due to a lack of transmission or distribution infrastructure, or because the network faces congestion.

Increase fixed charges coupled with decrease in energy price: Fixed charges payable by each consumer may be increased, with cheaper price charged for higher electricity usage.

These are my “fourteen points” for consideration by the powers that be. Collectively, these actions would reduce the capacity payment burden by no less than 50%. Where there is a will, there is a way. In addition, we may convert imported coal to local coal, where possible, via co-mingling.

Energy experts have discussed the potential for this conversion. Yes, there are technical issues regarding the quality and transportation of local coal. However, to the extent that it can be used through co-mingling with imported coal or otherwise, it should be used. This would not only reduce electricity prices but also save precious dollars.

Although this solution is not directly linked to capacity payments, the possible reduction in electricity prices would help reduce consumers’ overall burden.

My parting advice is to avoid repeating past mistakes. It is crucial to uphold the sanctity of contracts. We must ensure that future investments in capital-intensive projects in Pakistan are not made more expensive by resorting to coercive actions against current investors.

Copyright Business Recorder, 2024