Victimising local IPP sponsors risks scaring future investment

The first round of IPP negotiations has concluded, resulting in the termination of five contracts through coercive measures—though labeled as mutually agreed upon. This approach has demonized investors and stigmatized profit-making, undermining the sanctity of contracts. The outcome so far is a minimal reduction in tariffs—a mere half a rupee.

While there may be short-term celebrations, the long-term consequences could be severe. The message being sent is clear: we welcome investors with red carpets initially, but when challenges arise, they are punished unilaterally, with no accountability for the counter party.

The unsustainability of the power sector largely stems from poor planning by government entities and the regulator, NEPRA. By 2016, it was apparent that 9,000 MW would be added to the South to meet demand in the North of the country. Yet, the infrastructure needed to evacuate this power to load centers is still missing.

Consumers are now paying the price for the negligence of public sector entities such as NTDC, PPIB, CPPA-G, and NEPRA.

In 2016, it was also known that imported coal (3,300MW), nuclear (2,400MW), Thar coal (2,640MW), and Phase 2 wind projects (660MW) would come online within 5-6 years to address Northern load gaps. The logical move would have been to upgrade the transmission and distribution systems to ensure the supply of inexpensive power to the North. Yet, that work remains pending.

Plans for two HVDC (High-Voltage Direct Current) lines—Matiari-Lahore and Matiari-Faisalabad—were devised but the latter was shelved. There was no engagement with IPPs on how to manage generated power that couldn’t be transmitted to where it was needed. With 60-70 percent of demand on NTDC system emanating between the geographic region lying between Rahim Yar Khan and Attock, plants should have been strategically located, but planning failed.

In the 1980s, planning was far superior, with strategically placed generation and transmission pit stops. These require upgrading, which is yet to be done, while generation capacity has been added in isolation. This is like building houses in a housing society without constructing roads—the houses remain stranded, just as the power generation capacity does now.

The opportunity costs are enormous. The 4,000MW Matiari-Lahore HVDC line operates at half capacity, yet the government pays Rs50 billion annually for its unused potential. Moreover, the failure to transmit cheaper coal power, replaced by costly RLNG, costs consumers an additional Rs300 billion annually.

These losses far exceed the savings from terminating the IPP contracts, yet no one from Nepra, NTDC, the power ministry, or other government departments is held accountable. The situation worsened with winter blackouts, as overloading was halted, further exacerbating the issue. Why is the public sector allowed to escape accountability?

The next major challenge lies in distribution losses and inefficiencies, which are deeply political. Politicians exploit distribution companies (DISCOs), hiring favored employees and protecting theft. Can the state tackle union resistance if privatization is pursued? Can it confront the business and political elites who benefit from maintaining control of DISCOs?

The government consistently opts for the easier path—rhetoric that temporarily boosts public perception. This happened in 1998, in 2020, and history is repeating itself.

Regarding public savings, the most significant gains would come from reprofiling Chinese IPP debt and reducing government taxes. Initial efforts to reprofile Chinese debt were supposed to be part of discussions during the Chinese Premier’s visit. However, after the recent attack on Chinese engineers at Karachi Airport, that agenda item has been shelved.

Lowering taxes, which add Rs7-8 per unit to consumer tariffs, requires IMF approval. The FBR chairman, who previously opposed these taxes while in the power ministry, now faces the challenge of undoing them. However, this is unlikely, as the government lacks alternative sources to maintain fiscal neutrality.

The next step will likely involve further coercive negotiations with other IPPs (excluding CPEC), potentially saving Rs200-250 billion annually (Rs2-2.5 per unit). However, these savings will do little to alleviate consumer misery while causing significant harm to investor confidence. The repeated short-term fixes, lack of accountability, and disregard for investors will not just haunt the sector—they will cripple any future attempts at reform. If we continue down this path, Pakistan’s energy landscape won’t just be unsustainable; it will be unsalvageable.

Copyright Business Recorder, 2024