The World Bank is discussing energy reform programme with Pakistani authorities, proposing to place ceiling on circular debt, which reached about 1% of GDP by the end of February 2015.
This was stated by Richard Jeremy Spencer, a WB energy specialist, during an online discussion on the topic of "Circular Debt in Pakistan". Spencer leads the Bank's support to Pakistan's energy sector, including helping with reform of the electric power sector and also works on energy projects in Afghanistan.
"The idea of a ceiling is under discussion, but a plan that addresses a more permanent solution has to accompany it," said Spencer, adding that the permanent solution to overcome circular debt is to remove the causes. There are many of these and they will not easily be addressed - there are no quick fixes.
He further said that subsidies do distort the market and result in inefficient consumption of electricity. Pakistan has done well to bring them down considerably in the last couple of years - can it be right that the biggest consumers of electricity - people using more than 300kWh per month of electricity (enough to live comfortably even in Pakistan's summer) were getting something like 60% of the subsidies, while the consumers who only use 50kWh/month were only getting 5%?
Spencer said targeted subsidies which support government policy are justified. The problem with all subsidies is making sure that they get to the right people and that they do not cost more than the government can afford. A better way of helping the poor is through income support schemes such as BISP because with cash they can choose whether to buy more electricity or, say send their daughter to school - a choice which an electricity subsidy doesn't give, he added.
The surcharges are relatively low - in total less than Rs 2/kWh. He said he can only remember the exact level of one which was the Neelum-Jhelum surcharge which was Rs. 0.10/kWh. The evidence suggests that reducing surcharges would not help mitigate circular debt.
The energy expert said Punjab has least to fear in terms of the liability that the Discos represent - whereas KPK, Sindh and Balochistan have Discos which perform badly and would require a significant subsidy from provincial budgets. Clearly though this is a political problem and one that will only be decided by politicians.
Spencer said tariffs are already at different levels for commercial and industrial users compared with residential, with broadly speaking the latter paying less. For economic efficiency, consumers must pay what it costs to supply them.
There is need to get the electricity from the generation plant (whether hydro or thermal) to the consumer - so you have to improve transmission and distribution. Then you have to make sure none of it is stolen on the way. When you have got it to the consumer you have to make sure he is billed and that he pays promptly. You also have to make sure that government or others do not impose additional costs on this chain for which they do not pay. Undoubtedly the transmission and distribution infrastructure is old and does not have sufficient carrying capacity to meet demand. This gets worse in summer when demand goes up while the capacity goes down (because transformer loads must be limited to prevent overheating). Investment in the T&D infrastructure will reduce losses, which means more electricity will be available for sale. Demand side energy efficiency efforts always help, regardless of the level of losses and is the first-best solution as it is often the lowest cost.
The important point is that the Discos need to have the power to enforce payment and to cut people off if they do not. Really it must not be the concern of the government but of the management of Discos, he stated.
The use of expensive fuel sources has two effects on the circular debt. First, it makes electricity more expensive and therefore increases the incentive for people to steal electricity or not pay their bills when they receive them. Second, the value of the electricity not paid for is higher, and therefore the circular debt is higher. So it is part of the story, but really the main reason for the circular debt arising is because not all costs are recovered in the tariff, and then not all bills are paid. Nepra independence will be very important for privatisation. The privatisation process has been stalled, and plainly privatisation is a politically challenging thing to try.
The amount payable by distribution companies to their suppliers was about Rs 278 billion at the end of February. This is not quite the same as the circular debt because this Rs 278 billion includes amounts not yet due.
There is a need for a hydrothermal system but some hydro can be baseload (Dasu will run 85% of the time). We can argue about costs of hydro forever, but our appraisal of Dasu - which the World Bank is financing - suggests levelized cost of around 3 cents/kWh., Spencer concluded.
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