The power albatross

In April 2008 as the world oil prices crossed the $140 per bbl mark the oil-based high priced Independent Power Producer (IPP) model came home to roost. The model protected the independent power producers from any form of competition or market risk and instead concentrated all the risk on the Government of Pakistan and power consumers. The result was that a steep increase in Pakistan's oil import bill triggered a massive balance of payment crisis and a steep rise in energy costs for the producer economy generated economic stagnation and declining competitiveness at home and abroad.
Nepra, the power regulator of Pakistan, in its hearings in August 2008 fixed the end consumer tariffs (for LESCO) at around Rs 8.62 per kwh for peak time and Rs 5.11 for off peak consumption. Since those fateful days Pakistan's economy has not recovered its zest and for the last eight years it has been limping along. The power sector has seen crippling impact of circular debt, continuing massive transmission and distribution losses, huge public sector receivables, escalating power tariffs and continued menace of power shortages.
In spite of the massive decline in oil prices that started in mid 2014 and reached under $30 per bbl at the end of 2015, a decline of around 80 percent from its peak, the power tariff has not seen any major decline. The Peak tariff topped Rs 15 per kwh and off peak tariff was around Rs 9.5 in June 2015. Since then the peak tariff has hovered around the Rs 14 mark. On the supply side, power generation, which in 2007 was clocked at 98,384 GWH, reached an anemic level of 102442 GWH in 2015. An average growth of half a percent per year over the last eight years. This is a direct result of the failure of the previous government's ill-fated policy to induct rental power in a corrupt and opaque manner and the current government's ill-conceived Gadani Power Project that took a long time to implement and in the end didn't see the light of day.
The failure of policies of two governments in this respect reveals the bankruptcy of public sector management of the power industry of Pakistan. The ministry of water and power and its paraphernalia of attached departments and regulators are responsible for this debacle. Eight years is a long time during which the sector could have been totally transformed, reformed and shortages eliminated yet it seems we have hardly moved. If people of Pakistan have to get affordable power in future, the power system has to be moved from a governmental controlled monopoly to a fiercely competitive power market. There is however no signs yet of an emerging competitive power market; renewable energy has hardly made a dent and the power sector continues to hobble the prospects of stronger economic growth or higher private sector investment.
Going forward the ministry through its principal accounting officer has informed us that In order to cater for an expected generation shortfall of between 7000-8000 MWs estimated for 2017-18, the additional capacity planned to be achieved by March 2018 is around 10,996. We are further informed the plans beyond 2018, would take the capacity addition to 30,837 MWs by the year 2022. What the ministry failed to inform the public is at what cost?
People of Pakistan would have to bear both massive environmental damage and excessive tariffs. Coal power comprises the major share of the added capacity being planned. We know that other countries are phasing out coal power at a time when Pakistan is embracing coal power. We have to prepare ourselves for unprecedented levels of smog in our cities like what is currently happening in China and India. It will be monumentally costly to get rid of the side-effects of unbridled coal power expansion.
Adding 30837MWs of mostly dirty power through IPPs at an upfront tariff of around 9 cents per kwh when the rest of the world would be generating equivalent power at less than 4 -5 cents per kwh will bankrupt our economy and will be a direct raid on the pockets of consumers in Pakistan. A single cent per unit excess tariff would translate into a daily extra payment of six million dollars that will be borne by the Pakistani consumer. A four cent difference would cost us a cool ten billion dollars per year. These excess payments would represent a continuous albatross around our necks for the life of these long-term IPP contracts foreclosing any possibilities for developing a competitive power market.
When the inefficiencies of the transmission and distribution system are factored in the cost of power to the consumer becomes unsustainable. The entire chain, from the supply of fuel to the power stations, to the billing and collection from the consumer is riddled with corruption, incompetence, waste and mismanagement dominated by federal government decision making and control. The consumer is on the verge of revolt against this daylight robbery.
The question is, when the entire chain is in the process of being unbundled due to technological advancement in renewable power production, wherein a single integrated national grid is no longer needed for efficient supply of power to the consumer and where the large and small consumers can easily produce the power at half the cost compared to what the national grid can or is willing to supply, then why the consumer should pay the extra cost of state ineptness and the single buyer IPP model. It is clear that Pakistan's international competitiveness has been eroded by a rotten power system that needs a total transformation for national survival.
There is a national malaise when it comes to power sector reforms. The unholy alliance of vested interests has stunted and delayed most efforts for honest reform towards a competitive power sector. The ECC belatedly on April 30, 2015 approved the establishment of the Central Power Purchasing Agency (CPPA) as an independent entity from the National Transmission and Despatch Company Limited (NTDC). This was done as a necessary step towards the transition of the power sector into a competitive market by July 1, 2020, the deadline approved by the ECC.
The most recent attempt to move the process forward was reported in this paper on December 15, captioned "CCI all set to approve amendments in Nepra law"; a ray of hope albeit about five years too late. The approval of amendments by CCI, in the words of the Ministry of Water and Power were needed as the existing legislative regime, does not facilitate moving to a competitive market structure because:
(i) There is no specific provisioning for energy trading, power market exchange, exclusive clearing and settlement etc;
(ii) There is a lack of clarity on regulatory role of Nepra apart from tariff setting and licensing;
(iii) There are regulatory barriers for persons wishing to establish and operate a power generation facility;
(iv) There is a lack of a tariff setting regime which is conducive to competitive power markets, there is a lack of an energy exchange and absence of licensing of energy traders;
(v) There is insufficient enforcement capacity of Nepra to protect consumer interests; and
(vi) There is a need for re-alignment of regulatory functions of Nepra to cater to proposed power sector structure, while accommodating socio-political and socio-economic objectives of the federal government."
The summary for the CCI reportedly inter alia states that:
(i) Power generation has to be de-licensed and captive generation has to be freely permitted and connectivity to national grid ensured instead of just establishment and operation of generation plant,
(ii) The summary notes that Pakistan needs to move towards a power market by introducing concept of market traders; as present law does not cater to licensing of persons wishing to trade in electricity.
We have yet to know whether the CCI met and approved the amendments or not. But in the meanwhile the federal government, instead of strengthening Nepra, has acted by curtailing the independence of the regulatory body by placing it under the administrative control of the ministry of water and power. It is clear that at the current pace of reforms, the target of achieving a competitive market by 2020 will not be met. The costly 30837 MW planned IPP addition to the national grid will be a fait accompli and an albatross around our necks for foreseeable future. Creating relief for the people and economy of Pakistan through a competitive power market will remain a pipe dream.
(The writer is a former Finance Minister)