EDITORIAL: Bashing IPPs (Independent Power Producers) – especially those under the CPEC (China Pakistan Economic Corridor) – has become a norm, which is sending a wrong signal to prospective investors that are hard to come by in this country.
There is no doubt that the energy sector (especially power) is unsustainable in its present form.
However, our own authorities and decision-makers are to be blamed for the mess we are in. Passing the buck to the Chinese, who invested at a time when no one else was even in sight, is absolutely unfair and uncalled-for, to say the least.
It was the same Pakistan Muslim League-Nawaz (PML-N) government that described the CPEC as game changer and maintained a hush-hush approach to watertight contracts. Unfortunately, however, the same people are saying that the CPEC projects are making the power sector unsustainable.
There was 8–10 hours of load shedding in 2013 and industry was relying on expensive captive plants. The motto of their associations was that ‘no power is more expensive than power at any cost’.
Now when the power is in the mix, they are taking a huge U-turn by saying that they cannot afford it, and some are asking to let them remain on captive generation.
The problem is lack of planning and absence of adequate investment in transmission and distribution system to cope up with growing generation capacity.
For example, most of the economical plants (nuclear and Thar coal) are installed in the south, while around 80% demand is north of Guddu in the Sindh province.
However, adequate transmission network is not being installed and, instead, expensive north plants are being operated while the cheap ones in the south remain idle.
Failing to follow the merit order is not the fault of the Chinese. The nuclear plants (not part of CPEC but have Chinese debt), contributing 20-25 percent of the capacity payment, have almost zero marginal cost, but due to transmission constraints, these are not operated optimally.
It is pertinent to note that the Chinese have already agreed to have a moratorium of two years on principal debt repayment on nuclear plants from July 2023 to June 2025.
Pakistan did not pay that portion of capacity charge in fiscal year 2023-24. However, it is still reflecting in tariff as the regulator is not approving it, as they think paying high interest cost for two years constitutes an additional cost. The regulator apparently doesn’t understand time value of money.
It is important to note that not only were RLNG projects being added, hydel expansion projects were also coming, although our relevant authorities or decision-makers had already conceived nuclear plants. Therefore, one of the questions that needs an answer is why the government decided to have plants on imported coal under the CPEC.
The other questions that too need plausible answers are: why was an imported coal plant installed in the north, which is adding both transportation and environmental costs?
Was it Chinese or our people’s? That must be probed. Pakistan as a country should be thankful to the Chinese for turning the Thar Coal dream into a reality, which allows the country to have cheap and indigenous base load for the long run.
But we must not lose sight of the fact that the Chinese did not come to the country a voluntary basis. We pushed them to invest. Clearly, it was a quid pro quo or a favour or advantage granted in return for something.
The Chinese wanted to re-establish the old Silk Road and, in return, we asked them to install power infrastructure. They were rightly so, varying on our tight power regulatory regime where government is the main player, and the infamous circular debt. Then the tariff of 2015 IPPs was upfront unlike cost plus of 2002 policy.
In CPEC projects, power regulator Nepra did alter the tariff and reduced it from what was envisaged earlier. And if still there is any over-invoicing, should we not blame our regulator who let that happen under its nose? Was Nepra sleeping back then?
The issue within generation sector is that due to having too many projects in too shorter time and massive currency adjustment, the capacity cost has become unaffordable. The projects have a useful life of 25 to 40 years and the return on equity is on 20 percent of the project cost.
The remaining 80 percent is debt where it must be paid back in 10 to 12 years. That is eluding the economic value generation of these projects. What is required is re-profiling of the debt, which would lower, albeit partially, the tariff. Then the transmission and distribution issues are to be addressed to ensure system capacity to evacuate power to the designated load centres.
More importantly, the government’s presence in the sector is required to be reduced. Without doing so, any negotiation can make power slightly cheaper for a short time.
Not to forget that we have already done two negotiations in the past and still the sector is a mess as the authorities have failed to solve the core problem of government’s footprint in the energy sector.
Copyright Business Recorder, 2024