KARACHI: Energy experts have blamed a host of issues for the rising electricity prices, saying that the recent stance by many stakeholders that Independent Power Producers (IPPs) capacity charges is the main reason for higher bills, does not depict the real state of affairs.

According to data from energy department, Capacity Payment (CP), often blamed for increased tariffs, accounts for just 31 percent of the total electricity cost. CP is essential without which the current model of power market, where a sole buyer (CPPA-G) has exclusive right on the generation of the IPPs, cannot operate. Imagine an investor who has invested millions of dollars of his savings and bank borrowings on the request of GOP to setup an IPP and the sole buyer refuses to off take energy from him after few months.

Under the contracts, the IPPs are obligated to keep their power plants available for generation 24/7, and if they are unable to do so, they have to bear heavy cost for it.

Pakistan renegotiating power deals with IPPs to cut costs, minister says

CP includes compensation of essential expenses such as debt servicing, maintenance, insurance, manpower etc. This phenomenon is being followed around the globe termed ‘take or pay’.

Experts say that in addition to capacity charges, the base tariff includes several other components that make up the overall cost of electricity. The total consumer tariff is approximately Rs 60.18/KWH out of which Rs 41.05/KWH (68 percent) is base tariff and remaining Rs 20.13/KWH (32 percent) are levies and taxes. There is another dimension of seeing the consumer tariff, the cost of generation (EP and CP) in the total tariff is 49 percent and the remaining 51 percent are the levies, taxes, distribution margin, cross-subsidy and tariff adjustments.

It is of utmost importance to scrutinize the quantum of these levies, taxes, distribution margin, cross-subsidy and tariff adjustments.

The experts opined that another reason for increase in power tariff can be attributed to deprecation of Pak Rupee against USD as well as higher interest rates in recent years as they are directly linked with the cost of generation.

One energy consultant explained, “The real issue is not the IPPs, but the taxes, inefficiencies, and other costs built into the system. Capacity payments ensure power plants stay operational, but the government needs to focus on improving the overall system, such as reducing power theft and modernizing infrastructure”.

Transmission and Distribution (T&D) and Recovery losses incurred by network aggregates to 27 percent of the total generation, these losses are added to the cost of generation.

Annual savings of approximately Rs 150 billion can be made by eliminating the recovery losses and reducing the Transmission & Distribution losses to 10 percent, this will reduce the consumer tariff by Rs 1.38 per KWH approximately.

Karachi Electric (KE) is a prime example that has reduced its T&D losses from 36 percent in 2009 to 15.27 percent in 2023. “If we are able to privatize the DISCOs, we can certainly achieve efficiency and attract investment in this sector that would definitely ease the consumer tariff.”

Experts also mentioned that the biggest share in installed generation capacity of the country is owned by Government, i.e. 54 percent. The Government controlled 03 IPPs having the gross capacity of 3700 MW have earned net profits of Rs 65.6 billion alone in the financial year 2023. GOP can either reduce their tariffs or use the profits generated by these entities to reduce the consumer tariff.

Experts are urging the government to address these underlying problems rather than renegotiate contracts with power producers, as this could discourage future investments in the energy sector.

Renegotiations with the IPPs have been done before at least twice but problems in the sector have continued as the root cause lies elsewhere.

They recommend improving recovery rates, tackling power theft, and upgrading the power distribution system by privatizing it, to help reduce electricity prices for consumers.

Copyright Business Recorder, 2024