A monster called Charge Capacity

KARACHI:

The ever-increasing electricity bills have recently assumed the status of a major existential threat to Pakistan. Some apologists are still trying to justify them with various pretexts.

This is despite our costs being the highest in the region, with a commercial price of US$0.166 per kilowatt-hour (kWh) and in Bangladesh, India and China US$0.087, US$0.121 and US$0.089 .

Some analysts have suggested privatization of distribution companies (RSCOs) as a solution, although the private sector is also struggling to survive. Some experts suggest nationalization of independent power producers (IPPs) as a viable course.

It also seems impractical due to the incompetence that pervades the public sector. Even if an attempt had been made, subsequent legal proceedings would have blocked it. This article is an attempt to share my thoughts on this issue.

First of all, the tariff paid to electricity producers, i.e. The IES consists of two parts – a variable board and a power board. Capacity payments are payments guaranteed by contract to independent utilities, whether they produce electricity or not.

Pakistan’s electricity consumption has barely increased since FY18, when it stood at 106,928 gigawatt-hours (GWh). In fact, it declined by 10% YoY in FY23, followed by a further decline in FY24.

However, in order to absorb rising capacity payments, it would be possible to either increase tariffs or pay subsidies from the government. When the government fails to pay subsidies, the circular debt increases.

Similarly, if tariffs increase, consumers start avoiding electricity usage as we saw in FY23 and FY24. As a result, capacity fees begin to rise further.

Even after the bitter experience of oil plants set up in lieu of the 1994 and 2002 policies and the ever-increasing cost of energy imports, we have further expanded our line of expensive imported fuels in the form of Liquefied Natural Gas (LNG) and imported coal. This has made the country even more hostage to capacity charges as well as power shortages.

Since 2018, we have also started to pursue the goal of achieving 60% of electricity generation from renewable sources along with an off-grid solarization policy. Instead, the dire situation required a moratorium.

As a result, payments for capacity continued to accumulate due to the constant increase in idle generating capacity. In the last 10 years alone we have paid over $50 billion on this issue; which is equivalent to 40% of our external debt.

Circular debt

Annual capacity payments are expected to exceed $10 billion by 2024-25. They increase the cost per unit of electricity as well as the circular debt unless said cost is immediately passed on to consumers.

During the development of the 1994 energy policy, oil prices historically remained below $20 per barrel. However, since 1999 they began to grow. The first jump was from $18 to $28 per barrel, but we did not try to correct the rate, even taking into account the 2002 policy.

We saw prices rise from $18 to $54 per barrel from 1999 to 2005, with a 40% increase from 2004 to 2005 alone. However, to avoid public backlash, the government began to absorb additional costs by subsidizing tariffs. As a result, circular debt first appeared in 2006 at Rs 111 billion.

In the past, oil refineries were primarily used as peaking power plants; however, by the early 2000s, burning the candle at both ends, we began using some of them as baseload stations.

This led to an increase in the share of oil in electricity production to 33%, while oil prices were constantly rising. In 2008, they reached $97 per barrel, after which the crisis worsened.

The government tried to absorb it through subsidies but failed, leading to the accumulation of even more circular debt. As a result, we saw a prolonged decline in the load until 2013, when the circular debt crossed Rs 500 billion. It now stands at 2.6 trillion rupees.

Prime Minister’s Working Group on Energy

No analysis of the effectiveness of this issue can be completed without mentioning the report of the Prime Minister’s Working Group on Energy of January 1994, from which the 1994 Energy Policy emerged.

In my opinion, the task force lacked professional capacity due to the complexity of its task and the due diligence it required, including forecasting multiple economic growth scenarios, global energy price sensitivity, and local energy dynamics over the next few decades.

The deployment of the panel’s necessary powers and a broader consultative process may have removed speculation about aggressive economic growth and associated additional power generation capacity, which the report forecasts will reach 54,000 megawatts by 2018, exceeding existing capacity at that time. moment power is 10,800 megawatts. MW. Currently it is only two thirds of the same.

Likewise, an appropriate cost-plus model may be challenging in any country, let alone in a regulatory environment with little capacity to control costs.

The model itself did not encourage NPPs to do this. Not surprisingly, by 2001-2002 Pakistan was paying $1 billion in lieu of capacity charges alone.

Muhammad Ali Report

Another important document in this regard is the thematic report from March 2020. This is a world-class professional report consisting of 288 pages, containing not only in-depth analysis but also practical solutions.

The report found countless cases of overpayments by IPPs in the form of fuel costs, installation costs and costs that they were not entitled to or that they claimed through misrepresentation.

Based on this, the report recommends a forensic audit of all companies to check for inflated project costs, fuel usage, misrepresentation of financial statements, etc.; and audit of thermal performance of fuel-fired thermal power plants.

Leaving aside the so-called sovereign guarantees that are being waved around to protect the continuation of the above-mentioned farce, four years have passed and we have never heard of the above-mentioned checks or the responsibility of individuals and institutions for turning a blind eye to the problem for decades .

As regards warranties, they will only remain in force if both parties fulfill their respective contractual obligations. Therefore, a comprehensive third-party technical, commercial, contractual and legal audit of all contracts is required.

For example, it is necessary to determine how the required capacity has been installed in terms of availability, regulatory compliance, etc., before making the appropriate payment for the capacity.

Avoidance of independent inspections is quite the norm in our country. I recently came across some records that are replete with clear indications that the PSE board terminated a contract with a power project to avoid similar scrutiny.

What to do?

No country can afford to remain hostage to sheer and blatant incompetence, the devastating consequences of which are detailed above. It is therefore time for the relevant boardrooms to be liberated from the stranglehold of the so-called generalists and handed over to professionals and business leaders with a proven track record. Then the sector will begin to recover in the near future.

Moreover, the team that compiled the Muhammad Ali report deserves to be recognized and rewarded at the government level, followed by empowerment and then tasked with implementing the report’s recommendations.

The author is a petroleum engineer and oil and gas industry management specialist.