LACK of foresight in these agreements, coupled with escalating fuel costs, a depreciating rupee, and insufficient attention to renewable energy sources, laid the groundwork for the current crisis. Energy, the lifeblood of a nation’s economy, faces a critical juncture in Pakistan. The country boasts a sizable installed capacity of 46,035 MW, including 28,811 MW from thermal plants. The rest of the capacity comes from cheaper renewable sources. The energy mix is burdened by the volatility of imported fuel prices and the swirling dollar rate. The government’s delinquency in the timely clearance of the IPP invoices has exacerbated the situation, leading to reduced power generation and a detrimental cycle of load shedding and soaring electricity bills.
Origins of the crisis: The roots of this crisis traces back to the 1994 Power Policy, which incentivized the establishment of privately financed thermal power plants fueled by fossil fuels. The Power Purchase Agreements (PPAs) offered to IPPs included lucrative capacity payments, indexed to the US dollar and covered fixed costs regardless of actual electricity generation. This lured numerous foreign and local investors, leading to a rapid proliferation of IPPs over the next two decades. However, a lack of foresight in these agreements, coupled with escalating fuel costs, a depreciating rupee, and insufficient attention to renewable energy sources, laid the groundwork for the current crisis. The government’s inability to manage the resulting financial burden has led to a vicious cycle of underutilized capacity, higher energy mix rates, and widespread consumer discontent.
Identifying the responsible: While IPPs are often vilified for their perceived role in the crisis, a more nuanced approach is necessary. The contracts, while undoubtedly favorable to IPPs, were entered into by successive governments seeking investment and quick solutions to the pressing energy shortages of the time. While some level of concession may have been justifiable given the volatile political and economic climate, the failure to prioritize national interests and exercise due diligence in contract negotiations is evident. Furthermore, the mismanagement of power agencies, including inadequate transmission infrastructure, rampant line losses, and dubious billing practices, further compounded the problem. The past governments, who had sowed the wind in 1994, are now reaping a whirlwind and caught in a cataclysmic energy crisis. The IPP invoices worth millions of dollars are piling up every month the government can’t pay, contributing further to the swelling circular debt.
The price offered to IPPs comprises Capacity Charge and Energy Charge. Capacity Purchase Price (CPP) is a fixed amount mainly covering investment and rate of return (ROE). The other part is the energy rate, a variable charge that accounts for fuel consumed and the O&M of the plant. Further, the market and country condition risk factors were also embedded into the price – even though the government provided a sovereign guarantee and took over all the risks associated with the fuel prices and the exchange rate. Capacity payments have to be made regardless of whether the electricity is used. This has been the main point of contention. Under the 1994 policy, 16 IPPs were established. The following two decades saw the installation of another 26 plants. The combined capacity rose to 26000 MW. A blind eye was turned to the escalating dollar exchange rate, fuel prices, and depleting natural gas resources, the cheapest and most cost-effective fuel in power generation.
A path forward: The current crisis demands a multifaceted and pragmatic solution. Strengthening the transmission and distribution network, curbing line losses and theft, and expanding access to electricity in agricultural areas is crucial. Some measures that can effectively walk us out of the present energy mess are outlined below; The first step is to strengthen the transmission and distribution network so that all the available energy can be purchased and dispatched to the consumers.
The second step to significantly cut down on idle capacity payment would be expanding the power consumer base by including agriculture, industrial sectors, housing colonies, and commercial and military entities. They can be offered power at lower rates than the typical rate they generate with their captive power plants. The government can easily cut the unit rates for commercial, industry, and agriculture affordable by slashing a few cryptic charges like excessive taxes and various surcharges, which are not even related to the power sector but are meant to take care of the government’s other profligate current expenditures. Alternatively, the government may encourage IPPs to sell unutilized capacity directly to these consumers in bulk. The main motive behind this is that the plant capacity, lying idle otherwise, should be utilized and charged to the consumers, thus considerably easing the burden of capacity payments.
The heart of the issue lies in the existing PPAs. To clear it, a forensic audit of all IPPs is pertinent and overdue, as it will assess IPP’s compliance with PPA operational parameters and financial matters. As per PPA, the IPPs must conduct periodic Efficiency and Heat Rate tests to verify the performance specifications indicated in the contract. These tests also verify fuel consumption and identify any discrepancies or over-invoicing. The IPPs must also conduct the Capacity Availability test annually, which forms the basis of the capacity payment. If the auditors discover contract breaches, the government can reclaim overcharged amounts and initiate PPA renegotiations for better terms. The discrepancies can also be a tool to initiate contract termination if the renegotiations don’t proceed well.
Conclusion: The energy crisis in Pakistan is a complex issue with no easy solutions. However, a combination of prudent financial management, improved regulatory oversight and a focus on renewable energy can pave the way for a more sustainable and equitable energy future. There are a plethora of government agencies employing hundreds of thousands of professionals in the power sector. We expect from them just one-time empathy and compassion for the energy-battered people. It is imperative that all stakeholders, including the government, IPPs and consumers, work together to find a mutually beneficial resolution that prioritizes the long-term interests and survival of the nation – more importantly, their own.
The writer, a guest columnist, was a Manager in a multinational electrical firm and was the EPC Project Manager of an IPP.
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