Circular Debt Reduction Is Possible In Single Click to Save Pakistan from Financial Catastrophe and Destabilization

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          By Engineer Arshad H Abbasi

The power sector of Pakistan is a leaking bucket, the holes deliberately crafted and the leaks carefully collected as economic rents by various stakeholders that control the system. It is a self-evident truth that our power sector is bedeviled by corruption, greed, inefficiency, and injustice. While this is so, the bills have continued to increase. The main hole in the power sector bucket is circular debt, other than expensive electricity.

In Pakistan’s power sector, the circular debt is a public debt that builds up on distribution companies as a result of unpaid government subsidies. When this occurs, the country’s debt is exacerbated because the distribution companies are unable to pay IPP, CPEP Power Plants, who in turn are unable to pay fuel suppliers. Pakistan’s total circular debt as of March 2024 was Rs. 3,000 billion.

Pakistan is in the midst of political and economic turmoil, with record inflation, primarily due to the high cost of electricity to the extent that it now not challenging national sovereignty but posted the lowest GDP since its creation of the country. The majority of Pakistanis, pay bills that are far higher than their monthly income, which is the worst of all. The cost hike is all because of circular debt in the Power sector.

Moving from cheap hydroelectricity to imported Oil, Coal and LNG fired power plants is the fundamental cause of the circular debt and the enormous price increase for electricity. While expensive electricity generation has put a severe strain on the nation’s finances, but now challenging national sovereignty. The extraordinary unrest, protests, and dissent caused by electricity in Azad Kashmir during the second week of May shocked Islamabad and served as a sobering reminder that the electricity sector poses the greatest threat to national security.  

Hydropower was once a major source of energy in Pakistan, accounting for nearly 60 % or above of all electricity generation until year 1991. However, this share has dropped to about 29% due to a decline in the construction of hydropower plants and rising demand. The share of thermal generation has risen to about 50%, with most plants using unaffordable oil, LNG, Imported Coal or gas.

Pakistan was put off the track in late nineties from hydroelectricity to thermal power electricity generation when the construction of 3600 Megawatt Kalabagh Dam on the Indus River could not be started because of political controversies which was due to be completed in 1993.

Year PUBLICIPP  Total
HYDROTHERMALNUCLEARHYDROTHERMAL
GWh% ageGWh% ageGWh% ageGWh% ageGWh% age
19798,35378.72,25621.3  000010,609
19808,71871.93,40628.1  000012,124

Pakistan’s transition from hydroelectricity to thermal power generation was derailed in the late 1990s when political disputes prevented the construction of the 3600 megawatt Kalabagh Dam on the Indus River, which was scheduled to be finished in 1993. A small group of sycophantic and pseudo-environmentalists have skillfully crafted political controversies that seriously undermine the harmony between Pakistan’s four provinces too.  In year 2004, the then Federal Minister for Parliamentary Affairs[1] issued a press released that Independent Power Producers (IPPs) operating in the country are behind the anti-Kalabagh Dam move because they do not want to see Pakistan meeting its energy requirements through its indigenous resources.

The annual production of clean electricity would have been 11,400 (GWh) million unit if the Kalabagh dam had been completed in 1993. Yet, because of political controversies, the Dam could not came up on schedule. This failure to develop Kalabagh Dam is resulted in severe electricity shortage.  The installed capacity in the country in was 10,800 MW and shortage of around 2000 MW in 1993. This capacity was insufficient to meet the demand, so consumers have to be subjected to load shedding (forced power cuts). The then PPP government came up with the 1994 Power Policy designed for thermal power plants.  The Government offered very generous and lucrative incentives to investors without considering rational tariff according to EPC (Engineering Procurement Cost) construction.

The policy made a tariff of 6.5 cents per KWh appealing to potential investors. The average cost of producing hydroelectricity was only two cents per KWh. Nevertheless, Pakistan saw remarkable economic growth between the early 1960s and the early 1990s, when hydroelectricity accounted for the majority of the electricity produced. At the same time, the price of electricity was not only affordable for consumers, but it also did not put a strain on foreign reserves or require monthly fuel adjustments. Most importantly, Pakistan had zero circular debt during that golden period, when hydroelectricity was ruling the energy mix.

Burning 92 billion cubic feet of petrol annually to generate electricity instead of using water as fuel was one of the major losses incurred by the nation as a result of the Kalabagh Dam’s incompleteness. The valuable 2760 billion cubic feet of natural gas needed to turn plant turbines have been depleted by this disastrous switch from hydroelectricity to thermal power generation. If Kalabagh Dam had been generating hydroelectricity at the same time, USD 3.5 billon in LNG imports per year could have been avoided, and the country would have had enough gas for industry and domestic use until 2050.

Executive Summery

The 1994 Power Policy was designed to attract foreign investment with a high tariff rate, the IPPs were allowed to use any technology and free to choose any main fuel. According to Power Purchase agreement made by then purchaser WAPDA by IPPs is computed from a formula. The formula includes in it the components of the Fixed and Variable Costs. The total tariff is the sum of the Capacity Purchase Price (CPP) which is the fixed component and the Energy Purchase Price (EPP) which is the variable cost. While the Fuel Price was deemed to be a pass through item. From induction of IPPs, mothered of Circular –debt. Besides passing the burden of to 35 million consumers, circular debt made Pakistan a global bagging bowl.

As indicated in table 2, there are 15 IPPS that are commissioned in accordance with the 1994 power policy. As of April 2024, 74 thermal power plants across the nation are operational, following various policy changes.   These IPPs, including CPEC Energy projects grappled  the electricity sector with persistent issues, ranging from increasing capacity payments to over-reliance on imported fuel, under-utilization of power plants, circular debt, transmission constraints, operational inefficiencies, under-utilization of HVDC line etc. However, the primary driver of the electricity sector’s stress is worst governance, spanning from planning to execution and subsequent operation, coupled with severe lack of accountability.

CIRCULAR DEBT

The current responsibility for purchasing electricity on behalf of EXWAPDA DISCOs is being handled by CPPA-G replacing WAPDA. Via the transmission company, NTDC, it buys electricity from generation companies to supply to DISCOs. Furthermore, KE is receiving electricity from CPPA-G. When electricity is supplied, CPPA-G bills all distribution companies for the power that was supplied as well as the transmission company’s use of system charges. To allow CPPA-G to pay the generation and transmission companies, Distribution Companies must pay CPPA-G the outstanding amount within the allotted time.

However, the majority of Distribution Companies are unable to make payments on time due to a variety of factors, including higher T&D losses, lower recoveries, etc., which makes it more difficult for CPPA-G to pay generation and transmission companies. Therefore, when generation companies are unable to reimburse fuel suppliers who are experiencing difficulties paying the import bill, circular debt is created. The cycle is maintained by this circumstance. Under PPAs, there is a markup and a higher financial liability if power companies are not paid on time.

High Cost of Generation due to Capacity Payment

Without analyzing the consumption, significant amount of generation capacity has been added in recent years, the cost of electricity for end users has gone up for a variety of reasons, including high T&D losses, low recovery, circular debt, large capacity payments, currency devaluation, fuel costs, and underutilization of efficient power plants.  For example, when the installed capacity was 34,848 MW the consumption was 130,000 million unit, while when the installed capacity was reached to mark of  41,198 MW the generation was deceased to 129,485 million unit. This means that after addition of 6000 MW is generating a signing unit except creating capacity payment without operating the thermal plant. Though there are other factors such as increasing cost of fuel, rupee devaluation, reduce electricity usage and negative sales growth but the main reason of circular debt and abnormal high capacity payment. As the total tariff is the sum of the Capacity Purchase Price (CPP) which is the fixed component and the Energy Purchase Price (EPP) which is the variable cost.

While analyzing the availability factor of gas/RLNG power plants, which is 92%, coal power plants is 85% and RFO power plants is 88%. The optimal utilization of most efficient power plants is opted to minimize the cost of power generation in the country. It is observed from the data that the efficient power plants are either not utilized or under-utilized while giving dispatch to the power plants with lesser efficiency which causes increase in the per unit electricity cost for end-consumers. Underutilizing the efficient power plants not only deprives the country of available cheaper electricity units but it also increases the burden in the form of capacity payments for un-utilized capacity. Departure to the less efficient plants causes inefficient burning of fuel translating into expensive electricity for the consumers.

The major issues causing the high cost of electricity is other than inflated contracts with IPP are deliberately unused or under-utilized the optimal operation of most efficient power plants. Use of highly inefficient power plants, particularly K-Electric in Karachi.

           Non-use or Underutilizing of the efficient power plants not only deprives the motherland of available cheaper electricity units but it also increases the burden on the national economy in the form of capacity payments for un-utilized capacity.

           The reason for the continuous rise of circular debt is the operation of inefficient power plants. The glaring example of non-usage of efficient power plants and capacity payments is 1250 MW HUBCO Coal, 1250 MW Sahiwal Coal (HSR) and 1250 MW Port Qasim Coal power plants.  Particularly, 1250 MW HUBCO Coal and 1250 MW Post Qasim falls within jurisdiction but almost remained idle for the last two years , yet at same time both IPPs claimed capacity charges at 60%        

                        Capacity Payment is result of  ‘Take or Pay’ and ‘Take and Pay’ Contracts:

The majority of PPAs involving base load thermal power plants are “Take or Pay” agreements that are based on capacity and mandate capacity payments against available generation capacity whether or not it is used. The ‘Take or Pay’ mandate demands that these power plants be used to their fullest potential in order to prevent needless capacity payments, which increase the cost of each unit of electricity produced.

While successive governments concentrated on building more power plants, the maximum utilization of these facilities has frequently remained unattainable, resulting in higher electricity prices for consumers and a significant financial burden for the power sector regardless of the sale of electricity.

The base load “Take or Pay” for CPEC and other major thermal power plants in the CPPA-G system dropped from FY 2019–20 and FY 22–23, meaning that customers were also required to pay capacity charges for 60% of the unutilized capacity. Below is the table showing how the electricity generation from three major CPEC power plants were dropped  FY 2019–20 and FY 22–23. This means the huge addition of capacity payment   was added in the circular debt.

Power Station FY2019-202020-212021-222022-23
Port Qasim Coal  (GWh8,9798,3697,4753,201
China HUBCO Coal (GWh)6,1437,9276,7671,548
Sahiwal Coal (HSR) GWh6,1647,3486,8872,878

Retirement of Inefficient Public/Private Sector Generation Plants:

In this report, one the key factor that is adding capacity Payment is Retirement of Inefficient Public/Private Sector Generation Plants that is completely missing in the government policy and national power regulator both.  To make it is simple understanding, as people retire, power plants retire too. Old power plants have maintenance, efficiency and technology issues. Old power plants suffer usually from low efficiency and higher O&M cost; while new plants would have higher efficiency and lower fuel cost.

Globally, particularly in India, Thermal power plants have an average service life of at least 20 years, but they are usually designed for continuous operation of more than 25 years.  According Indian Electricity Authority any Thermal Power Plant completed 25 years may be retired.  Keeping this policy  Since March’ 2016 to May’ 2019, 25 years or more old & inefficient coal / lignite based thermal power units of total 8470 MW capacity have been retired on the basis of un-economic operation or low efficiency.

It is noted that there does not exist any clear policy regarding the retirement of thermal power plants in place. However Regulator NEPRA can play a pivotal role in the development and implementation of such policies which takes into account for the efficiency of plant, economic, and environmental considerations.

The Paris Agreement requires that each Party to UNFCCC prepare, update and communicate its Nationally Determined Contribution (NDC) document declaring the actions it plans to undertake to combat climate change, especially to reduce its greenhouse gas emissions from thermal power plants as well. Accordingly Pakistan set a cumulative ambitious conditional target of an overall 50% reduction of its projected emissions by 2030.

It is scientific fact that Over 40% of energy-related carbon dioxide (CO2) emissions are due to the burning of fossil fuels for electricity generation.  Government of Pakistan after floods 2022 is globally beating the drum that country is one of the most affected countries from adverse impacts of climate change as well as air pollution. Yet ministry and NAPRA both never bother to check the that Power sector in Pakistan is one of major contributors to GHG emissions in the country. The national electricity mix is dominated by thermal power projects emitting large quantities of CO2. This shown in the graph

Pakistan19901995200020052010201520202022
CO215.4825.0032.9035.9040.4144.1552.4151.96

The National Power System Expansion Plan (2011–2030) calls for the retirement of a sizeable portion of current thermal power plants—6,935 MW—by NTDC, the party that signs power purchase agreements with IPPs.  According to this plan from NTDC, a company that used to purchase electricity from IPPs, 127.5 MW of Gull Ahmad Energy and 123.5 MW of Tapal were scheduled to retire in 2019–20. However, NEPRA also approved a ten-year licence extension for them.  One of the primary causes of the endless cycle of debt that is currently causing instability in Pakistan is the horrible crime committed by NEPRA, which was to grant generation licences to outdated and inefficient plants. The nation would have avoided financial catastrophe if NEPRA had not decided to extend their generation.

Thermal Power PlantsType of Technology /Date of CommissioningInstalled CapacityFuel Type 
Kot Addu (KAPCO)[2]GT Feb 97 to Feb 91- CC Jan 1991 and Jan 971601RFOGeneration License[3] (No. lPGL/020/2004 dated September 22, 2004) was 3 years from the date of expiry
HUBCOST  Jul-96 to 971292RFOThe Plant started generation in year 1996, while NEPRA granted license on after 12 years in 23 Jun 2008 
KEL (KOHINOOR)ST 6/1/1997131RFONEPRA deleted[4] original date of expiry 25th Aug 2019  and replaced by 25th Aug 2027
AES LalpirST 11/1/1997362RFOLicense[5] granted on 30 Aug 2003 after six years of plant functioning
AES Pak Gen.ST 2/1/1998365RFOLicense[6]  granted on 30 Aug 2003 after six years of plant functioning
Habibullah Coastal PowerCC 9/1/1999140Gas /HSDModified/Extended[7]  up September 10, 2029
Saba PowerST 1st Dec 1999136RFOPlant started operation in year 1999 while license on  30 Aug 2003 after 4years of plant operation
Altern Energy Ltd.Gas Engine Jun-200131.0GasGeneration License was granted for 17 years which was extended for another term of 10 years (up to June 2031);
Gul Ahmad EnergyEngine-1997127.5RFO25th  August, 2029[8]
Tapal EnergyEngine-1997123.5RFONEPRA extended thee generation license[9] (No. IPGL/010/2003, till June 19, 2029
Total4309 

All GENCO power Plants, except 545 MW Nandipur Thermal Power plant and 747 MW Guddu Thermal Power plant, remaining GENCO thermal Plants having combined installed capacity 2,435 MW ought to retired based on their old commission date

Bin Qasim-IUnit-1Unit-2Unit-3Unit-4Unit-5Unit-6
Date of Commissioning198319841989199019911997
Useful Life-determined by NEPRA[10]323232323232
Date of Retirement[11]  201520162021202220232029
Efficiency FO %31.4632.0326.6226.2332.1531.64
Efficiency –Gas %29.6130.2626.6226.2330.2629.24

Conclusions and Recommendations

          Over time, the efficiency of outdated thermal  power plants has declined. Additionally, as a result of their low efficiency, the plant utilization factors have decreased to lower bounds. The nation is constantly burdened by the operation of inefficient GENCO and IPP power plants. It would be financially disastrous to keep operating the outdated, inefficient steam thermal power plants when there are plenty of capable, efficient power plants available on a “take or pay” basis.  While NEPRA has consistently stressed the need to only retire the GENCOs’ older power plants, it has never mentioned the retirement of IPPS’s thermal plants, which would have lessened the sector’s financial burden and diverted precious fuel to the most efficient power plants.

It is strongly advised that all of the aforementioned thermal power plants shut down right away in order to stop the circular debt and lower consumer electricity bills. This GOP action will adhere to international agreements, particularly to respect the Paris Declaration, which committed Pakistan to lowering its carbon footprint. It is important to remember that power plants emit more carbon dioxide when they operate less efficiently, even though they are producing the same amount of electricity. 

If the CRSS management doesn’t forward this report to the UN for implementation of the recommendations, there is no possibility that a government facing serious institutional collapse will be able to quickly and easily address these workable solutions in single click.