Inefficient distribution: Circular power debt swells by Rs396bn in a year

ISLAMABAD: In a troubling revelation, the inefficient power distribution companies (Discos) plagued by bad governance have been identified as the major contributors to the addition of Rs396 billion to the circular debt during the financial year 2022-23.

High losses, accounting for Rs160 billion, and less recovery of electricity bills, adding Rs236 billion, have exacerbated the circular debt crisis.

The National Electric Power Regulatory Authority (Nepra) has recommended a forensic audit to ensure accountability among staff, aiming to bring transparency and efficiency to the distribution network. The recently released State of Industry Report 2022-23 (SIR-2023) by Nepra reveals that most Distribution Companies (DISCOs) failed to meet Transmission and Distribution (T&D) loss targets, significantly contributing to the circular debt.

Notable entities such as Pesco, Tesco, and Sepco reported substantial losses, collectively contributing an additional Rs160.49 billion to the circular debt. Pesco alone added Rs77.35 billion to the debt, reporting a loss of Rs77.3 billion. Other contributors include Lesco (Rs21.9 billion), Mepco (Rs7.9 billion), Hesco (Rs15 billion), Sepco (Rs20.38 billion), and Qesco (Rs21.21 billion).

As of June 30, 2023, the circular debt surged to Rs2.309 trillion from Rs2.252 trillion in FY2021-22. Current defaulters owe around Rs900.821 billion, posing a significant challenge. Nepra emphasised the need for the government to ensure timely subsidy payments and explore innovative solutions to minimise losses.

The recovery rate in FY2022-23 stood at 92.4 percent, adding an additional Rs236 billion to the debt. Nepra recommended outsourcing recovery tasks and urged the government to focus on addressing inefficiencies to curb the accumulation of circular debt.

Receivables for DISCOs surged to approximately Rs1.727 trillion in FY 2022-23, raising concerns about potential billing manipulation. Nepra recommended establishing committees with independent professionals to ensure accurate receivables.

The power regulator also denounced loadshedding based on AT&C losses, urging DISCOs to prioritise resolving inefficiencies. A forensic audit was suggested to hold staff accountable and ensure transparency and efficiency in the distribution network.

DISCOs failed to provide new connections as per Performance Standards (Distribution) Rules, 2005, leading to a substantial backlog of connections. The power regulator emphasised the need for accountability measures, including penalties for negligence and rewards for exemplary performance.

Safety concerns resulted in fines and investigations, with 163 fatalities reported in DISCOs during FY 2022-23. The regulator recommended grounding of poles/structures and a focus on safety to prevent accidents.

To address challenges in DISCOs, Nepra recommended involving the private sector. The authority sanctioned a five-year investment plan of Rs375 billion for Iesco, Lesco, and Fesco, encouraging the installation of Advanced Metering Infrastructure (AMI) for real-time monitoring and efficiency.

The State of Industry Report highlights the need for strategic reforms, renewable energy diversification, and improved governance to attract investors for sector modernisation. The authority noted various factors contributing to higher electricity costs, including fuel cost increases, rupee devaluation, capacity payment hikes, circular debt, reduced electricity usage, and governance issues.

Inefficiencies in state-owned generation companies (GENCOs) were noted, with Nepra urging the retirement of older, inefficient power plants to optimise fuel allocation and alleviate financial strain.

K-Electric Limited faced generation capacity deficiencies in FY 2022-23, leading to reliance on expensive sources. The authority recommended augmenting power from the National Grid and establishing a long-term generation plan to address cost concerns. Technical constraints resulted in Rs20.203 billion loss in electricity evacuation.

Nepra emphasised the need for NTDC to promptly address constraints to prevent passing on the burden to consumers or taxpayers. The under-utilisation of NTDC’s transmission system and limited interconnection capacity between NTDC and KE were highlighted as inefficiencies impacting consumers.

In conclusion, Nepra’s SIR-2023 stresses the urgency of comprehensive reforms and strategic planning to overcome challenges in the electricity sector, ensuring sustainable growth and transparent, efficient governance.

Meanwhile, the National Electric Power Regulatory Authority (Nepra) has identified K-Electric for generating expensive electricity, placing a significant financial burden on power consumers throughout the fiscal year 2022-23.

During this period, K-Electric grappled with a deficiency in generation capacity, leading to its reliance on the Central Power Purchasing Agency (CPPA) and other resources. Nepra’s State of Industry Reports 2023, released on Friday, revealed that renewed agreements with legacy RFO-based Independent Power Producers (IPPs) and Power Purchase Agreements (PPAs) with Captive Power Plants (CPPs) contributed to elevated per-unit costs.

The existing fleet of K-Electric, heavily dependent on imported fuel with a 30 percent efficiency rate for BQPS-I, prompted Nepra to recommend augmenting power from the national grid to address cost concerns. Under privatisation agreements, K-Electric is entrusted with maintaining an efficient generation fleet and procuring electricity from NTDC/CPPA-G.

With surplus power available at CPPA-G, limits for supplying electricity to K-Electric have expanded. Urgent calls for a long-term formal agreement, approved by relevant authorities, highlight the detrimental impact of ad-hoc planning on the power sector and national finances. Consumers and taxpayers bear the consequences of such unplanned measures.

The existing interconnection capacity between NTDC and K-Electric, limited to 1,100MW, necessitates enhancement for accommodating new generation facilities. K-Electric’s investment plan proposes the establishment of two 500 kV grid stations at KKI and Dhabeji, along with the augmentation of the 500 kV NKI grid station. A structured, long-term agreement is deemed crucial for maintaining a stable and sustainable energy ecosystem amid significant investments and extended timeframes.

Furthermore, K-Electric’s thermal generation capacity stands at 2,816MW, falling short of meeting the current demand of its system. To bridge this gap, K-Electric procures electricity from external sources, including 366MW from thermal IPPs, 100MW from solar potential, 139MW from SPPs/CPPs, and approximately 1,100MW sourced from the CPPA System.