Nepra okays costly Kapco tariff amid idle capacity, govt power cuts push

ISLAMABAD: Pakistan’s energy regulator has greenlit a controversial tariff revision for the ageing Kot Addu Power Company (Kapco) plants, granting a 25 percent return on equity on a “Take-or-Pay” basis — despite the fact that over 70 percent of the country’s existing thermal capacity remains idle, while the government works to phase out costly plants.

Critics within the regulator itself are raising red flags saying it defies economic logic, rewards inefficiency, and shifts the burden of institutional failures onto the overburdened electricity consumers. They term it a regressive move at a time when all stakeholders are working to eliminate Take-or-Pay contracts.

The decision comes at a time when cheaper energy resources remain under-utilised due to chronic transmission bottlenecks.

Under the new pricing structure, Kapco’s total tariff for electricity generated on gas/RLNG will soar to Rs32.98/kWh, while furnace oil-based generation will cost Rs34.48/kWh — far higher than several other options available in the national pool. This revision effectively locks in capacity payments, even if the plant doesn’t dispatch electricity, raising serious concerns over economic merit.

In a dissenting note, Nepra Member (Technical) Rafique Ahmad Shaikh highlighted the economic and technical irrationality of extending Kapco’s life. He cited the system’s installed generation capacity — 42,512 MWs as of June 2024 — already far exceeds demand. Thermal power, accounting for around 25,000 MW, was utilised at a dismal 29 percent in FY24.

Kapco’s continued operation — despite its prior license extension of 485 days — was justified by authorities citing “grid constraints.” Yet, the much-touted 4,000 MW HVDC line, designed to transfer inexpensive southern electricity to the north, operated at only 38 percent utilisation last year, even as consumers paid full capacity charges.

He further noted, while policymakers campaign to eliminate Take-or-Pay contracts and lower the cost of electricity, they are simultaneously extending one of the most expensive such arrangements.

“The failure to address these issues has resulted in a situation where the country is unable to optimally utilise its more economical and indigenous energy resources in the South, primarily due to the limitations of the transmission system. Consequently, we find ourselves reinvesting in outdated and inefficient generation capacity, further exacerbating the problem,” Shaikh wrote.

He further noted when Nepra renewed Kapco’s license on Sept 8, 2022, it directed NTDC and Mepco to fix technical issues causing violations of the Economic Merit Order. With just six months remaining in the license period, those issues remain unresolved.

He recommended that Kapco’s revised tariff be granted strictly on a Take-and-Pay basis. More critically, he urged that any costs arising from the violation of merit order—where cheaper generation is bypassed for expensive alternatives—should be borne not by the consumer, but by the grid operators who failed to remove constraints.