Capacity payments a threat to sustainable power sector

ISLAMABAD: With the injection of 11000MW in the system by June 2018, the capacity charges’ payment crisis will continue to be the headache and a threat to stimulate the liquidity crisis in the power sector as almost in every year the central power purchase agency (CPPA) pays Rs150-200 billion as capacity charges to the power houses, The News has learnt.

The latest data pertaining to the capacity charges payments unfolds that in last year, the hefty amount of Rs203 billion has been paid to the IPPs (independent power producers) as capacity charges.

The capacity charges are paid to those power houses which are available for power generation but the government does not purchase power from them as per the Merit Order for dispatch of electricity.

As per the Merit Order, the efficient plants are encouraged to generate power to make the electricity at affordable prices. Right now the plants run on furnace oil and costly diesel are made non-functional, but they all are being paid the capacity charges.

Mr Zargham Eshaq Khan, Joint Secretary (power finance) confirmed that in the last year Rs203 billion has been paid in the form of capacity charges to the power houses saying as of today the payables to all kinds of IPPs stand at Rs472 billion out of which the amount of Rs103 billion is to be paid under the head of capacity charges. Khan said that the government will continue to pay till five years after 2028 as the Power Purchase Agreements (PPAs) with most of the IPPs have been signed for 25-30 years time and they will end up by 2028 and capacity charges payments will continue 5 years beyond 2028. He, however, admitted that every year, the capacity charges payments to IPPs hovers in the range of Rs150-200 billion.

Secretary Power Division Yousaf Naseem Khokhar admitted that the capacity charges payments are a threat to sustainable power sector. He said that in the past questionable Power Purchase Agreements (PPAs) were done with IPPs which were not in favour of the countrymen.

However, the then decision makers are of the view that Pakistan was considered high risk country and no one was ready to invest in power sector. So such kinds of PPAs were inked to ensure the electricity availability in the country.

“If one happens to go through such PPAs, one will feel that investors had drafted the PPAs on their own and the state officials had just signed the said agreements. Now many of PPAs of some IPPs are going to expire in 4-5 year and will completely erode by 2027-28.”

“This is how the government will come out of capacity payment charges’ crisis,” Khokhar said while explaining the strategy. Zargham Eshaq Khan, while coming to the liquidity crisis that triggers from the circular debt, said that payables of power sector stands at 472 billion as of today out of which IPPs need to be paid Rs222 billion.

Power sector also need to pay Rs162 billion to PSO, Rs13 billion against the use of gas and Rs18 billion to Wapda. He admitted that power distribution companies (DISCOs) are still unable to increase the recovery of the billed amount of electricity. Khan said though the DISCOs have improved the recovery from 86 percent to 92 percent, but the injury of 8 percent translates to Rs58 billion damage to the system which appears in the shape of circular debt and when the recovery was at 86 percent the loss to the system stood at Rs136 billion every year.

Mr Khan said that DISCOs have been asked to improve the recovery and they have no option but to perform.