Capacity payments swell 60pc to Rs664bln in FY2019

KARACHI: Capacity payments – charges paid to power producers for unused electricity – sharply rose 60 percent year-over-year to Rs664 billion in the last fiscal year of 2018/19, the central bank said, citing it as a major reason that electricity consumers couldn’t benefit in shape of reduction in bills from decline in fuel cost.

“Capacity payments constitute the bulk of power tariffs in Pakistan, and a sharp increase in these payments in recent years has completely offset gains from declining fuel cost,” the State Bank of Pakistan (SBP) said in a latest report.

The SBP said approximately 729 megawatts of capacity was added into the system during the year, while there were modest growth in power supply, the increase in net hydel profits to provincial governments, and the associated arrears.

The SBP said capacity charges increased between 2013 and 2018 despite softening of fuel charges and shift in domestic fuel composition during the period. “For nearly all the Discos, the increase in capacity charges have completely offset the fall in fuel charges.”

The country’s power generation capacity increased 45.7 percent since June 2014 to reach 34,282 megawatts at end March 2019.

The central bank said the capacity payments are likely to grow over the next 5-6 years, as a number of ongoing power projects (mostly coal and renewables) come online and, in the absence of a commensurate growth in demand amidst a challenging macroeconomic environment, there would be a capacity surplus situation in the country.

The SBP said it would be challenging for the government to achieve the objective of providing cheap electricity to domestic users in the wake of reduction in power subsidies, chronic governance issues in state-owned power distribution companies and rising capacity payments. The central bank called for policy overhaul and implementation of rationalised strategy to make power sector more efficient and financially sustainable to ensure smooth and affordable electricity to end-users.

The SBP said the practice of keeping government-notified tariffs below even the levels of procurement costs for most of the power distribution companies, is proving as a major disincentive for such institutions to carry out the necessary investments at an adequate scale.

“Hence, there is an urgent need for the government to review this practice to ensure that the power sector is able to channel forward the coming additions in generation to the industrial, domestic and other end-users,” it added.

The central bank asked the government to keep exiting pressures on the country’s balance of payments and fiscal resources under consideration while renewing or making new power purchase agreements (PPA) with the producers. Currently, the PPAs allow guaranteed returns along with dollar-based indexation of capacity payments.

“The government must realise that if the capacity payment structure remains unchanged, the desired effects of providing affordable energy to the public by increasing the share of cheaper power sources in the generation mix are unlikely to materialise,” the central bank said.