Circular debt threatens energy security, consumer welfare: think tank

ISLAMABAD: A new report issued by an independent think tank PRIME has warned that continuous build-up of the circular debt, which stands at an all-time high of 5.2pc of GDP, poses a threat to the country's energy security and consumer welfare.

The report acknowledges the federal government's efforts to reduce capacity payment liabilities and its plans to introduce a long-overdue competitive market regime. The PRIME report mentions that the share of renewables in the energy mix has gone down from 8.2pc to 2.4pc.

The key messages of the report are: for every unit of electricity produced, on average only Rs14 is collected as opposed to its real cost of Rs21, adding the difference of Rs7 to the ever-mounting ledger of circular debt. The circular debt build-up is attributed to multiple causes namely, Tariff Differential Subsidy, Capacity Payments, T&D and Recovery Losses, and Governance Issues. The report establishes that this has led to an unprecedented level of circular debt amounting to Rs2.3 trillion.

Further, the incumbent government’s mandate for alleviating the ailments of the power sector, by introducing green energy into the mix, has yet to see the light of day. The share of renewables in the energy mix has decreased, as opposed to rising as per the PTI manifesto. The report further highlights the key costs of circular debt -- for end-consumer the high energy tariffs, power outages and for investors their constrained liquidity, everyone becoming worse off.

The report calls for a holistic policy approach and puts forth recommendations for the government to tackle the problems riddling the electricity sector. Liberalizing prices is right but it needs to be complemented by reforms to address the technical and operational inefficiencies, inadequate power infrastructure, and soaring circular debt. In the short term, the government is advised to improve governance to effectively do away with energy theft and recovery losses, continue negotiations with IPPs to reverse the ‘Take or Pay’ contracts and prioritize the use of cost-effective plants to minimize production inefficiencies.

In the long run, the report recommends that the government should aim for up-gradation of power infrastructure, as only then can the T&D losses (a major component of circular debt) be curtailed, shift to a more renewable energy mix for electricity consumption, re-evaluation of power subsidies, reconstruction of tariff regime on the bid-based model rather than cost-based pricing. The circular debt is a multifaceted issue and must be handled accordingly by establishing a radical and long-term policy plan.