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March 7, 2021

Bankrupt power

Opinion

March 7, 2021

The power sector is the foundation of an economy. Red alert: Pakistan’s power sector – sans government subsidies – is bankrupt. The real culprit behind this bankruptcy is: gross misgovernance. This gross misgovernance shows up as: circular debt and capacity payments (the two are indeed related).

Circular debt has risen from Rs1.1 trillion in 2018 to Rs2.4 trillion – and is projected to hit Rs4 trillion by 2025. Capacity payments – payments made for not utilising the installed power capacity – have gone up from Rs664 billion to Rs900 billion, and are projected to hit Rs1.5 trillion a year in the next couple of years. Imagine, capacity payments amount to 3 percent of Pakistan’s GDP. Lo and behold, circular debt is projected to hit a worrisome 8 percent of GDP.

Pakistan’s energy is both dirty and expensive – and the government is bent upon adding more of the same. The culprits behind dirty energy are the coal-fired plants. And the two culprits behind expensive energy are: the government’s failure to stop theft and the expensive Power Purchase Agreements (PPAs) with the Independent Power Producers (IPPs).

Pakistan’s energy is not only dirty and expensive but we have too much of it too. For the record, current summertime and wintertime peak demand hovers around 25,000MW and 12,000MW, respectively. What we have – installed as well as in the pipeline – is 38,000MW. There are two problems with the installed capacity. One, the current transmission and distribution infrastructure cannot transmit and distribute 38,000MW. Two, the economy that was growing by 5.8 percent in 2018 has gone into a nose-dive.

Some energy projects under CPEC are quite expensive. Of the 10,000MW capacity under CPEC 65 percent is coal-fired. Currently, Pakistan’s obligations under capacity payments to Chinese financed energy projects stand at around Rs400 billion a year, every year. Lo and behold, in the next couple of years this amount will go up to Rs800 billion a year, every year.

Pakistan’s policy framers have just blundered through a coal-heavy power expansion whereby 64 percent of our electricity is now from fossil fuels, 27 percent hydropower, 5 percent nuclear and only 4 percent from solar and wind. The good news is that Pakistan has shelved two coal power plants.

Reform or regress. To be sure, the government of Pakistan has almost no capacity to reform. The two tools that the government seems to possess are: subsidies and one tariff increase after another. Over the past decade or so, the government has doled out more than a trillion rupees in subsidies and an additional half a trillion to K-Electric. The power sector is bankrupt – sans government subsidies. Yes, we have a national Electric Vehicle (EV) policy to reduce the impact of climate change but 64 percent of our electricity is from fossil fuels.

Pakistan’s power sector is dirty, expensive and bankrupt. Imagine trying to build an economy on a foundation that is bankrupt. We urgently need a paradigm shift. We urgently need a brand new model. The ‘single buyer’ model has failed-failed miserably. We need a more competitive model. To be certain, Pakistan’s power sector will make or break Pakistan’s economy. Red alert: A bankrupt power sector will, sooner or later, lead Pakistan into a default.

The writer is a columnist based in Islamabad.

Email: [email protected] Twitter: @saleemfarrukh