Tuesday October 26, 2021

How to control circular debt

April 30, 2021

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

It was recently reported that the PM has asked the Ministry of Finance and the Power Division to reduce circular debt without increasing the tariff, and handle the capacity charges.

One is relieved to hear of the PM’s interest in the issue. Indeed, the best option is to somehow reduce the capacity charge which has been increasing due to slow demand and higher capacity cost. Increase in tariffs would have political consequences among rising inflation. Even the economy and exports may be hurt due to an increase in electrical tariff.

However, the bad news is that financial closure has been signed off between PPIB and the government of Punjab for a 1263 MW RLNG based combined cycle plant (TRIMMU). This happens to be the fourth plant in the series. Vested interests found this to be an opportune time to quietly get it approved while there is new leadership in the Ministry of Energy.

Undoubtedly, these are highly efficient plants. The question, however, is whether we needed this plant and whether this plant would be able to operate due to lack of demand. As is generally acknowledged, our circular debt problem is largely due to the large number of plants having been installed – much more than required. The economic slowdown has further aggravated the problem.

In the last few years, many base load power plants consisting of four coal-fired plants have been commissioned that are working fine and at full load. A few more coal power plants are under construction and will be commissioned shortly. A nuclear power plant has been commissioned and another one will be shortly commissioned. Another 12000 MW of capacity is at various stages of planning and implementation.

Admittedly, there are various legal commitments and one may not be able to wriggle out of the committed projects. However, with some hard work and negotiations, project implementation of additional capacities may be delayed. After all, the present government has been able to extract some concessions from the existing IPPs. And, certainly, government contracts can be postponed for when the demand builds up.

However, exactly the opposite has been done. The Punjab government has made it a fait accompli by undertaking the construction of TRIMMU under its own equity even before the completion of the financial closure. There is questionable illegality in this.

The three other power plants – Bhikki, Balloki and Haveli Bahadurshah, each of 1000 MW – have never been run at full capacity. There have been various problems confronting these power plants. These plants are supposed to run on RLNG. Qatar RLNG has been expensive and there are take-or-pay obligations. Therefore, these were supposed to have a guaranteed minimum gas take-off at 66 percent. The Power Division later managed to get this condition waived-off, realizing that these power plants may not be able to achieve capacity utilization of 66 percent. In that case, why this fourth plant of even larger capacity? There are gas supply issues as well. SNGPL has been cajoled to surrender its 150 mmcfd of RLNG to KE for its LNG power plant. Amusingly, there is power shortage in Karachi, while the country is suffering from excess capacity.

The problem is that there are various sources of power influencing the approval of power projects. The PAEC has a strategic division which manages to quietly get its projects approved. No data is disclosed, and approval is disguised. Private parties have their own interests and manage to garner influence to fast-track their incomes and profits.

Provinces are free riders as they do not have to share in the circular debt. Provinces, including Khyber Pakhtunkhwa and Sindh, also manage to get their projects approved. KP wants to fast-track hydro, Sindh wants to fast track renewables and Thar coal. Punjab has a penchant for gas while it has no gas of its own and wants to impose WACOG on other provinces to reduce its load. And there is a free lunch going on under the aegis of CPPAG with its large aggregation with equally large losses and circular debt. Ironically, nobody accepts responsibility and nobody is held responsible since the system is so complex and distributed.

As the classical joke goes, some people are removing water from an over-filled bucket, while others are filling it at the same time. There is a need for an embargo on capacity addition for the next five years; and only the PM should have the authority in this respect. A powerful board should be constituted to resist unwarranted capacity additions.

Another issue is the Integrated Generation Capacity Expansion Plan (IGCEP) which is prepared for twenty years under certain assumptions of economic growth. The IGCEP, once approved, is implemented without any consideration of changes in economic conditions. It should be a rolling plan to be revised every year and adjusted for new economic circumstances. This offers some technical justification for unbridled capacity expansion. However, it is clear that additional capacity is not required, and the existing capacity is underutilized. If the IGCEP is implemented in its present form, circular debt would double. It is recommended that a high-powered committee be formed to address this issue to delay the implementation of approved and semi-approved projects.

It may be advisable to consider immediately stopping further construction of TRIMMU which in any case would not be utilized. A stranded investment of 25 percent is much worse off than stranding 100 percent investment. There are always some arguments on the other side such as improvement in power quality and quantity in the Jhang area. But the question is: can we afford the additional liability of capacity charge of Rs50 billion per year of an unutilized project?

Admittedly, the fundamental problem is the large difference between the peak winter and peak summer demand. Peak summer demand exceeds 25000 MW and peak winter demand is around 10,000 MW. This is a highly complicated issue which we have dealt with earlier in this space. Suffice to say here that both tariff and non-tariff steps are required to address this. Electricity demand has to be increased in winter and reduced in summer. One solution is through tariffs – cheaper in the winter and higher in the summer. Another, rather wild, solution is banning geysers and gas heaters and promoting electrical space heating and solar water heating. And, even more wildly, gas connections to posh areas may be discontinued altogether and be supplied with LPG only. Cheaper wind and hydro power is available in the summer. Thus, tariff optimization may not be an easy job calculated manually. Linear programming and other operations research tools would be required; USAID assistance may be handy in this respect.

Concluding, controlling circular debt is a very difficult job as the die has already been cast by excessive capacity commitment and high tariff agreement. Applying some breaks on the remaining ones is required.

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