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‘Swelling circular debt, capacity payments causing dent to economy’

January 28, 2022
‘Swelling circular debt, capacity payments causing dent to economy’

ISLAMABAD: The swelling circular debt and capacity payments coupled with running of inefficient power plants more and more by the government has caused a huge dent to the economy as the country’s industry has lost its competitiveness manifold, says a letter of FPCCI President Nasser Hyatt Maggo to Prime Minister Imran Khan.

The letter with the headline "Save Pakistan from economic collapse by addressing energy sector issues," addressed to Prime Minister Imran Khan, asked for action against K-Electric for its utter failure in providing uninterrupted electricity and huge increase in power tariff as it is involved in running its most inefficient plants on furnace oil, which is a costly fuel.

The FPCCI president submitted to the PM a set of eight recommendations in his letter to fix the energy sector woes, asking for detailed technical audit of all thermal power plants of KE at the earliest. He also asked for the immediate retirement of 1,250 MW Bin Qasim-l along with two lPPs Gul Ahmed and Tapal. "The fuel (Gas or Oil) for these power plants may be allocated to other efficient power plants connected to the national power grid having higher efficiency to reduce the electricity cost."

And to bolster the future of Karachi's growth, he also urged the prime minister to dedicate the electricity generation of 7,320 MW Port Qasim Coal Plant, 7,320 Hub Coal Power Plant, 7,200 MW HUBCO and 7,7OO MW KANUPP-2 (Karachi Nuclear Power Plant) to Karachi along with upcoming 660 MW Lucky Coal Electric Power and 1,100 MW KANUPP-3. All these power plants are installed in Karachi. All the EPC cost of 1,200 MW HUBCO power plants has been paid by the public through tariff so now the government of Pakistan ought to take control of this power plant. He said that there is a need to set up an independent technical commission for inquiry against the officials of NEPRA and Ministry of Energy involved in this most sophisticated crime of awarding more than 500 bn rupees tariff differential subsidy (TDS) to KE since its privatization, which has placed the country almost at the verge of financial collapse. He asked the prime minister to direct the energy ministry to supply surplus electricity from the national grid to KE by constructing new 500kV and 220kV interconnections. "This action will help to meet the electricity demands of KE and well help avert huge capacity payments to almost idle power plants connected to the national grid." He also asked for setting up an Energy Security Unit at the Prime Minister's Office in collaboration with the FPCCI to oversee the power and oil & gas sector.

Nasser Hyatt Maggo also mentioned that in Karachi, large parts of it regularly plunge into darkness. K-Electric, privatized in 2005, has repeatedly come under scrutiny for its often illegal profit-maximizing business practices and countless mishaps leading to prolonged blackouts and frequent loadshedding. Maggo said that now it is time to make energy security at affordable prices a part of national security. The Indian establishment had declared almost two decades ago that energy security was a vital organ of national security.

However, spokesperson K-Electric, when contacted, stated that “All our generation plants including legacy power plant Bin Qasim Power Station 1 (BQPS-I) have efficiency at par or better than comparable power plants of the same class operating in the National Grid. These details can also be confirmed via NEPRA’s State of Industry Reports as well."

The spokesperson said: "KE is investing around USD650 million to establish its flagship 900 MW RLNG-based Bin Qasim Power Station 3 (BQPS-III), which is progressing swiftly towards commissioning. Upon completion, BQPS-III will be among the top five-most efficient plants in the country. To secure the RLNG supply for the plant, KE also signed GSA with Pakistan LNG Limited (PLL) in August 2021; the utility looks forward to receiving the requisite fuel to generate maximum power to cater to Karachi’s demand in the upcoming summer months.

“Since privatization, the company has invested more than Rs410 billion across the value chain upto June 2021, adding over 1,000 MW of highly efficient generation capacity and doubling its transmission and distribution capacity, while also significantly reducing line losses from approximately 36pc in 2009 to 17.5pc as of FY 2021. Owing to these investments, KE has successfully exempted over 75pc of its service territory from loadshedding, including 100pc exemption to industries.”

Commenting on the cost of generating electricity, the KE spokesperson clarified that rising global prices of furnace oil and RLNG, coupled with a drastic reduction of indigenous gas supply, have resulted in higher costs of power generation across the country. The provision of adequate quantity and pressure of indigenous gas to KE’s fleet is imperative to ensure that cost efficiencies are maintained. Moving forward, KE is also exploring to expand its renewable energy base to ensure uninterrupted provision of power with sustainability and affordability."

The KE spokesperson further clarified that the company is working closely with the federal government and NTDC under the guidance of NEPRA to set up interconnections/ grids to enable additional supply of electricity from the National Grid to address Karachi’s evolving electricity demand.”

Meanwhile, eminent energy expert Arshad H Abbasi, associated with SDPI, when contacted, shared his mind on energy sector woes, particularly in Karachi saying that capacity payments amount to about 3 percent of Pakistan's GDP alone. Consequently, circular debt is projected to soon hit a worrisome 8 percent of GDP. Pakistan has now installed a capacity of around 39,000 megawatts (MW). The previous government did not invest in the high voltage transmission and the distribution system network, so electricity cannot be transmitted more than 25,000 MW. The national economy that was growing by 5.8 percent in 2018 has gone into a nosedive, one of the major reasons is the circular debt, including capacity payments to lPPs. As a result, the escalating cost of surplus power has meant a continuous rise in consumer power tariffs. This also has fueled inflation, eaten away industrial competitiveness, and necessitated growing resort to government-funded subsidies on power tariffs to shield export-oriented industries from the full brunt of the tariff hikes.

Abbasi goes on to say that the power sector of Pakistan is a leaking bucket, the holes deliberately crafted and the leaks carefully collected by rent-seeking stakeholders. It's time to rein in these selfish stakeholders. The circular debt has risen from Rs 1.1 trillion in 2018 to Rs2.28 trillion during the fiscal year 2020-21 and is projected to hit Rs4 trillion by 2025. The main reason behind the circular debt and hike in tariff is the expensive and excess unutilized power capacity. The last regime added electricity generation, which is 25pc more expensive than comparable regional benchmarks, and also substantially more than national needs. Yet, at the same time, the last government added generation capacity with a contract of 'TAKE OR PAY' basis that has hit the power sector hard. The annual capacity charges that increased to Rs860 billion are now projected to be a whopping Rs1,455 billion in 2023.

He also said that this capacity payments of Rs1,455 billion in 2023 will be equal to the amount which can be used to buy simultaneously state-of-the-art five nuclear-powered ballistic missile submarines, multi-role fighter aircraft i.e. 20 US F-35A, 20 French-made Rafale and 600 M1 Abrams tanks in the international market.

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