Keeping the lights on

December 11, 2022

A goal-oriented electricity policy is crucial for the revival of the economy

Keeping the lights on


hallenges for Pakistan’s power sector are growing. A few months ago, the then finance minister, Miftah Ismail, had warned that unless it was run in a realistic way the power sector had the potential to sink the entire economy.

A draft of the National Electricity Plan has been circulated recently among various stakeholders for comments, feedback and questions. It is basically a list of initiatives to be taken by the Ministry of Energy over the next five to fifteen years. The policy measures revolve mostly around five dimensions: energy security, energy equity and financial viability, sustainability, governance and innovation.

Keeping the lights on in Pakistan is a daunting task. Today, power producers, distributers and fuel suppliers all have liquidity problems. The policy document seeks to reform the system through various interventions. A major sticking point today is the affordability of power. Following the recent raise in tariffs, required under the IMF programme, recoveries have nosedived. This has resulted in a growth in the so-called circular debt, which currently stands at Rs 2.6 trillion. Over the last fiscal year, it has grown by about 10 percent.

Successive governments, including the current setup, have promised to arrest the mounting debt through some circular debt management plan. All have failed.

The draft plan offers new guidelines, implementation mechanisms and tools to realise the priority goals of the National Electricity Policy approved in June 2021. The five-year plan has a fifteen-year outlook and touches on rationalising the functions of the regulators, restructuring the divisions within the Ministry of Energy around its five core functions.

The first is the unification of the regulating bodies: the National Electric Power Regulatory Authority (NEPRA), the Oil and Gas Regulatory Authority (OGRA) and the National Energy Efficiency and Conservation Authority (NEECA) into one unified energy regulating entity. The goal is to be achieved by June 2024. With regard to the procurement of power, a revised generation policy framework will be included; licensing requirements for GENCOs will be done away with; an annual Transmission System Expansion Plan will be published via the Indicative Generation Capacity Expansion Plan (IGCEP); and a separate strategic roadmap will be agreed between the Power Division and WAPDA’s distribution companies (DISCOs). Regulatory targets will be built into their tariffs based on certain performance benchmarks such as consumer service, safety, technology and HR-related improvements.

Given the historical inertia of the regulatory bodies, a key question arises about the feasibility of such a merger.

The system operator is to have a detailed implementation plan to integrate dispatch operations based on economic merit order and other “take or pay” commitments. The NEPRA has admitted to fuel mismanagement in its State of the Industry Report for 2022.

A key component of energy security is the induction of 60 percent of indigenous resources by FY2025 with 75percent input from such sources by FY2030. This is a healthy target given that during the last 20 years, reliance on imported fuel has caused the circular debt to bulge.

It is important to mention here that more energy is being added to the system based on the assumption that further industrialisation will take place. Given that the near-term forecasts suggest that a recession is very likely in FY2023 and onwards, this may be too optimistic a forecast in view of the FDI trends (a year on year reduction of 52 percent and export industries getting reduced orders from the US, the EU and the UK).

The five-year plan has a fifteen-year outlook and touches on rationalising the functions of the regulators, restructuring the divisions within the Ministry of Energy around its five core functions.

The next key element is the ambitious Universal National Electrification Programme whose primary target is to ensure 100 percent access to energy by 2030. Given the current contraction in the economy on account of rising inflation, a plan to improve and maintain access and recoveries is relevant.

To ensure the financial viability of the power sector entities, a forward-looking fuel cost adjustment is planned for as one of the roles and determinations of the regulator for six and twelve months and to be evaluated monthly. This will also include financial charges arising on account of systematic time lag between the period of generation invoicing and payment made by customers.

The recovery of open access costs is also built into the charges for consumers opting for bilateral contracts under which cross subsidy, grid and network charges and a transition mechanism to competition charges will also be instituted. Each last resort supplier shall file a petition for its determination.

The transition will entail recovery of 100 percent capacity charge in the first two years, 75percent by year three and four and 50 percent by the fifth year. A question arising here is will capacity payments and the contracts be renewed if the demand doesn’t grow substantially?

To ensure the environmental sustainability, the Power Division will collaborate with the Ministry of Climate Change and other stakeholders to devise a roadmap for development of an integrated assessment model and enable the developments for cleaner energy through cross-sector policy decisions. The goal is to invest in and include 75 percent of the generation mix from renewables.

To facilitate this growth new rules for micro-grids and distributed systems will be incorporated into NEPRA Rules and Procedures.

To protect vulnerable segments of the population, a direct subsidy disbursement programme is in the works that will first quantify and validate protected consumers in the residential and agricultural category. By 2025 the Power Division will launch its own programme using the relevant data, extracted from the NSER database. The cross-subsidy is to be progressively reduced and capped at 20 percent of the cost of service by FY2025.

On the governance front, the sector is to be systematically liberalised to reduce the time required to deploy new connections. A progressive reduction to remove bottlenecks is being pushed through to streamline connection uptake.

Further opening of the market to allow bulk consumers to negotiate cheaper tariff lines is on the cards.

Full utilisation of indigenous resources will take time (target of FY2030). Till then lower income households will remain at a disadvantage.

GIS mapping of the sector via DISCOs will be implemented alongside consumer mapping through CNICs. This is a great way to document connections while also deriving further insights through load monitoring systems

The draft plan does not clearly answer some important questions, including the following:

Once bilateral contracts are instituted, how will the regulator protect the consumers in the last-resort-suppliers network?

What are the incentives for the last resort suppliers to improve their services if their consumers cannot pay competitive tariffs?

How can consumers be spared high energy prices in the short term i.e. before indigenous fuel sources come online?

More energy is being added to the system based on the assumption that further industrialisation will take place. How are we hedging the bet?

Will capacity payment contracts be renewed if demand doesn’t grow substantially?

A result-oriented electricity policy is crucial for the revival of the economy.

The writer is an economic correspondent for The News. He tweets at @Jawwadrizvi

Keeping the lights on