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The power sector tariff dilemma

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The power sector tariff dilemma
Ali Khizar 11 Apr 2021
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The biggest economic headache this government inherited in 2018 was energy circular debt, which has only exacerbated since. At Rs2.3 trillion, it has doubled since PTI came to power. If nothing is done to curb the malaise, it will likely cross Rs4.5 trillion by the end of PTI term, growing 5 times between 2018 and 2023. This alone can drag the economy into an abyss. Business as usual simply cannot continue.
The rate of growth is attributable both to currency adjustment (2018-20), and new capacity additions. Another Rs980 billion capacity payment shall be added during 2021-23. The government has developed a circular debt reduction plan with the support of the IMF and ADB, although it has not been made public so far. Here, the highlights of the plan (based on background discussions with the stakeholders) are presented and the viability is evaluated.
The primary challenge is to make electricity distribution companies (discos) efficient. This falls under the purview of Ministry for Power, whose performance has remained sub-par during the first half of PTI's term. That discos cannot be mended if they continue to remain under government control is a fact. The plan aims to reduce T&D losses from 18 percent to 15.5 percent, and to improve recovery from 90 percent to 95 percent by June 2023.
The idea is to develop public-private partnership models. Ten discos have been bifurcated into two segments - five of which are doing well (and operate in Punjab) while the remainder five operate in other parts of the country (excluding Karachi). For the good discos, the idea is to give 10-year concession with management rights to the private sector. The concessionaires will invest own resources and the weighted average cost of return shall be determined by Nepra - as in the case of K-Electric. For the other discos performing poorly, a five-year management contract is proposed with performance-based returns - the government will invest and share the benefit of reduction in losses with the respective private party.
Discos' management in private hands may not only improve revenue recovery from existing customers but may also help acquire new customers. Many industrial players rely on captive power generation. The government is persuading them with the use of stick to move to the grid. Private players can offer marketing carrots to lure them.
Five years ago, discos' inefficiency was the elephant in the room. Now, a much bigger monster is showing teeth. The cost of generation must be rationalized. Recently, the government renegotiated contracts with old IPPs. A similar treatment is warranted with the China Pakistan Economic Corridor (CPEC) and other new and upcoming IPPs. For the government to be seen credible, it is better to release old IPPs' due payment sooner than later. The National Accountability Bureau (NAB) must be taken out of the equation.
The Central Power Purchasing Agency (CPPA) supplies 650MW to K-Electric; but the deal has not been reached on commercial basis. This summer onwards, another 450MW will be supplied to KE. This should be on commercial basis - KE must sign a Power Purchase Agreement (PPA) to receive the incremental power.
With new plants coming up, there is surplus electricity. The government's plan is to retire old inefficient Gencos, which has been achieved partly. Combined with all the above-mentioned steps the government aims to curb the flow of Rs850 billion during 2021-23.
The second contour of the plan is directly subsidizing the partial gap. Right now, the amount of budgeted subsidy is Rs140 billion. The government's plan is to provide additional Rs740 billion in the next two years. This will invariably widen the fiscal deficit unless the government miraculously manages to increase the revenues.
Still, a one-third of the circular debt flow is to be dealt with. That is said to be met by raising power tariffs by Rs4.50 per unit - initially, the increase would be of Rs5.50 and then reduced to Rs4.50. Mind you, the government has already increased the tariffs by Rs1.95. The average tariff is at Rs16.5 and this will increase further to Rs21. This could well be counterproductive.
In the amended Nepra Act, this increase will be automatically passed on to consumers. The government will not have the option to delay it. The tariffs will be notified; and if consumer do not pay, the government ought to. The NEPRA Act eventually will undergo the required parliamentary process.
When this plan was presented to the PM, he declined the tariff increase. All IMF asks is to reduce the net flow to zero by 2023. If the government does it without increasing tariffs, the IMF should be on board. Power ministry is coining alternate options. One is to reduce or abolish the GST on electricity. Will FBR agree?
The second option is to restructure the debt of Chinese IPPs. In the next three years, the debt principal payment of CPEC IPPs is $2.8 billion (Rs435bn). This is in addition to the interest cost and return on equity (RoE). Pakistan has dry powder within the CPEC ambit. One option is to use this to pay Chinese banks in IPPs. The money will move within China and banks would be indifferent. This will give a three-year principal holiday to Pakistan and will have an impact of Rs1.5/unit. These debts are frontloaded - the projects are for 25 to 30 years while the debt is to be paid in the first ten. This is like pushing the can down the road but will help solve today's cash flow problems.
Another option is to end take and pay contracts with IPPs operating on furnace oil. 3,000MW is seldom used (4-5%), but the government pays Rs60 billion capacity charge on them. The government can buy them out by paying Rs150-200 billion as compared to Rs450 billion over the next seven years. The other option is to give these a further haircut (Rs75-100 billion) by letting them have the plants, but end take or pay contracts.
These steps would dilute the increase in tariffs. Even without, PM has the discretion of not increasing tariffs. The Nepra Act was promulgated through an ordinance. Eventually, it will pass through parliamentary process - just like amendments to the SBP Act. Parliament can change or altogether shelve it.
There is no plausible reason to further increase the power tariffs. The good domestic, commercial, and industrial users will move to renewables or captive plants - already industry and government are at loggerheads on converting from captive to grid. The better consumers cross-subsidize majority of the domestic consumers. Nearly 85 percent of domestic consumers are of 300 units or below consumptions. The tariffs for these are lower than those for similar consumers in India, Bangladesh, and Sri Lanka. On the flipside, industrial and commercial consumers pay higher tariff at home.
Pakistan is already less competitive with its peers insofar as energy cost is concerned. There is no way industry can grow and sustain at high rates. On pure economic principles, lower slab domestic consumers should pay their due cost. However, the practice of cross-subsidy is going for long. It is a kind of informal social contract. Breaking it has a huge political cost.
The PM is already under immense pressure to deal with inflation. It seems unlikely that tariffs will increase further. If at all, it would be a fraction of what is proposed. One school of thought argues that tariffs should decrease. That is to encourage consumption and to pick up the economic growth. Once the economy consistently starts growing over 5 percent, the electricity puzzle would solve by itself. Perhaps, it is the only way to control this circular debt monster.
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The second option is to restructure the debt of Chinese IPPs. In the next three years, the debt principal payment of CPEC IPPs is $2.8 billion (Rs435bn). This is in addition to the interest cost and return on equity (RoE).
Can someone correct me if I am wrong. What kind of bullshit agreement we have with them.

Basically we own the debt, we pay interest payment on it. On top of it we pay the ROE and the capacity payment on imported fuel power plants.

I mean what the **** is this. Chinese companies took loan in our name, we pay it back along with interest. But we don't own the plants. Loan has to be repaid in 10 years along with interest, but these companies eat ROE (which is world highest for energy plant) for 30 years (which in it self comes to 5-6 times the actual cost of the project over the time period. They charge capacity payment on top of it which is huge.


I think we need to start asking the relevant questions, how much cut is being transferred by these companies to the people who signed these contracts?

My advice to PTI is let the debt accumulate no need do anything about it. They want it gone by 2023, **** them.

The more I see things the more I believe ' jab handi mai botia khatam ho gye they want pti to refill it for them'. Haramkhor Jo palay huay hain.
 

ziaulislam

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Can someone correct me if I am wrong. What kind of bullshit agreement we have with them.

Basically we own the debt, we pay interest payment on it. On top of it we pay the ROE and the capacity payment on imported fuel power plants.

I mean what the **** is this. Chinese companies took loan in our name, we pay it back along with interest. But we don't own the plants. Loan has to be repaid in 10 years along with interest, but these companies eat ROE (which is world highest for energy plant) for 30 years (which in it self comes to 5-6 times the actual cost of the project over the time period. They charge capacity payment on top of it which is huge.


I think we need to start asking the relevant questions, how much cut is being transferred by these companies to the people who signed these contracts?

My advice to PTI is let the debt accumulate no need do anything about it. They want it gone by 2023, **** them.

The more I see things the more I believe ' jab handi mai botia khatam ho gye they want pti to refill it for them'. Haramkhor Jo palay huay hain.
Rengotiate terms
Privitize distributions
Increase subsidizies
Increase tax revenues
Retire DESCOs completely

These meausres will resolve the circular debt
Problem is IMF will be against subsidizies for valid reasons

However resolving this issue will mean PTI will not win 2023 election but IMO PTI is going to loose anyway so i hope they do the right thing
 

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Rengotiate terms
Privitize distributions
Increase subsidizies
Increase tax revenues
Retire DESCOs completely

These meausres will resolve the circular debt
Problem is IMF will be against subsidizies for valid reasons

However resolving this issue will mean PTI will not win 2023 election but IMO PTI is going to loose anyway so i hope they do the right thing
They can easily win, they got $24b to play with now, walk away from imf, manipulate rupee, take control of SBP and make them bankroll expensive projects, free load the public, finish petroleum levy, reduce interest rates. Reduce taxes on imports.

Growth will accelerate, dollar will be down, inflation will be down. Let the people who let thieves go sort it out.
 

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Can someone correct me if I am wrong. What kind of bullshit agreement we have with them.

Basically we own the debt, we pay interest payment on it. On top of it we pay the ROE and the capacity payment on imported fuel power plants.

I mean what the **** is this. Chinese companies took loan in our name, we pay it back along with interest. But we don't own the plants. Loan has to be repaid in 10 years along with interest, but these companies eat ROE (which is world highest for energy plant) for 30 years (which in it self comes to 5-6 times the actual cost of the project over the time period. They charge capacity payment on top of it which is huge.
Only Pmln supporters can explain this science. They are the ones supporting Mian Mafroor for solving energy shortage in Pakistan by giving the country most expensive electricity in the region.
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Speaking of inflation, indeed it was getting higher when PTI came at the helm, however as per the following graph its crystal clear that its on a continues decline due to economic policies, so seems to me, PTI and IK are doing something right.

1618244945805.png


And btw, high inflation is NOT only the issue with Pakistan, here in Canada things are also getting out of hand, however, Pakistanis have this knack to cry a river on everything these days.
 

Patriot forever

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Speaking of inflation, indeed it was getting higher when PTI came at the helm, however as per the following graph its crystal clear that its on a continues decline due to economic policies, so seems to me, PTI and IK are doing something right.

View attachment 733443

And btw, high inflation is NOT only the issue with Pakistan, here in Canada things are also getting out of hand, however, Pakistanis have this knack to cry a river on everything these days.
This graph depicts a lot of data, inflation is a symptom. It is a painful sight. See the problem why countries like India and Bangladesh have left Pakistan far behind?
 

Del

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This graph depicts a lot of data, inflation is a symptom. It is a painful sight. See the problem why countries like India and Bangladesh have left Pakistan far behind?
Indeed, so basically this is the STORY OF PAKISTAN ... so anybody who blames IK for all Pakistan woes is a fool.
 

ziaulislam

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They can easily win, they got $24b to play with now, walk away from imf, manipulate rupee, take control of SBP and make them bankroll expensive projects, free load the public, finish petroleum levy, reduce interest rates. Reduce taxes on imports.

Growth will accelerate, dollar will be down, inflation will be down. Let the people who let thieves go sort it out.
True
But if they do so and win then what?

I would rather have them have a legacy of fixing pakistan then destroying it

Better prepare for 2028 after all ..... In 2023 PTI expecting to loose central punjab(again) they will still stay in KPK though i doubt karachites have any patience so they will loose there too
Only Pmln supporters can explain this science. They are the ones supporting Mian Mafroor for solving energy shortage in Pakistan by giving the country most expensive electricity in the region.
@Chak Bamu @Muhammad Omar @Mav3rick @muhammadhafeezmalik @Tameem
Even if PMLN sells pakistan in slavery the educated central punjab will support them in absence of punjabi leader launched from punjab

Hence why i think PTI critical mistake was not getting a good person from central punjab into punjab CM leadership

They needed someone like hammad azhar to lead punjab and play dirty to get punjab in control

As of things stand right now in 2023 central punjab will go to PMLN, south punjab will join the wining party(PMLN), PPPP will take sindh, PSP/MQM karachi and PTI will hold KPK

MQm/PMLN will form govt and PPPP will act as soft opposition

The only way it doesnt turn this way is if karachi stands strong and south punjab sense PTI wining and join them...even then it will still be a weak PTI govt or PMLN PPPP coalition
 
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muhammadhafeezmalik

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Can someone correct me if I am wrong. What kind of bullshit agreement we have with them.

Basically we own the debt, we pay interest payment on it. On top of it we pay the ROE and the capacity payment on imported fuel power plants.

I mean what the **** is this. Chinese companies took loan in our name, we pay it back along with interest. But we don't own the plants. Loan has to be repaid in 10 years along with interest, but these companies eat ROE (which is world highest for energy plant) for 30 years (which in it self comes to 5-6 times the actual cost of the project over the time period. They charge capacity payment on top of it which is huge.


I think we need to start asking the relevant questions, how much cut is being transferred by these companies to the people who signed these contracts?

My advice to PTI is let the debt accumulate no need do anything about it. They want it gone by 2023, **** them.

The more I see things the more I believe ' jab handi mai botia khatam ho gye they want pti to refill it for them'. Haramkhor Jo palay huay hain.
This is the propaganda of PTI.

The RLNG or Coal Power Plants set-up by PMLN government are state-owned power plants, and these were setup under Power-Policy-2002. Government tried to sell these plants without any guarantee but failed.

These plants were using cheaper fuel than the power plants setup by PPP in 90s or 2002-2013. Had we were still using those kind of power plants we would be doomed by now.

Under the power policy of 2015 it was decided that we will not use FO or diesel as fuel, but this government ignored that policy and we are paying the price now.

Idle Capacity Charges is the right term instead of capacity charges, this is a kind of guarantee to the investors that we will repay the loan at any cost, if we would not have provided that guarantee no one would be willing to invest here.

Every PTI supporter just say that Capacity Charges is the sole reason for CS , but in this article it is stated that PTI government agreed to provide another 450MW (650MW+450MW=1100MW) will be supplied to KE @Rs.3.5/unit, while the cost of electricity provided to all other distribution companies is at a rate of Rs 6.7 per unit.

Only 5 of the distribution companies are collecting the billed amount others are just righting-off billions every year, who are paying for un-billed electricity??
 
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Bouncer

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Can someone correct me if I am wrong. What kind of bullshit agreement we have with them.
That's the beauty of Nawaz & Co's corruption and general apathy towards this country. Zardari's corruption was open "in your face" type corruption; take kickbacks, commissions, fake projects etc. Nawaz and Shahbaz were very careful in their approach. Remember that Chinese company that got blacklisted in China for suspicious transactions?

To answer your question; Chinese companies get loans in our name from Chinese banks, import Chinese equipment and technical staff, all engineering design is done in China by Chinese, Chinese companies get to boast about these projects in other countries and Pakistan ends up paying exorbitant capacity charges, loan principal plus interest rates while profusely thanking China for their friendship.

Oh and on top of that you are not allowed question these deals, otherwise you are doing propaganda against the country.
 

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This is the propaganda of PTI.

The RLNG or Coal Power Plants set-up by PMLN government are state-owned power plants, and these were setup under Power-Policy-2002. Government tried to sell these plants without any guarantee but failed.

These plants were using cheaper fuel than the power plants setup by PPP in 90s or 2002-2013. Had we were still using those kind of power plants we would be doomed by now.

Under the power policy of 2015 it was decided that we will not use FO or diesel as fuel, but this government ignored that policy and we are paying the price now.

Idle Capacity Charges is the right term instead of capacity charges, this is a kind of guarantee to the investors that we will repay the loan at any cost, if we would not have provided that guarantee no one would be willing to invest here.
Who ruled.jpg
 

Patriot forever

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This is the propaganda of PTI.

The RLNG or Coal Power Plants set-up by PMLN government are state-owned power plants, and these were setup under Power-Policy-2002. Government tried to sell these plants without any guarantee but failed.

These plants were using cheaper fuel than the power plants setup by PPP in 90s or 2002-2013. Had we were still using those kind of power plants we would be doomed by now.

Under the power policy of 2015 it was decided that we will not use FO or diesel as fuel, but this government ignored that policy and we are paying the price now.

Idle Capacity Charges is the right term instead of capacity charges, this is a kind of guarantee to the investors that we will repay the loan at any cost, if we would not have provided that guarantee no one would be willing to invest here.
Bro seriously, for the nth time.

1618305133437.png


The orange one is FO.

Fine enough if you want to call it idle capacity charge instead of capacity payment.

The capacity payment per unit comes to around 8Rs for every unit, moreover it will increase to 10-11 Rs per unit by 2023.


My point is 1st of all you do such contacts and add capacity based on realistic data like consumption requirement and actual transmission capability.
A couple of power plants in 2015, a couple more in 2018, and so on while improving the transmission and accounting for your actual need. You don't front load generation without demand and equivalent transmission capability especially on such unfavourable terms.

You go for 2 fuel based to meet the demand than start work on hydel which takes long time to complete based on future projection of consumption so that when they come online demand is there.


2ndly why are pti hydro power agreements ≥50% cheaper as compared to Plmn?

The most important point why didn't you adjust/raise tariff based on your own introduced generation cost ?


Even if we take your point of view that no one was willing to invest was your own doing no? Who was responsible for such miserable economic ratings?
It was a writing on wall we were going to go bankrupt, based on imminent BOP crisis.
 
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Patriot forever

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True
But if they do so and win then what?

I would rather have them have a legacy of fixing pakistan then destroying it

Better prepare for 2028 after all ..... In 2023 PTI expecting to loose central punjab(again) they will still stay in KPK though i doubt karachites have any patience so they will loose there too

Even if PMLN sells pakistan in slavery the educated central punjab will support them in absence of punjabi leader launched from punjab

Hence why i think PTI critical mistake was not getting a good person from central punjab into punjab CM leadership

They needed someone like hammad azhar to lead punjab and play dirty to get punjab in control

As of things stand right now in 2023 central punjab will go to PMLN, south punjab will join the wining party(PMLN), PPPP will take sindh, PSP/MQM karachi and PTI will hold KPK

MQm/PMLN will form govt and PPPP will act as soft opposition

The only way it doesnt turn this way is if karachi stands strong and south punjab sense PTI wining and join them...even then it will still be a weak PTI govt or PMLN PPPP coalition
Sir your first point, no one cares who fixes the country. Everyone is here for their own share of pie.


Your second point,

Pti will retain south Punjab ( especially if they announce south Punjab province which they are working on but will do near the end of term as right now they don't have majority in central Punjab). Farmers are happy with pti because of high MSP. Same goes for industrial cities. Areas of north, along with KP.
Karachi is still holding I am not talking about fringes of city. Besides MQM or PSP if they gain seats will again be a part of coalition (they will follow whoever they are told to besides they have a good working relation with Pti) If PTI manages to hold a fair census, which is Karachi's biggest demand than they can easily cash in along with the work going on.
At the very least it will be a coalition of Pti and PPP.

This is my assessment, given I am no expert.
 

muhammadhafeezmalik

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Bro seriously, for the nth time.

View attachment 733610

The orange one is FO.

Fine enough if you want to call it idle capacity charge instead of capacity payment.

The capacity payment per unit comes to around 8Rs for every unit, moreover it will increase to 10-11 Rs per unit by 2023.


My point is 1st of all you do such contacts and add capacity based on realistic data like consumption requirement and actual transmission capability.
A couple of power plants in 2015, a couple more in 2018, and so on while improving the transmission and accounting for your actual need. You don't front load generation without demand and equivalent transmission capability especially on such unfavourable terms.

You go for 2 fuel based to meet the demand than start work on hydel which takes long time to complete based on future projection of consumption so that when they come online demand is there.


2ndly why are pti hydro power agreements ≥50% cheaper as compared to Plmn?

The most important point why didn't you adjust/raise tariff based on your own introduced generation cost ?


Even if we take your point of view that no one was willing to invest was your own doing no? Who was responsible for such miserable economic ratings?
It was a writing on wall we were going to go bankrupt, based on imminent BOP crisis.
The capacity payment per unit in the last year was around Rs. 6.7 for every unit which was 40% less in 2017, because of currency devaluation by this government it jumped by 40%.

1618309539119.png


Why are pti hydro power agreements ≥50% cheaper as compared to PMLN?

This government has awarded 7.9 cents(Rs.12)/unit to HPPs (95% of which is Capacity Charges, 5% M&O charges)
While PMLN government awarded highest ever tariff to NJHPP at Rs8.50/ unit, this government renegotiated and offered the reference tariff of Rs14.59/kWh for the first 20 years, which will then drop to Rs5.10/kWh for the remaining 30 years.
 

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