Mitigation of
Circular Debt
CIRCULAR DEBT ITS CAUSES AND REMIDY
Pakistani power and energy sector is beset with
financial woes , this has tesulted in what is called circular debt .Circular
debt is an issue that has various agency. a detailed study was commissioned by
US AID ( March 2013), the study presented the causes, estimtes and remdies for
the circualr debt issues. Ministry of Water and Power presented a policy paper
in 2015 (Managing Cicrular Debt , Septemebr,2015) . The paper presented an anlsysi if the
ciauses of circular debt and prseseneted a plan to contin and mitigaite the
circular debt issues. The Papers targres are presented as follows :
Circular Debt Flows B.Rs.
|
||||||
Actual
|
Projected
|
|||||
Description
|
2015
|
2016
|
2017
|
2018
|
||
Sector Inefficiencies
|
||||||
Line Losses
|
49937
|
31950
|
17948
|
10533
|
||
Tube wells
|
33504
|
2328
|
2377
|
2253
|
||
FATA & Private
receivables
|
41058
|
41398
|
25937
|
21280
|
||
Tariff induced Inefficiencies
|
||||||
Late Payment Surcharge
|
8272
|
4971
|
3950
|
1658
|
||
Debt service
Determination delays
|
22558
|
|||||
Fiscal & Govt
Inefficiencies
|
||||||
Determination delays
|
10600
|
7600
|
4560
|
1824
|
||
AJ&K
|
15238
|
|||||
GST non refund
|
14296
|
|||||
Govt receivables
|
13831
|
3420
|
1893
|
1454
|
||
Total
|
209294
|
91667
|
56665
|
39002
|
The Government /
Power sector institutions have largely achieved the above stated targets. . This success , however, masks shortcomings like :
continued subsidization of domestic cutomers by industrial cuatomers ;
reduction in theft ; reduction of technical losses to regional and
international norms ; 100% recoveries ; FATA and AJ&K power issues ;
regulatory refoms ; and privatisation have not revieved the attention these
desercved.
Way Forward
The PMLN Government took eradication of load shedding as their election
manifesto and after the election resolved to fulfill this promise. This
resulted in, more than usual, involvement of Government in affairs of Power
Sector entities .This needs to change Government needs to:
1.
Distance itself from the governance of the power sector, control of entities should be given to corporate bodies
and given independence
2.
GoP needs to support NEPRA to put in place a more competitive power
sector. A road map to a competitive, market must be approved across the
political divide and the plan must be set rolling with c ear goal and timeline.
3.
Tariff and subsidy disputes between Provinces, CPPA and DISCOs need to
be settled by negotiations or arbitration.
4.
Legislation making theft of electricity a crime with specific
punishments mentioned .and specialized courts established to implement this .
5.
The selection criteria for appointment of DISCOs Board of Directors need
to be improved. Members need to have high professional and technical
capabilities , be independent of political influence and have full authority
for decision making .Training to effectively monitor performance and enforce
accountability needs to be imparted to prospective candidates of BoDs.
6.
Eliminate the tariff equalization regime and gradually move to Regulator
determined tariff based on true costs. The current cross subsidy between better
performing DISCOs and poor performing DISCOs need to be eliminated.
7.
Implement a strong program for energy conservation , demand side
management and efficiency
8.
Measures that promote local sources of energy need to be given special
attention. Local coal, Hydropower, solar electrification of tube wells, solar
panels for home use in rural and even urban areas needs to be pushed. There is
also need to push used of solar for heating applications in Industry and homes,
both are competitive.
Background
Circular debt (CD)
occurs when one entity in the power chain is unable to pay suppliers this
affects others players as well who are also unable to fulfill their financial
obligations. This results in increase in generation costs and unnecessary load
shedding as many players in the power chain have defaulted and lest cost
dispatch is not possible. Circular debt arises when
one party not having adequate cash flows to discharge its obligations to its
suppliers withholds payments. When it does so, the problem affects other
entities in the supply chain, each of which withholds its payments, resulting
in operational difficulties for all service providers in the sector, none of
whom are then able to function at full capacity, causing unnecessary load
shedding.
CD is the amount of payables within the Central Power Purchasing Agency (CPPA) that it cannot pay to power generation companies (Independent Power Producer (IPP), government owned thermal generation companies (GENCOs), the hydropower producer (WAPDA Hydel) and National Transmission & Despatch Company (NTDC). The revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, refiners, and producers; resulting in a shortage of fuel supply to the GENCOs and IPPs and thereby reduce power generation and thus increase in load shedding.
The cause of
circular debt includes:
1.
Poor governance
2.
Delay in tariff
determination by an inadequately empowered regulator compounded by interference
and delay in notification by the Government of Pakistan (GoP).
3.
A fuel price
methodology that delays the infusion of cash into the system
4.
Poor recoveries of energy billed by DISCOs
5.
Delayed and
incomplete payments by the Ministry of Finance on Tariff Deferential Subsidy
(TDS) and Karachi Electric (KE) contract payments.
6.
NEPRA sets tariff
at 100% recoveries whilst DISCOS have managed to collect between 86% to 94%
receivables in various years in the last 10 years or so.
7.
High power loss due to theft and the gap between NERA allowed
losses in tariff setting and actual losses incurred by DISCOs and NTDC .
8.
Inability of DISCOs to pass entire fuel cost to customers due to
court stay orders.
9.
Increase in receivable for both public and private customers.
10. Lower efficiencies and higher O&M cost of publically owned
generation companies (GENCOs) than those allowed by NEPRA in tariff setting.
11. Payment of GST upfront in
billed amount
The circular debt numbers that get reported in the press tend to
be the sum of the receivables of each organization which ends up exaggerating
the amount, simply because of double counting. After all, one party’s payables
are the other party’s receivables, and logically these should cancel out when
we subtract one from the other. At worst the net amount should be much smaller.
The oil marketing companies sell oil to the IPPs or the
Wapda-owned electricity generation plants (called Gencos) which produce
electricity and sell it to the government-run distribution companies referred
to as DISCOs (for example Lesco, Pesco, etc) which provide power to our homes
and factories and bill us for this service. The tariff (price) at which the
Gencos sell to the DISCOs and the tariff at which electricity is supplied to us
consumers is determined by Nepra, after receiving government approval.
The first problem which results in the receivables not
cancelling out payables is when the tariff is unable to meet the costs of its
generation and distribution. For instance, if the price of oil goes up
internationally and tariffs are not revised upwards to account for this
increase, there is an element of subsidy whose cost the government has to pick
up. So one component of what constitutes circular debt is the lower rate at
which electricity is being charged to the consumer than the cost of its
generation and distribution. By failing to foot this subsidy bill the
government builds up the circular debt. The bulk of the issue arising from the
failure to revise tariffs upwards on a timely basis has been resolved; the
remaining adjustment required on this account is Rs100bn for this year, which
also includes the cost of poor governance.
Next, three components, and the most critical ones, which raise
costs, and feed the circular debt, are the following:
— The inefficiencies of government-owned generation and
distribution companies, overstaffing , poor maintenance of plant equipment,
obsolete technologies (resulting in technical losses), corruption, all of which
simply add to the cost of electricity that consumers are being constrained to
bear with equanimity through tariff increases.
— The massive issue of electricity theft — the cases of DISCOs
in Hyderabad, Peshawar, Quetta and Fata are now well known; with literally no
one paying in Fata.
— Poor collection of electricity bills.
To summaries, the issues are failures to revise electricity
tariffs on a timely basis; prevent electricity theft; and ensure collection of
billings speedily and disconnecting those not paying their bills;
disconnections will actually also reduce the extent of outages/load shedding.
In other words, the principle issue is that of governance.
GENCOs
Publically
owned power generation companies or GENCOs are allowed efficiencies that are
lower than the actual de-rated efficiencies of their plants. The allowed tariff
to these GENCOs, by NEPRA, does not in fact cover costs. GENCO tariffs are based on the heat rates of generating units. The heat rate is defined as
the amount of fuel consumed for each unit (kWh) generated. Over time, as efficiencies of generating units have declined, heat rates have increased. The higher the heat rate of the
plant, the greater the amount of fuel consumed per unit of electricity generated. There are
some allegations of fuel thefts
at the GENCOS, which also results in lower efficiency. However, for tariff determination, NEPRA uses lower heat rates versus the actual GENCO
rates as shown in below:
HEAT RATES GENCOS and NEPRA ALLOWED HEAT RATES
|
|||
Diff
|
|||
GENCOs
|
NEPRA
|
Actual
|
%
|
CPGCL (GENCO I)
|
|||
Block 1
|
8,533
|
9,153
|
7.27
|
Block 2
|
9,481
|
10,200
|
7.58
|
Block 3
|
11,377
|
13,109
|
15.22
|
Block 4
|
12,189
|
14,041
|
15.19
|
NPGCL (GENCO III)
|
|||
Unit 1-3 (TPS
Muzaffargarh)
|
10,788
|
11,677
|
8.24
|
Unit 4 (TPS Muzaffargarh)
|
10,692
|
11,087
|
3.69
|
Unit 5-6 (TPS
Muzaffargarh)
|
12,158
|
14,164
|
16.50
|
Units 1-2 (SPS
Faisalabad)
|
14,368
|
14,156
|
-1.48
|
Units 1-4 (GTPS
Faisalabad)
|
15,366
|
17,708
|
15.24
|
Units 5-9 (GTPS (Faisalabad)
|
11,701
|
10,259
|
-12.32
|
Unit 1-3 (Multan)
|
14,114
|
16,169
|
14.56
|
JPCL (GENCO II)
|
|||
Unit 1 (Jamshoro)
|
10,655
|
11,505
|
7.98
|
Units 2-4 (Jamshoro)
|
10,862
|
12,930
|
19.04
|
Unit 1-2 (Kotri)
|
21,813
|
22,353
|
2.48
|
Units 3-7 (Kotri)
|
10,564
|
11,902
|
12.67
|
The price of power delivered by the GENCOs is
underestimated as it does not reflect the true cost of fuel to the GENCOs. This reduces the
GENCOs’ income, resulting in cash flow difficulties, which causes the GENCOs to postpone
maintenance and
other essential expenses, including payment to fuel suppliers.
A heat rate audit needs to be conducted to establish new benchmark heat rates for NEPRA to use for
tariff determinations. Until this audit is conducted, NEPRA cannot update its heat rate figures
for use in setting tariffs for the DISCOs.
In recent rulings NEPRA has allowed GENCOs and
KE plants to carry out independent efficiency audits , these tests are also to
be supervised by NEPRA .
GENCOs O&M Rates
NEPRA does not allow the actual GENCOs O&M costs, this
result in lower recoveries than cost by GENCOs.
NTDC LOSSES
The NTDC also failed in keeping its transmission losses for the 500/220
kV transmission network within NEPRA-approved limits Presented as follows
NTDC actual and NEPRA allowed losses
|
||||||||||||
Growth %
|
Growth %
|
Growth %
|
||||||||||
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
FY 09-13
|
FY13-16
|
FY13-16
|
||
Allowed
|
%
|
2.5
|
2.5
|
2.5
|
2.5
|
2.5
|
2.5
|
2.5
|
2.5
|
|||
Units for Trans
|
GWh
|
82702
|
87115
|
90575
|
88987
|
87080
|
94089
|
95979
|
100871
|
1.30
|
5.02
|
2.88
|
Losses
|
GWh
|
2959
|
2740
|
2740
|
2508
|
2656
|
2587
|
2620
|
2623
|
-2.66
|
-0.42
|
-1.71
|
Losses
|
%
|
3.58
|
3.15
|
3.03
|
2.82
|
3.05
|
2.75
|
2.73
|
2.60
|
-3.91
|
-5.18
|
-4.46
|
Diff
|
1.08
|
0.65
|
0.53
|
0.32
|
0.55
|
0.25
|
0.23
|
0.10
|
-15.48
|
-43.28
|
-28.76
|
Had the high transmission losses
been restricted to the regulatory target, the accumulation of circular debt in
FY 2009, FY 2010, and FY 2011 could have been reduced by Rs11 billion and over
40 MW capacity released, reducing load shedding by this amount close to the
Regulator allowed losses . The above suggests that there is increased economic
activity in the period 2013 to 2016 than in the period 2009 to 2013 there has been a steady decrease in losses,
with increased investment in transmission it is likely that transmission losses
will be within the regulator set limits although transmission demand is also
growing. and the regulator set losses targets are moving targets ..
Tariff
Differential Subsidy (TDS)
NEPRA determines tariffs based on
analysis for all customers in all DISCOs, these differ widely among DISCOs. ,
the Government deems it essential to have the same tariff for the same type of
customer for all DISCOs. NEPRA law does not allow tariff be set above the one
determined by NEPRA. This therefore requires that the tariff for each customer
category class be set equal to the lowest such tariff determined by NEPRA. This
also means that Government will have to pick up the difference. This subsidy to
equalize tariff forms a major part of the circular debt since the government
subsidy is not always equal to the requirement and it is not always paid in
time. The following is an example of how TDS works.
TARIFF DIFFERENTAIL SUBSIDY - CALCULATION 2011-12
|
|||||
Subsidy
|
|||||
Consumer
|
NEPRA
|
Gov
|
Subsidy
|
Subsidy
|
% Total
|
Rs,/kWh
|
Rs,/kWh
|
Rs./kWh
|
M.Rs.
|
%
|
|
Domestic upto 50
|
3
|
2
|
1
|
2300
|
0.64
|
Domestic 01-100
|
9.9
|
5.8
|
4.1
|
54200
|
15.09
|
Domestic 101-300
|
13.1
|
8.1
|
5
|
55000
|
15.32
|
Domestic 301-700
|
15.5
|
12.3
|
3.2
|
12300
|
3.43
|
Domestic over 700
|
17.2
|
15.1
|
2.1
|
2800
|
0.78
|
Domestic Total
|
126600
|
35.25
|
|||
Commercial
|
14.4
|
11.4
|
3
|
12400
|
3.45
|
Industrial
|
12.9
|
10.3
|
2.6
|
54000
|
15.04
|
Bulk Supply
|
13.1
|
10.3
|
2.8
|
4000
|
1.11
|
Tube wells
|
12.6
|
9.4
|
3.2
|
28000
|
7.80
|
Others
|
14.1
|
10.8
|
3.3
|
7500
|
2.09
|
Total
|
12.57
|
9.55
|
3.02
|
359100
|
|
Delay in Notification of the
Decisions/Determinations of the Authority:
Upon intimation by the Authority and non-submission of the
re-consideration request, the Federal Government pursuant to Section 31(4) of
NEPRA Act, is required to notify the Authority’s approved tariff, rates,
charges, and other terms and conditions for the supply of electric power
services by generation, transmission and distribution companies, in the
Official Gazette, within 15 days. As per NEPRA record, a large number of
notifications (79Nos, in 2015) in respect of NEPRA’s determinations/decisions,
were pending with Ministry of Water and Power, either for notification or of
notified,
Delays in tariff determination and notification contributed
Rs72.19 billion11 to the circular debt for FY 2012. Tariff determinations for
all nine DISCOs were delayed for nine months and it took an additional month
for the notification to be published. Consumer tariffs in 2011-12 were largely
based on 2010-11 tariff values whereas the actual fuel cost for 2012 was 52%
higher than the previous year. Without new tariff values from NEPRA and the
GOP, the DISCOs had no chance to receive the necessary cash required to meet
their monthly wholesale power cost.
Once NEPRA determines the tariff, the GOP reviews it and
officially notifies a tariff after modifications as deemed appropriate.
Although NEPRA has reduced the time it takes to determine tariffs, the
determination procedure still takes many months. In addition, tariff setting
lacks independence, as the GOP notification process often results in a delay
and/or reduction in the tariff due to political considerations.
The Government in 2015 issued a paper
that intended to reduce Circular Debt. The objectives were:
1.
Maintain a cap of Rs. 314 billion on the Circular Debt
2.
Reduce circular debt from Rs. 314billion ( end June 2015) to Rs 212 billion by FY2018 and
3.
Reduce PHCL debt from Rs 335 billion to Rs 220 billion by FY2018.
These objectives were to be
achieved by the following measures:
Improved
Efficiencies.
The strategy for improving efficiency was based on a gradual decrease in the losses and increase in the collections from consumers. Working on the same strategy, collections have seen an improvement in FY 2015 in the range of 89.2% as opposed to the previous rate of recoveries in FY 2014 of 87%. Losses stabilized at 18.7% in the same period. The plan for management of CD until the end of FY 2018 is based on the same strategy and principles.
The objective has been partly
achieved. Recoveries are presented as follows:
Recoveries : Billings and Collections DISCOs
|
|||||||||||||||||||
FY 2012-13
|
FY 2013-14
|
FY 2014-15
|
FY 2015-16
|
Growth
|
|||||||||||||||
Billing
|
Collection
|
Billing
|
Collection
|
Billing
|
Collection
|
Billing
|
Collection
|
Billing
|
Collection
|
Difference
|
|||||||||
DISCO
|
M.Rs
|
% share
|
M.Rs
|
% 0f Billing
|
M.Rs
|
% share
|
M.Rs
|
% 0f Billing
|
M.Rs
|
% share
|
M.Rs
|
% 0f Billing
|
M.Rs
|
% share
|
M.Rs
|
% 0f Billing
|
%
|
%
|
%
|
LESCO
|
163868
|
21.43
|
160340
|
97.85
|
226044
|
23.39
|
221239
|
97.87
|
225481
|
22.24
|
216190
|
95.88
|
233501
|
23.41
|
231638
|
99.20
|
9.26
|
9.63
|
0.38
|
GEPCO
|
63705
|
8.33
|
62588
|
98.25
|
86026
|
8.90
|
82708
|
96.14
|
90872
|
8.96
|
88272
|
97.14
|
96437
|
9.67
|
95863
|
99.40
|
10.92
|
11.25
|
0.33
|
FESCO
|
95606
|
12.50
|
94711
|
99.06
|
124665
|
12.90
|
124729
|
100.05
|
128180
|
12.64
|
128255
|
100.06
|
133330
|
13.37
|
133416
|
100.06
|
8.67
|
8.94
|
0.27
|
IESCO
|
84123
|
11.00
|
79445
|
94.44
|
110070
|
11.39
|
99519
|
90.41
|
109958
|
10.84
|
99967
|
90.91
|
113756
|
11.41
|
103460
|
90.95
|
7.84
|
6.83
|
-1.01
|
MEPCO
|
107932
|
14.11
|
99035
|
91.76
|
138621
|
14.35
|
133127
|
96.04
|
138646
|
13.67
|
141881
|
102.33
|
141677
|
14.21
|
141663
|
99.99
|
7.04
|
9.36
|
2.32
|
PUNJAB
|
515234
|
67.36
|
496119
|
96.29
|
685426
|
70.94
|
661322
|
96.48
|
693137
|
68.36
|
674565
|
97.32
|
718701
|
72.06
|
706040
|
98.24
|
8.68
|
9.22
|
0.55
|
Share %
|
67.36
|
69.26
|
|||||||||||||||||
PESCO
|
71749
|
9.38
|
60700
|
84.60
|
82921
|
8.58
|
71537
|
86.27
|
105933
|
10.45
|
93258
|
88.03
|
91672
|
9.19
|
81119
|
88.49
|
6.32
|
7.52
|
1.20
|
TESCO
|
15025
|
1.96
|
17948
|
119.45
|
15740
|
1.63
|
1264
|
8.03
|
15072
|
1.49
|
11472
|
76.11
|
4692
|
0.47
|
20507
|
437.06
|
-25.25
|
3.39
|
28.63
|
NWFP
|
86774
|
11.35
|
78648
|
90.64
|
98661
|
10.21
|
72801
|
73.79
|
121005
|
11.93
|
104730
|
86.55
|
96364
|
9.66
|
101626
|
105.46
|
2.66
|
6.62
|
3.96
|
Share %
|
11.35
|
10.98
|
|||||||||||||||||
HESCO
|
33944
|
4.44
|
27560
|
81.19
|
40199
|
4.16
|
31829
|
79.18
|
45714
|
4.51
|
35768
|
78.24
|
49009
|
4.91
|
35331
|
72.09
|
9.62
|
6.41
|
-3.21
|
SEPCO
|
33024
|
4.32
|
17708
|
53.62
|
33933
|
3.51
|
19875
|
58.57
|
36706
|
3.62
|
21222
|
57.82
|
36309
|
3.64
|
19923
|
54.87
|
2.40
|
2.99
|
0.59
|
SINDH
|
66968
|
8.76
|
45268
|
67.60
|
74132
|
7.67
|
51704
|
69.75
|
82420
|
8.13
|
56990
|
69.15
|
85318
|
8.55
|
55254
|
64.76
|
6.24
|
5.11
|
-1.13
|
Share %
|
8.76
|
6.32
|
|||||||||||||||||
Export to KESC
|
59026
|
7.72
|
84000
|
142.31
|
62409
|
6.46
|
60961
|
97.68
|
51572
|
5.09
|
36000
|
69.81
|
40639
|
4.07
|
38379
|
94.44
|
-8.91
|
-17.78
|
|
QESCO
|
36007
|
4.71
|
11461
|
31.83
|
44962
|
4.65
|
18968
|
42.19
|
65166
|
6.43
|
21223
|
32.57
|
55339
|
5.55
|
39640
|
71.63
|
11.34
|
36.37
|
25.03
|
Share %
|
4.71
|
1.60
|
4.65
|
2.19
|
6.43
|
2.37
|
5.55
|
4.21
|
|||||||||||
IPPS
|
833
|
0.11
|
826
|
99.16
|
640
|
0.07
|
792
|
123.75
|
619
|
0.06
|
629
|
101.62
|
993
|
0.10
|
987
|
99.40
|
4.49
|
4.55
|
|
Total
|
764842
|
716322
|
93.66
|
966230
|
866548
|
89.68
|
1013919
|
894137
|
88.19
|
997354
|
941926
|
94.44
|
6.86
|
7.08
|
0.22
|
Collection figures for FYs
2017 shows further improvement in the recoveries position. Losses also have
registered an improvement. Losses are presented as follows:\
T&D LOSSES
|
||||
units for
|
units
|
units
|
units
|
|
Trans
|
billed
|
lost
|
lost
|
|
Year
|
M.kWh
|
M.kWh
|
M.kWh
|
%
|
2009
|
82702
|
62286
|
20416
|
24.69
|
2010
|
87115
|
68878
|
18237
|
20.93
|
2011
|
90575
|
71672
|
18903
|
20.87
|
2012
|
88987
|
71368
|
17619
|
19.80
|
2013
|
87080
|
70508
|
16572
|
19.03
|
2014
|
94089
|
76543
|
17546
|
18.65
|
2015
|
95979
|
78113
|
17866
|
18.61
|
2016
|
100871
|
81737
|
19134
|
18.97
|
Growth
|
2.88
|
3.96
|
-0.92
|
-3.69
|
The regulator allowed higher
losses in FY 2015 than in FY 2014, this
is presented as follow:
COMPARASION OF LOSSES in FY 2014 and FY 2015
|
|||||||||
Description
|
LESCO
|
GEPCO
|
FESCO
|
IESCO
|
MEPCO
|
HESCO
|
PESCO
|
SEPCO
|
Total
|
Allowed losses
|
|||||||||
FY 2016 %
|
11.75
|
9.98
|
9.50
|
9.39
|
15.00
|
20.50
|
26.00
|
27.50
|
15.23
|
Actual losses
|
|||||||||
FY 2016 %
|
13.94
|
10.58
|
10.24
|
9.09
|
16.45
|
26.46
|
33.76
|
37.87
|
17.95
|
Allowed losses
|
|||||||||
FY 2015 %
|
11.75
|
9.98
|
9.50
|
9.44
|
15.00
|
20.50
|
26.00
|
27.50
|
15.30
|
Actual losses
|
|||||||||
FY 2015 %
|
10.80
|
11.20
|
9.10
|
9.80
|
15.70
|
27.90
|
37.40
|
36.50
|
19.70
|
Allowed losses
|
|||||||||
FY 2014 %
|
9.01
|
9.98
|
9.50
|
9.45
|
15.00
|
15.00
|
20.00
|
20.00
|
13.05
|
actual % allowed
|
91.91
|
112.22
|
95.79
|
103.81
|
104.67
|
136.10
|
143.85
|
132.73
|
128.76
|
allowed 2015 % 2014
|
130.41
|
100.00
|
100.00
|
99.89
|
100.00
|
136.67
|
130.00
|
137.50
|
117.24
|
NEPRA issued the tariff determinations for FY 2014 for most of the DISCOs in January 2014. Allowed losses for DISCOs for 2013-14 were 13.02% compared to 18.7%. The 5.6% difference between determined loss and actual loss accumulated as CD of Rs 33.6 billion in FY 2014. The determinations for FY 2015 allowed 15.3% compared with expected losses of 18.70%, narrowing the gap between allowed and actual losses but will still result in accumulation of CD of Rs. 32 billion due to increase in generation. . For the purposes of this CD management plan, it was assumed that reductions in losses will reduce the flow of CD from Rs. 32 billion to
Rs. 11 billion Losses for FY 2017 have been reported to be 16.3%.
Surcharges:
Surcharges are levied under Section 31(5) of the Regulation of Electricity Generation, Transmission and Distribution Act 1997 (the NEPRA Act). Surcharges will be set at the level
that will rationalize subsidies and allow recovery of full cost of supply of electricity. This, however, will not completely
eliminate the subsidization of domestic sector by the industrial sector.
The impact of surcharges on
tariff determinations is illustrated by the following:
Variable charge FY 2016
to FY 2020 for B-3 Consumers. Rs./kWh
|
||||||||
LESCO
|
FESCO
|
MEPCO
|
GEPCO
|
IESCO
|
PESCO
|
HESCO
|
SEPCO
|
|
peak
|
13.85
|
14.55
|
14.50
|
15.80
|
14.30
|
15.70
|
15.45
|
19.60
|
off peak
|
6.85
|
6.25
|
6.80
|
9.50
|
6.70
|
9.65
|
9.25
|
12.75
|
Re-determined Tariff
|
||||||||
peak
|
14.87
|
14.48
|
13.32
|
15.22
|
14.85
|
18.90
|
18.49
|
20.56
|
off peak
|
7.97
|
6.51
|
7.32
|
8.42
|
7.05
|
13.05
|
12.50
|
14.31
|
Latest consumer tariff
|
||||||||
peak
|
16.04
|
16.23
|
16.37
|
15.36
|
16.63
|
19.82
|
21.96
|
22.45
|
off peak
|
9.16
|
8.26
|
10.37
|
8.56
|
9.03
|
13.97
|
16.06
|
16.20
|
Latest tariff 5 of
original tariff determined
|
||||||||
peak
|
15.81
|
11.55
|
12.90
|
-2.78
|
16.29
|
26.24
|
42.14
|
14.54
|
off peak
|
33.72
|
32.16
|
52.50
|
-9.89
|
34.78
|
44.77
|
73.62
|
27.06
|
The government is expected to increase the tariff by more than
Rs2 per unit with the addition of surcharges to make the tariff uniform for all
Discos because tariffs for SEPCO, HESCO and PESCO are very high. Although this
will significantly reduce the deficit
the inherent cross subsidization of domestic consumers by Industrial
consumers will not be mitigated. An analysis of tariffs on marginal cost basis
and on financial basis is presented as follows:
The Initial development
of LRMC has been made without the use of WASP simulation model. The capacity
LRMC at generation level is based on the assumption that the plant at the
margin will be an Open Cycle Gas Turbine (OCGT). The WAPDA System is evolving from an `energy
constrained’ system into a `demand constrained’ system. Un-served energy and
demand which was a result of failure to provide firm energy in the water dry
(winter) months is now occurring due to system inadequacies during high demand
periods. Periods of annual demand and daily demand will in future occur when
the system is at the maximum strain the least cost response to demand increment
can be summarized as follows:
. LRMC estimates are derives on
basis of: Capital cost of the plant at the margin, which is believed to be an
OCGT; Cost incurred due to enhanced un-served energy due to the fact that in
early plan periods Benefit in terms of energy cost savings due to advancement
of base load thermals and hydel plants in response to increase in demand and
consequent decrease in total energy cost. This results in the capacity marginal
cost at generation level to be about 90% the cost of an open cycle gas turbine.
LRMC estimates at an oil price of 52$ /bbl are as follows :
Table - : LRMC Estimates
|
|||
(Based on oil price of US$52)
|
|||
Voltage Level
|
Capacity
|
Peak Energy
|
Off Peak Energy
|
$/kW
|
c/kWh
|
c/kWh
|
|
Gen
|
417
|
10.24
|
6.39
|
500 kV
|
506
|
10.41
|
6.51
|
220 kV
|
540
|
10.59
|
6.58
|
132 kV
|
623
|
10.91
|
6.74
|
66 kV
|
718
|
11.23
|
7.00
|
11 kV
|
755
|
13.72
|
8.96
|
0.4 kV
|
970
|
16.35
|
10.25
|
Tariffs for a B-1
industrial consumer (load factor 0.4, coincidence 0.40),, a medium consumption
domestic consumer( load factor 0.35%, coincidence 0.95) and a higher
consumption commercial customer(load factor 0. 55, coincidence 1.0) is
presented as follows :
Tariff : Financial vs. Marginal
|
||||
Tariff Rs./kWh
|
||||
Customer
|
Financial
|
|||
Category
|
Financial
|
Marginal
|
% Marginal
|
|
Industry
|
13.46
|
11.59
|
16.19
|
|
Domestic
|
10.25
|
15.29
|
-32.98
|
|
Commercial
|
16.30
|
15.14
|
7.65
|
|
The above is based on
financial tariffs that are still under revision. The domestic customer is
subsidized by industrial customer. The high industrial tariff has repercussion
in industrial production and upon exports.
Privatization Receipts:
With the majority of DISCOs in the privatization plan of the GOP, the receipts
from privatization will be partially used to reduce/offset the stock of the PHCL debt and will reduce the need for budget to finance costs that cannot be met from other revenue sources. The CD management plan is thus dependent on the privatization of the DISCOs and GENCOs. There has been no progress on this
count. Government in recent moves has indicated bifurcation of four DISCOs to
make these more attractive to investors.
Low Collections by DISCOs from Private and Government
Consumers
Collections from private sector in most of the DISCOs have been
an issue which contributed to the buildup of CD. Actual recovery fluctuates
between 89-91% for the financial year 2015, whereas tariff determinations
assume 100%. Low collections have created a shortfall of Rs. 114 billion from
private consumers since the clearance of CD in July 2013. This less than 100%
collection is more pronounced in the five poorest performing DISCOs namely
PESCO, TESCO, HESCO, SEPCO and QESCO.
The plan was divided
into three parts. For all five distribution companies, recoveries will be
managed through power rationing. Experience in K-Electric has shown that this
kind of approach can improve collections significantly and quickly. For all
DISCOs, the aggregate technical and commercial losses (ATC) for each feeder
will be categorized by feeder into four: low (<10 and="" atc="" high="" medium="" very="">40% ATC). The second part of the
plan is to outsource to the private sector collections of bills in areas where
recoveries are weakest, based on the same categorization mentioned in the
preceding paragraph. This will build on experiences in K-Electric, LESCO, MEPCO
and PESCO areas. 10>
The
third part will address collection of Federal and Provincial government bills.
For all Federal accounts, MOWP will notify DISCOs that non-payment beyond the
billing cycle of 45 days should result in disconnection, per commercial
procedures. MOWP will move a summary to the Council of Common Interests (CCI)
proposing more stringent requirements for Provincial departments. It will request CCI to approve 100%
deduction at source in the case of non-payment and disconnection for
non-payment beyond normal commercial terms. MOWP will require DISCOs to take
more rigorous action following disconnection, requiring prepayment for
electricity before reconnection is approved
The Government has already started action of collection from
private consumers including initiation of revenue based load shed mechanism
based on feeder wise AT&C losses. If the recovery is not affected, then the
recovery will be ensured through law enforcement agencies (NAB and FIA) and
incentive packages. The rationing system was introduced from August 1, 2015. Recoveries have in fact
shown an improvement , FY 2015 recoveries were
94.4% .
GENCO Heat Rates
Recent
moves by the regulator have allowed some relief. Adjustment on Account of Calorific Value (CV)
of fuel, GENCOs were directed, to maintain and submit, on quarterly basis, a detailed
record of consignment wise CV of the oil received
and consumed for power generation, for the adjustment on account of variation against the reference
CV, duly supported
with copies of test reports,
certified by fuel supplier:
and provision for part load operation. Allowed part-load adjustment by approving partial
loading curves for TPS Jamshoro
and TPS Muzaffargarh, and allowed the adjustment on account of partial loading,
if the units are partially loaded in instructions of system operator
(NPCC). In order to safeguard the interest of end-consumers, the Authority has decided to treat availability of GENCO power plants,
on similar lines as the IPPs. Therefore
it has directed the power purchaser not to pay capacity
charges to the GENCO power plants in case the power plant is not available as per PPA’s requirement.
Conclusions
The issue of financial non-viability of the power sector
structure has existed for a long time and is, historically, the result of poor
governance, delays in tariff determination and notification process, gap in
performance of DISCOs to achieve the targets set by regulator and prolonged
stays on fuel price adjustments (FPAs) granted by the courts. There are other
factors too which contribute to the continuous growth in the Circular Debt.
Successive governments have made efforts
to improve the power sector cash flows through various measures including
reducing litigations on FPA determination and notification process, improving
governance through re-constitution of Boards of Directors (BODs) with more
representation from private members, signing of performance contracts with BODs
and tariff rationalization. However, despite all the reforms, power sector cash
flows remained under pressure and resultantly delayed the payment to power
generators and fuel suppliers. Despite the clearance of Circular Debt through a
one-time Government grant of Rs 480 billion in 2013, the outstanding arrears to
power companies had once again climbed back up to reach Rs. 850 billion by May
2018.
The
accumulation of arrears towards power generators and fuel suppliers resulted in
less than optimal utilization of power plants and caused massive power deficit
in the country. For the first time in 2014, the Economic Coordination Committee
of Cabinet (ECC) defined the term “Circular Debt” as the amount of cash
shortfall in CPPA-G that it cannot pay to power supply companies. This
shortfall is the result of (a) the difference between the actual cost of
providing electricity in relation to revenues realized by the power
distribution companies (DISCOs) from sales to customers plus subsidies; and (b)
insufficient payments by the DISCOs to CPPA out of realized revenue as they
give priority to their own cash flow needs. This revenue shortfall cascades
through the entire energy supply chain, from electricity generators to fuel
suppliers, refiners, and producers; resulting in a shortage of fuel supply to
the public sector thermal generating companies (GENCOs), a reduction in power
generated by Independent Power Producers (IPPs), and an increase in load
shedding. Table below briefly lists some of the reasons for
accumulation of Circular Debt and recommendations for addressing them.
Table: Proposed Solutions for
Reducing/Eliminating Circular Debt (CD)
Issue
|
Recommendation
|
Rationale
|
Lingering
Tariff Dispute with GOAJK
|
· In order to stop the
accumulation of receivables in future, the Tariff for GoAJK should be
determined as Rs. 5.79 / KWh as agreed by AJK and the same may be notified by
GOP.
· Modalities to be finalized
between Ministry of Finance and Ministry of Energy for settlement of
outstanding receivables
|
To
reduce the CD accumulation
|
Non-Settlement
of Issues with FBR and blockage of refunds
|
· Recovery of blocked refunds
from FBR and out of court settlement of all the disputes with FBR.
· Zero Rating for Power Sector
to stop the blockage of refunds in future
|
To
improve financial viability of DISCOs and payments towards CPPA
|
Delay
in Tariff Notification
|
· Notification of pending
determined tariff Including Multiyear Tariff
|
To
ensure recovery of tariff from either consumer or through subsidy as per
determined cost
|
Line
Losses & Recovery difference with NEPRA Target
|
· Review of targets by
Regulator
· DISCOs to take necessary
measures to control the line losses and improve recovery
|
To
reduce the CD accumulation
|
Receivables Issues related to FATA
&
Baluchistan Tube Wells
|
· Policy measures planned in
2015 to be implemented
· Ministry of Finance to
allocate sufficient subsidy budgets for FATA & Baluchistan Tube wells to
stop the flow.
|
To
reduce the CD accumulation
|
Other
needed measures
· Implementation of at-source
deduction mechanism for recovery from Government Departments as per CCI
decision
·
Implementation of Cost of Service based Tariff to eliminate
cross subsidies
·
Improvement
in the overall generation mix by inducting less costly power plants
· Improving governance leading to
phase wise privatization of all DISCOs & GENCOs
Update: Jan., 2, 2019: The Ministry of Power Division on Tuesday
informed the Public Accounts Committee (PAC) that the amount of circular debt
had reached Rs755 billion
Power Division has submitted the following
recommendations in order to resolve the long outstanding issues: (i) Nepra's
determined tariff for 1-100 unit slab of domestic category will be applicable
for AJ&K from January 1, 2018, currently which is Rs 5.79/kWh. Difference
between bulk supply tariff and 1-100 unit tariff will be provided by Finance
Division. The arrangement will continue till next Nepra tariff determination of
2018-19; (ii) bulk power supply to AJ&K may be made from CPPA-G as is being
done in case of K-Electric as per tariff determination by Nepra; (iii) Finance
Division may provide sufficient budget for AJ&K electricity bill.
Appropriate provisioning in AJ&K budget will eliminate any financial built
up or need for electricity subsidy for AJ&K and; (iv) Finance Division may
frame a mechanism for clearing the stock of dues which have piled up from 2011
onwards.
Update:
Jan., 5, 2019: circular debt has now crossed about Rs1.4tr. In August 2018,
this would mean that the circular debt has climbed by more than Rs200bn in the
137 days since August 2018. For
perspective, consider that the same figure stood at Rs922bn at the end of
November 2017, meaning that the size of the debt increased faster from August
till today than it did in the preceding ten months. At the moment, increasing
quantities of power sector inefficiencies are being passed onto the consumer
through miscellaneous surcharges and an elevated target for losses allowed by
NEPRA. The power sector is crying out for proper leadership, and the costs of
inaction are rising by the day.
Circular Debt; May, 7,
2019: Circular
debt, which increased by Rs450 billion during 2017-18, would be eliminated by
next year; Prime Minister was informed on Monday. Circular debt, caused by debt
piled up due to electricity leakages, theft and low recovery of bills from many
state-owned offices, schools, police stations, mosques, monuments and others,
has crossed the Rs1.4 trillion mark. The meeting was informed that circular
debt would be brought down to Rs293 billion during the current year and to Rs96
billion by 2019-20. It was told that the ministry’s drive to curb power theft
and recovery of dues had brought in positive outcomes. Within four months, the
additional power dues worth Rs48 billion had been recovered that would touch
Rs80 billion mark by year end and Rs190 billion till June 2020. The prime
minister was told that the special focus given to handling the losses caused by
theft, technical and transmission issues was coming to fruition. As a step to
curb power theft, 27,000 first information reports (FIR) had been registered
against those involved, while 4,225 people had been arrested including 433
officials of the power sector. Moreover, another 1,467 officials had been
charge-sheeted.
Circular Debt: Tube well conversion to Solar: May, 10, 2019: The Baluchistan government has decided to switch
tube-wells installed in the fields in the province to the solar system.
There are around 29,000 agriculture tube-wells running on electricity across
the province. It was decided that the geo-testing mechanism will be adopted for
the verification of tube-wells.
Circular debt retirement; July, 30, 2019: The government will be raising about Rs200bn through Islamic
bonds next month to reduce circular debt after securing about Rs11bn relief
from independent power producers (IPPs )
The government has now finalised those negotiations under which
the 10 IPPs, which had won international arbitration against the government,
have agreed to reduce their mark-up payments on overdue arrears from Kibor plus
4.5 per cent to Kibor plus 2pc. They have also agreed to apply mark-up after 90
days of non-payment instead of the existing 35 days, while the mark-up will now
be payable on the outstanding amount once instead of compound interest rate. As
a result, the government is estimated to get a financial relief of about Rs11bn
against the original cost of about Rs34bn awarded in favor of the IPPs by the
LCIA. The two sides are expected to sign the settlement agreement over the next
couple of weeks.
Power division had started
negotiations with the 10 IPPs set up under the 2002 power policy for
out-of-court settlement of originally Rs16bn award allowed by the LCIA. The
arbitration cost had increased to Rs34bn on account of interests and other
costs. An official in one of the IPPs said the government might be
overestimating the relief because the negotiations were limited to the extent
of interest payments. It might be a couple of billions of rupees and nothing
like Rs11bn, he said, adding that the out-of-court settlement would be a time-bound
discount and in case of non-clearance of dues within 45 days, the original
mark-up would get revived.
Simultaneously, officials are expecting that Rs200bn Sukuk
financing will also be approved by the Economic Coordination Committee (ECC) of
the cabinet later this week to ensure timely clearance of not only the
arbitration liability to the litigants but also other outstanding dues to all
the IPPs and fuel suppliers suffering cash flow problems because of around
Rs1.4 trillion circular debt.
An official said the ECC had approved in principle up to Rs400bn
Islamic financing for the power sector in February this year in two phases, but
a fresh approval by the ECC as well as the cabinet was required for the second
tranche because of changed financing costs arising out of more than 500 basis
points increase in the central bank’s policy rate to 13.25pc under the IMF
programme. Pakistan.
The assets belonging to a number of public sector power companies
have been mortgaged in favour of the financiers as well as the previous bond
backed by a government guarantee with a 10-year maturity at a rental return of
Kibor plus 80 basis points. The bonds entail half-yearly rental repayments from
the date of draw-down and repayments are made directly by the central bank on
the basis of a budgetary allocation by the finance ministry on its standing
instructions to direct debit for return and maturity repayment at the SBP
counter.
The boards of directors of all power distribution and generation
companies have agreed to pledge the properties/assets in the trust for banks.
Some additional properties and assets have been selected in the distribution
and generation network as collateral against rental payments.
At present the National Electric Power Regulatory Authority,
National Accountability Bureau and newly created Inquiry Commission on Debt are
probing the IPPs financials for purported higher than normal profits. The
government is also considering appointing a specialized commission comprising
international engineering, legal and financial experts on the issue.
Losses decreased: Aug., 12, 2019: The power sector has achieved in its revenues
a record increase of over Rs121 billion while curtailing line losses worth
Rs16bn, or 1.4 per cent.The initiatives include
both administrative and technical measures pertaining to system augmentation
and upgradation. Under the campaign to curb electricity theft, Rs1,368 million
was recovered from 5,318 power thieves after registering 36,000 FIRs against
them. The Aerial Bundled Cable is another project to
control and pre-empt illegal connections through direct hooking, thereby
controlling the menace of kundas and reducing line losses in high-loss areas.
The Peshawar Electric Supply Company and Sukkur Electric Supply Company have
already started installation of these cables as and where they clear feeders in
their anti-theft campaign. The anti-corruption and anti-theft drive has shown
positive effects on recovery of outstanding dues as well. It has motivated the
consumers to pay the bills in time. Discos’ recovery has shown an improvement
of 1pc since the launch of the campaign.
The electricity generation in FY19 grew barely 1 percent year-on-year to 122 billion units, which translates into 103 billion units of actual consumption, after factoring in the system losses. The losses have continued to be high, close to 20 percent, and in cases of some discos, even higher than easier thresholds. The regulator's inability to have a tighter control and instead allowing far more than threshold losses as part of final tariffs, has been a massive problem, and there was no progress on this front.
Nonetheless, the improvement did come in FY19 as the share of furnace oil based generation was reduced to single digits, while that of imported LNG and coal based generation reached new highs.
It would have been much nicer, had the benefit of a much improved generation mix been transferred to the consumers. But in fact the tariffs kept on increasing as Pakistan entered yet another IMF programme. The tariff increase was made a structural benchmark, in order to reduce the cost differential and put a lid on the ballooning circular debt, which had crossed Rs 1 trillion.
The tariffs have been increased across user categories, barring domestic consumers using up to 300 units a month. This in itself is more of a problem, as nearly 80 percent of domestic power consumption is exempt from tariff increase, and the allocated subsidy of nearly Rs150 billion in the budget, does not cover up for the same.
The rise of unfunded subsidy has been a major problem, and the issue exacerbated with the government's relief scheme for industrial users in general and export industries in particular. That takes out another 25 percent of total power consumption out of the tariff hike, instead this requires room for more subsidies, which have not been allocated. Either the government will have to roll back some of it, or will end up running higher subsidies, or in case of delayed payments, another round of circular debt may well be in the offing.
the capacity payments. Not that the government is not looking to recover the difference between price and cost, but there is little debate on the elephant in the room, that is the capacity payment component. The amount of upwards adjustment that may be required for FY19 determinations for respective discos, could be too hot to handle. The IMF is not the worry as far as the power prices are concerned, capacity payments are.
The capacity payments in FY16 were Rs280 billion or Rs3.4 per unit sold. This increased to Rs644 billion or Rs6.2 per unit in FY18, constituting almost 60 percent of the power purchase price
The
distribution companies (Discos) are facing revenue shortfalls. In 2018-19,
about 93,887 million units worth Rs1.342 trillion were billed to consumers
against which recovery of Rs1.061tr was made indicating a recovery percentage
of 79.06pc.
The
shortfall resulted in less receipt of revenue by the Discos, showing `managerial
inefficiencies and policy bottlenecks constraining the Central Power Purchasing
Agency (CPPA) to pay-off its energy procurement liabilities.
Compared with the last financial year, there was an improvement of 1pc in revenue recovery. Still, the recovery shortfall of 21pc posed a significant operational challenge for Discos. Recovery in Hyderabad, Tribal, Quetta and Sukkur companies was 54.17pc, 18.92pc, 24.29pc and 38.54pc respectively only in 2018-19.
Compared with the last financial year, there was an improvement of 1pc in revenue recovery. Still, the recovery shortfall of 21pc posed a significant operational challenge for Discos. Recovery in Hyderabad, Tribal, Quetta and Sukkur companies was 54.17pc, 18.92pc, 24.29pc and 38.54pc respectively only in 2018-19.
Losses
beyond the limit set by Nepra meant financial losses for the company as well as
a cyclic increase in the CPPA receivable amounts pertaining to Discos.
The rest of T&D losses in Discos and the financial impact thereof amounted to Rs37.5bn and Rs35.8bn in 2017-18 and 2018-19.
This implies that the performance of Discos in reducing T&D losses remained unsatisfactory. Moreover, it also shows that the development initiatives being made in these companies for enhancing the power transmission and distribution system are yet to make any appreciable impact.
Huge receivables from running and dead defaulters remained another major challenge. Over the years the volume of receivables from running and dead energy defaulters have increased significantly and it has become an important cause for power sector debt accumulation. As of June 2019, the total receivables from running and dead defaulters amounted to Rs572.179bn. Of this, Rs476.932bn pertained to running defaulters and Rs95.247bn to dead defaulters. Such a huge amount of receivables has added to the financial crunch in the power sector that demands immediate consideration and intervention.
Due to late payment of government subsidies like tariff differential subsidy, agricultural subsidy for tubewells, other provincial government subsidies, subsidy to Azad Jammu and Kashmir government and outstanding payments from K-Electric, Rs.549.2bn were held up as of June 2019. These receivables are adding up into the overall circular debt of the power sector. As on June 30, 2019, the total amount of circular debt stood at Rs.1.517tr including Power Holding Private Limited loans of Rs809.840bn from Rs1.160tr in 201718, registering an increase of Rs357.378bn or 31pc in the one financial year.
The rest of T&D losses in Discos and the financial impact thereof amounted to Rs37.5bn and Rs35.8bn in 2017-18 and 2018-19.
This implies that the performance of Discos in reducing T&D losses remained unsatisfactory. Moreover, it also shows that the development initiatives being made in these companies for enhancing the power transmission and distribution system are yet to make any appreciable impact.
Huge receivables from running and dead defaulters remained another major challenge. Over the years the volume of receivables from running and dead energy defaulters have increased significantly and it has become an important cause for power sector debt accumulation. As of June 2019, the total receivables from running and dead defaulters amounted to Rs572.179bn. Of this, Rs476.932bn pertained to running defaulters and Rs95.247bn to dead defaulters. Such a huge amount of receivables has added to the financial crunch in the power sector that demands immediate consideration and intervention.
Due to late payment of government subsidies like tariff differential subsidy, agricultural subsidy for tubewells, other provincial government subsidies, subsidy to Azad Jammu and Kashmir government and outstanding payments from K-Electric, Rs.549.2bn were held up as of June 2019. These receivables are adding up into the overall circular debt of the power sector. As on June 30, 2019, the total amount of circular debt stood at Rs.1.517tr including Power Holding Private Limited loans of Rs809.840bn from Rs1.160tr in 201718, registering an increase of Rs357.378bn or 31pc in the one financial year.
The electricity generation in FY19 grew barely 1 percent year-on-year to 122 billion units, which translates into 103 billion units of actual consumption, after factoring in the system losses. The losses have continued to be high, close to 20 percent, and in cases of some discos, even higher than easier thresholds. The regulator's inability to have a tighter control and instead allowing far more than threshold losses as part of final tariffs, has been a massive problem, and there was no progress on this front.
Nonetheless, the improvement did come in FY19 as the share of furnace oil based generation was reduced to single digits, while that of imported LNG and coal based generation reached new highs.
It would have been much nicer, had the benefit of a much improved generation mix been transferred to the consumers. But in fact the tariffs kept on increasing as Pakistan entered yet another IMF programme. The tariff increase was made a structural benchmark, in order to reduce the cost differential and put a lid on the ballooning circular debt, which had crossed Rs 1 trillion.
The tariffs have been increased across user categories, barring domestic consumers using up to 300 units a month. This in itself is more of a problem, as nearly 80 percent of domestic power consumption is exempt from tariff increase, and the allocated subsidy of nearly Rs150 billion in the budget, does not cover up for the same.
The rise of unfunded subsidy has been a major problem, and the issue exacerbated with the government's relief scheme for industrial users in general and export industries in particular. That takes out another 25 percent of total power consumption out of the tariff hike, instead this requires room for more subsidies, which have not been allocated. Either the government will have to roll back some of it, or will end up running higher subsidies, or in case of delayed payments, another round of circular debt may well be in the offing.
the capacity payments. Not that the government is not looking to recover the difference between price and cost, but there is little debate on the elephant in the room, that is the capacity payment component. The amount of upwards adjustment that may be required for FY19 determinations for respective discos, could be too hot to handle. The IMF is not the worry as far as the power prices are concerned, capacity payments are.
The capacity payments in FY16 were Rs280 billion or Rs3.4 per unit sold. This increased to Rs644 billion or Rs6.2 per unit in FY18, constituting almost 60 percent of the power purchase price
The
dependable generation capacity in FY19 went up by almost 20 percent
year-on-year to 31000 MW. The demand did not grow. The RLNG plants are fully
available, among many others from the CPEC projects. No demand growth and
higher generation availability, with contracts based on take-or-pay, it is
estimated that the capacity payments component for FY19 would be north of Rs900
billion. The currency devaluation has also played its role.
Now with almost Rs9 per unit as capacity payment, it is obvious that the benefit of lower fuel price and improved generation mix was never going to materialize. And there is more to come in lieu of tariff adjustments. The latest IMF programme, like any other IMF programme, is overly focused on price as the key to reforms. Yes, price is an integral part of the power sector reforms, but it is surely not the only one. It did not work back then, it will not work now. The government is due to announce the revised tariffs for FY19 by September end, as per the IMF's structural benchmark. And the budgeted subsidy may not be enough to cater for the increase.
The governance reform, the focus on transmission, privatization of DISCOs and commercially opening up the market are all key component of the reform, which have sadly taken a backseat, as price becomes the focus. The first year was a missed opportunity; the second could be a disaster, if they don't look beyond pricing as means of reforms.
Now with almost Rs9 per unit as capacity payment, it is obvious that the benefit of lower fuel price and improved generation mix was never going to materialize. And there is more to come in lieu of tariff adjustments. The latest IMF programme, like any other IMF programme, is overly focused on price as the key to reforms. Yes, price is an integral part of the power sector reforms, but it is surely not the only one. It did not work back then, it will not work now. The government is due to announce the revised tariffs for FY19 by September end, as per the IMF's structural benchmark. And the budgeted subsidy may not be enough to cater for the increase.
The governance reform, the focus on transmission, privatization of DISCOs and commercially opening up the market are all key component of the reform, which have sadly taken a backseat, as price becomes the focus. The first year was a missed opportunity; the second could be a disaster, if they don't look beyond pricing as means of reforms.