In-Depth Audit of IPPs to Address Pakistan’s Circular Debt Problem: Study

According to a comprehensive research by the Institute of Policy Studies (IPS) titled “Pitfalls in Power Sector of Pakistan: Accumulation of Circular Debt – Causes, Consequences, and Way Forward,” the power sector of Pakistan is a disaster and needs thorough and prompt governance and policy reforms.

Renegotiations of generation tariffs for independent power producers, segregation and deregulation of the administrative and operational activities of the distribution companies leading to public-private partnerships, implementation of accelerated reforms for independent power producers are a few of these. Others include an audit of independent power producers (IPPs), the development of business models to boost renewable energy, liberalisation of the energy market through deregulation and privatisation.

The report presented these as well as a number of additional realistic policy choices and answers for the sector’s sustainable development.

The research paper on the power sector’s limitations and flaws is especially concerned with figuring out what’s causing the circular debt, which has now risen exponentially to Rs 4 trillion, and offering workable answers.

Numerous problems that impede not only sustainable development but also the effective development and strategic expansion of this crucial sector have long been a constraint on the power sector. As a result, the energy crisis has had a significant detrimental effect on Pakistan and the nation’s economy as a whole.

 

The rise of circular debt: why?

Dependence on pricey imported fuels, high generation costs from thermal sources, an unfavourable rupee-to-dollar parity, poor governance and policy lapses, regulatory issues, inadequate recovery of distribution companies’ revenues, financial sustainability issues, capacity charges, ageing infrastructure, and line losses are some of the factors causing the increase in circular debt. The rise in circular debt necessitates ongoing tariff increases in order to maintain healthy cash flow for both public and private enterprises, which has an impact on consumers’ access to affordable energy.

In addition, Pakistan’s vertically integrated power market, where state entities have a dominating position, is partially monopolised. Due to this arrangement, there is no competition between the entities. 78 IPPs are now in operation in Pakistan and rely heavily on imported gasoline.

Without K-Electric, the nation’s installed capacity totals 40,813 MW. During FY2021–22, the system experienced a peak demand of 28,253 MW. The infrastructure’s capability for transmitting electricity, however, has remained constant at 23,000 MW. However, compared to the 13 percent target set by NEPRA, transmission and distribution losses of the state-owned distribution companies in FY2021–22 totaled over 17 percent.

Solutions
The most judicial approach to dealing with the circular debt problem calls for a thorough audit of all IPPs, which will aid in a comparison of their setup costs, actual fuel consumption, heat rates, O&M component of the tariff, interest during construction (IDC), and net annual plant capacity (NAPC) factor. These variables significantly affect the payments made to IPPs, but at the time of installation, cost plus tariff settlement and capacity component quarterly modifications are not taken into account for audit or assessment.

In conclusion, the paper makes the following recommendations:

 

Temporary Solutions

Places a focus on dual contracts
Division of DISCOs into smaller entities to ease the burden of their limitations
Rural electrification based on mini-grids (using solar, biomass, etc.)

Long-Term and Medium-Term Solutions

Promotion of Distributed Generation Based on Renewable Energy
creation of economic structures that will facilitate the grid’s quick incorporation of clean, inexpensive energy
Incentives are provided in the tariff system.
Utility-Scale Projects for Renewable Energy
Competitive tendering for renewable energy sources
hybrid energy-related initiatives
Energy market liberalisation; capacity development for indigenousness

Chairman of IPS Khalid Rahman commented on the study and emphasised how urgent it was for the government to develop a funding strategy and investment strategy. He emphasised that digitization and investments focused on the transmission and distribution system can solve the sector’s inefficiencies and aid in rationalising power tariffs, which are among the highest in the area. Additionally, he emphasised how crucial public-private partnerships are to advancing the industry.

In the end, addressing the challenges raised in the research will result in a more sustainable, effective, and open power industry. However, doing so will necessitate considerable reforms, investments, and policy changes.

 

 

 

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