ISLAMABAD: National Electric Power Regulatory Authority (NEPRA) acknowledged that amid the historically highest inflation in the country, the extraordinary increase in the price of electricity has badly disrupted life of an ordinary man.
The Power Regulator in its State of Industry (SIR) 2023 report explained the reasons for the power sector’s dismal performance during the year, starting from government’s action to depreciate the Rupee, take and pay and underutilization of efficient capacity. Pakistan’s total installed capacity stood at 45,885 MW in 2023.
According to the report, over the years, Pakistan power sector has grappled with challenges including increasing cost of electricity, inefficiencies in the generation, transmission, distribution and supply segments, fuel supply issues, transmission constraints, under-utilization of efficient plants, growing circular debt, governance and compliance etc. Most of these problems persisted during FY 2022-23 as well.
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However, during the reporting year, the liquidity situation for the electric power sector and the affordability of electricity for consumers aggravated due to unprecedented increase in cost of electricity. This price escalation emanated primarily due to increase in the prices of essential primary energy resources such as coal, oil, and gas in the international market and drastic devaluation of Pakistani Rupee which intensified the financial strain on the power sector and consumers.
High cost of electricity in Pakistan has emerged as a critical challenge affecting all segments of society, ranging from domestic consumers to industrial and agricultural sectors. Amid the historically highest inflation in the country, the extra ordinary increase in the price of electricity has badly disrupted the life of an ordinary man.
Besides domestic consumers, the high price of electricity has had a major impact on commercial, industrial, agriculture and services sector. This negative impact is manifest in lackluster economic growth of the country as the Gross Domestic Product (GDP) of Pakistan posted a growth of 0.29% in FY 2022-23.
While examining the reasons behind the higher cost of electricity in the country, the report noted a multitude of factors. These include, but not limited to, the increasing cost of fuel, rupee devaluation, increased capacity payments, circular debt, reduce electricity usage and negative sales growth, high aggregate transmission and distribution losses, theft, less recoveries, varying electricity demand pattern on daily and seasonal basis, litigation and poor governance in the overall electric power sector.
One of the primary drivers for the increase in electricity costs has been the impact of rupee devaluation. At the close of the FY 2021-22, the exchange rate was 1 $ to 204.85 Pakistani Rupees, whereas by the end of the FY 2022-23, this rate had risen to 1 US$ equaling 287.50 Pakistani Rupees. Since most of the investment in power sector of Pakistan is denominated in foreign currency, therefore, when the rupee depreciates, it escalates the cost of servicing of these foreign debts, placing strain on the financial stability of power companies and affordability of the consumers.
Moreover, Pakistan heavily relies on imported energy resources such as coal, oil and gas. The devaluation of the rupee leads to higher import costs, directly influencing the pricing of electricity and resulting in increased tariffs for consumers. Moreover, the power sector is heavily dependent on imported equipment and technology. A devalued rupee further amplifies the cost of such imports, making it more expensive to maintain and upgrade power infrastructure.
Another significant factor contributing to the increased cost of electricity is the under-utilization of ‘Take or Pay’ generation capacity, presenting a dual challenge to the power sector. Under ‘Take or Pay’ agreements, power utilities are obliged to pay for contracted capacity, regardless of whether it is consumed or not. The unutilized capacity places a financial burden on electricity consumers, who end up paying for unused power.
During FY 2022-23, the utilization factor of de-rated thermal electric power generation capacity remained 34.68%. Additionally, non-optimal utilization of capacity leads to inefficiencies in the power generation process. This not only results in economic losses for power companies but also diminishes the overall efficiency of the power sector.
Use of less than available capacity from power plants in-operation warrants payment of Part Load Adjustment Charges (PLAC) to generation companies which further escalates the per unit cost of electricity. During FY 2022-23, the payment made to the power plants for PLAC, in Central Power Purchasing Agency (Guarantee) Limited (CPPA-G) system, amounted to Rs. 46.59 billion.
The rupee devaluation coupled with under-utilization of ‘Take or Pay’ capacity significantly contributed to the higher cost of electricity exacerbating the financial liquidity and instability within the power sector.
Non-payment to the power generation companies in timely manner hampers their ability to make timely payments to fuel suppliers and other stakeholders, triggering a ripple effect throughout the industry.
This precarious financial situation of power companies, compounded by the challenges of rupee devaluation and ‘Take or Pay’ obligations, may dissuade potential investors from participating in the power sector which could have a negative impact of the power sector modernization and expansion.
While closely looking at the individual factors which contributed for high electricity cost, it becomes evident that most of them are controllable. For instance, the cost of fuel can be managed by diversifying the generation mix towards renewable energy sources.
Similarly, the impact of increased capacity payments can be mitigated by boosting electricity sales. Issues like circular debt and others can be addressed through timely reforms, better planning and improved governance.
Pakistan’s electric power transmission system is a vital organ of the nation’s energy infrastructure meant for smooth flow of electricity from its generation sources to distribution networks. The introduction of the High Voltage Direct Current (HVDC) Matiari-Lahore Transmission Line has significantly enhanced the system’s capacity, allowing it to efficiently and economically handle heavier loads over greater distances.
However, its under-utilization (around 60.4%) places a substantial burden on the financial health of the power sector, consequently elevating electricity costs for end-consumers. The high voltage 500 kV and 220 kV transmission system of NTDC grappled with severe challenges; network constraints hinder the smooth evacuation of power from several highly efficient power plants.
The maintenance and upkeep of the existing system, in addition to concerns regarding work quality, safety, and security, necessitate immediate attention and intervention.
The poor governance in electric power DISCOs need to be curbed imperatively for sustained growth and financial viability of Pakistan’s power sector. Effective implementation of regulatory frameworks and robust oversight is crucial to improve governance in DISCOs.
Investment in human resource development and encouraging a culture of accountability can be instrumental to bring a positive shift in the performance of these companies. By tackling the governance issues, Pakistan can pave the way for an efficient, transparent, and consumer-centric electric power sector, ultimately benefiting both the industry and the citizens alike.
The addition of three Thar Coal-based power plants during FY 2022-23 is a positive development. However, the operation of 660 MW power plant of Lucky Electric Power on imported coal due to unavailability of Thar Coal is a serious issue that demands immediate attention.
From an economic perspective, nuclear and Thar Coal-based plants stand as the most viable options for base load power, necessitating concerted efforts towards further developing Thar Coal mines and associated infrastructure such as railways.
