Tag: Electricity

Pakistan’s energy crisis has been a persistent issue, with deep-rooted inefficiencies, financial burdens, and regulatory challenges. At the heart of this crisis lie two key players: the Central Power Purchasing Agency (CPPA) and Independent Power Producers (IPPs). While IPPs are often blamed for the high electricity costs and the ever-increasing circular debt, a closer look at the operations and responsibilities of CPPA reveals a more complex interplay that exacerbates the situation.

Central Power Purchasing Agency (CPPA): The Key Facilitator

The CPPA, established as a single buyer and market operator, plays a crucial role in the energy sector. It is responsible for purchasing electricity from generation companies, including IPPs, and selling it to distribution companies (Discos). CPPA’s operations are central to the financial flows in the power sector, and its inefficiencies have significantly contributed to the circular debt problem.

Circular debt has ballooned to over Rs 3 trillion, a figure that represents the difference between the cost of electricity and the revenue recovered from consumers. A substantial part of this debt is attributable to the CPPA’s failure to make timely payments to IPPs. In 2023 alone, the CPPA owed IPPs over Rs 1 trillion, leading to disputes and operational inefficiencies. The delay in payments forces IPPs to borrow at high-interest rates to cover their operational costs, which are then passed on to consumers through increased tariffs.

CPPA’s role in tariff setting, in conjunction with NEPRA, has also been problematic. Tariffs are often set below cost-recovery levels, necessitating government subsidies. According to a 2023 report by the Ministry of Energy, the government provided over Rs 1.5 trillion in subsidies to cover the shortfall. However, these subsidies are unevenly distributed, with many benefiting industrial consumers more than residential ones, leading to social inequities.

CPPA’s inefficiency is also evident in the high transmission and distribution (T&D) losses, which stood at 17% in 2023, far above the global average of 8-10%. These losses represent a significant cost, estimated at Rs 350 billion annually, that ultimately falls on the consumer. The CPPA’s inability to reduce these losses reflects broader governance and operational challenges that exacerbate the energy crisis.

The Role of Independent Power Producers (IPPs)

The introduction of IPPs in Pakistan’s energy sector was a response to the country’s inability to meet its growing electricity demand. The Power Policy of 1994 opened the doors for private sector involvement, leading to the establishment of several IPPs. These companies operate under Power Purchase Agreements (PPAs) with the government, which guarantee payments for electricity generated, including capacity payments for maintaining available generation capacity.

From 2013 to 2019, Pakistan saw significant growth in its generation capacity, with IPPs playing a pivotal role. New projects, primarily based on imported fuels like LNG and coal, added approximately 9,000 MW to the grid. This expansion helped reduce the severe load-shedding that plagued the country in the early 2010s. However, reliance on imported fuels introduced new vulnerabilities. According to the National Electric Power Regulatory Authority (NEPRA), around 50% of Pakistan’s electricity is now generated from imported fuels, making the country susceptible to global price fluctuations and foreign exchange variations.

A major point of contention is the system of capacity payments, which, according to recent figures, contribute significantly to the rising cost of electricity. Capacity payments are made to IPPs even when they do not generate electricity, leading to public outcry. The 2023 data shows that capacity payments reached Rs 1,300 billion, up from Rs 600 billion in 2018. These payments are indexed to the US dollar, which further burdens the economy, especially with the Pakistani rupee’s depreciation.

Critics argue that IPPs have secured exorbitant profit margins, sometimes up to 15-18% Return on Equity (RoE), as per NEPRA’s reports. While these agreements were made to attract foreign investment, they have been criticized for being overly generous, especially in the context of Pakistan’s economic constraints. The 2020 report by the Committee for Power Sector Reforms highlighted that IPPs earned a cumulative profit of Rs 450 billion from 2008 to 2019, which some view as excessive given the economic situation.

Comparing Responsibilities: CPPA vs. IPPs

While IPPs are often criticized for their profit margins and the burden of capacity payments, it is crucial to recognize that these issues are symptoms of deeper systemic problems, for which CPPA bears significant responsibility.

IPPs operate under the terms of contracts that were designed to attract investment at a time when Pakistan desperately needed new generation capacity. These contracts, while perhaps overly favorable to IPPs, are legally binding and reflect the conditions of the time. CPPA, on the other hand, is responsible for managing the day-to-day operations of the power sector, including payment flows, tariff setting, and ensuring efficiency. The chronic delays in payments, mismanagement of subsidies, and high T&D losses point to systemic inefficiencies that fall squarely under CPPA’s purview.

The direct impact on consumers comes from high electricity tariffs, which are a result of both the profit margins secured by IPPs and the inefficiencies within CPPA. However, it is CPPA’s failure to reform and manage the power sector effectively that has allowed these issues to persist and worsen. The 2023 NEPRA report indicates that the average tariff increased by 35% in the last five years, with much of this increase attributed to the costs passed down from inefficiencies within CPPA and the broader energy sector governance.

Conclusions and Recommendations

Pakistan’s energy crisis is a multifaceted issue, deeply rooted in the contractual arrangements with Independent Power Producers (IPPs) and the inefficiencies of the Central Power Purchasing Agency (CPPA). While IPPs have contributed to the high cost of electricity through capacity payments and favorable profit margins, these issues stem from the regulatory frameworks and agreements established by the government. On the other hand, CPPA’s inefficiencies, particularly in managing payments, tariff setting, and reducing transmission and distribution (T&D) losses, have significantly exacerbated the crisis. To address these challenges effectively, the following recommendations are proposed:

1. Renegotiation of Power Purchase Agreements (PPAs) with IPPs

Rationale: The current PPAs with IPPs, particularly the capacity payments and dollar indexation clauses, are heavily skewed in favor of the power producers. While these agreements were initially designed to attract foreign investment, they have now become a significant burden on the economy.

Recommendation:

• The government should initiate a renegotiation process with IPPs to revise these contracts. The goal should be to reduce capacity payments and minimize dollar indexation where feasible. Some recent agreements, particularly with newer IPPs, have shown a willingness to revise terms, and this should be extended to all contracts.
• Establish a task force comprising representatives from the government, NEPRA, and independent financial experts to oversee the renegotiation process, ensuring transparency and fairness.

2. Improving CPPA’s Operational Efficiency

Rationale: CPPA’s inefficiencies, particularly in managing timely payments to IPPs and reducing T&D losses, have significantly contributed to the circular debt and the financial instability of the power sector.

Recommendation:

• Implement an automated payment system that ensures timely disbursement of funds to IPPs, reducing the need for IPPs to borrow at high-interest rates and pass these costs to consumers.
• Invest in advanced grid management technologies to monitor and reduce T&D losses. CPPA should collaborate with distribution companies (Discos) to implement smart grid technologies that provide real-time data on electricity flows, enabling more effective loss prevention.
• Enhance the capacity of CPPA staff through training programs focused on financial management, contract negotiations, and advanced grid management techniques.

3. Encouraging Renewable Energy Integration

Rationale: Pakistan’s heavy reliance on imported fuels for electricity generation makes the country vulnerable to global price fluctuations and foreign exchange variations. Increasing the share of renewable energy in the energy mix can reduce these vulnerabilities.

Recommendation:

• Set ambitious targets for renewable energy generation, aiming to increase its share to 30-35% by 2030. This will require a mix of solar, wind, and hydropower projects.
• Provide incentives for private sector investment in renewable energy, such as tax breaks, guaranteed purchase agreements, and fast-track project approvals.
• Invest in grid modernization to handle the intermittency of renewable energy sources effectively. This includes energy storage solutions and enhanced grid connectivity to ensure a stable supply of electricity from renewable sources.

4. Developing a Competitive Energy Market

Rationale: The monopolistic structure of Pakistan’s energy market limits competition and innovation, contributing to inefficiencies and higher costs. A competitive energy market could drive down prices and improve service quality.

Recommendation:

• Gradually transition from the single-buyer model dominated by CPPA to a competitive market where multiple buyers and sellers can trade electricity. This requires the introduction of a Competitive Trading Bilateral Contract Market (CTBCM), where Discos can directly negotiate contracts with generation companies.
• Start with pilot projects in select regions to test the CTBCM model, refine regulatory frameworks, and address any issues before scaling up nationwide.
• Provide training and support to stakeholders, including Discos, generation companies, and regulators, to navigate the complexities of a competitive market effectively.

The author is an agricultural engineer specialized in energy systems. He currently serves as a Green and Clean Energy Officer at The Alternate Development Services, Islamabad.