Undertaking power sector reforms

By Asad Cheema

ISLAMABAD: The government has taken two major steps with remarkable degree of success – report on independent power producers (IPPs) and the follow-up agreement which will reduce power generation costs by a whopping Rs1 trillion over the next 10 to 20 years, provided all generation companies including government and CPEC ones are included. If implemented finally, it would be a major achievement. Secondly, the government is finally going for revival of Pakistan Electric Power Company (Pepco) in the form of a managing agent, although a holding company could have been a better choice, which would separate policymaking role of the Power Division and keep it away from day-to-day involvement in the running of companies. Pepco was made dysfunctional in the hope that distribution companies’ (DISCOs) boards would be more effective than Pepco. This has not happened. Appointments on boards could not be merit-based and a two-hour board meeting of unqualified and disinterested directors could not achieve much. It is hoped that the government would be able to equip the reorganised Pepco with competent people – some through transfers from DISCOs and some from the open market. We have elaborated on it in an earlier article. We will briefly touch upon other steps the government should take in order to bring about the required change and impact in the power sector.
Surplus capacity and rising capacity charges are contributing to circular debt. More capacity is coming in while demand is not increasing. About 25,000 megawatts of new capacity is under various stages of implementation. People are nervous as to how capacity payment would be made. Circular debt is being projected to go as high as Rs4 trillion. One solution is to slow down the capacity buildup as much as one can. All interested parties are trying to push their projects, lest their projects are dropped.
Lower tariffs
Tariff reforms are badly needed. The other approach for slowing down the accumulation of circular debt is to increase demand – easier said than done. But it is possible. There is a known and accepted negative relationship between price and demand. Demand can increase with lower prices and tariff. When fixed costs are high, increased demand at lower prices can increase the contribution to overheads, if not profit. However, there are several provisos to it. One, the price reduction has to be in paying sectors and not in the subsidised sector, which is already a loss sector. Two, the industrial sector can definitely expand, if electricity prices go down. New products and industries can come up. Products which, hitherto, are not viable can be introduced. Industries can be encouraged to add third shifts. Three, the IT industry can expand and become competitive, if tariffs are low. Exports can increase. Four, there is much less electricity demand in the night and a special night-time industrial tariff could be introduced. Five, winters may have a reduced tariff to encourage people to switch from gas where a shortage is being forecast for the next two years. Some steps have been taken in this respect but these were based on mediocre calculations. A scientific study would be required. Six, there are other areas which should be looked into. Currently, even well-to-do are benefiting from the consumption-based tariff.
Market and competition should be another focus of reforms in the power sector. Immediate possibilities are in the area of wheeling and competitive bidding for new projects. Unfortunately, the National Electric Power Regulatory Authority (Nepra) and Private Power and Infrastructure Board (PPIB) are continuing with the traditional system despite their avowed commitment to competitive tariff at least in the area of renewable energy like solar and wind.