Sector Update – Pakistan Power Sector 2018

Introduction Pakistan’s Power Sector

Under Pakistan’s constitution, Electricity is a Federal Subject. The Council of Common Interests (CCI) is the highest constitutional body in the country and is responsible for formulating and regulating the sectoral policies of the electricity sector. However, the Constitution does provide that the Provincial Government may play an important role:

1. by requiring supply to be made in bulk for transmission and distribution within the Province;
2. by levying tax on consumption of electricity within the Province;
3. by constructing power houses and grid stations and lay transmission lines for use within the Province; and
4. by determining the tariff for distribution of electricity within the Province.

Pakistan continues to face myriad power sector challenges. Chronic load shedding, caused by technical, operational, commercial, and regulatory barriers, has reduced industrial output, crippled economic growth, and has created social unrest. To avert a looming energy crisis, Pakistan needs to address structural deficiencies in its power sector to provide an enabling environment for private sector investment to close a growing power deficit. At present, Pakistan’s almost 30,000 MW installed capacity is insufficient for the country’s growing population of 220 million (of whom 60 percent is believed to have access to the grid with others relying on off-grid solutions and other sub-standard fuels). Moreover, with losses at the distribution level of up to 40 percent in some DISCOs (HESCO, PESCO and SEPCO), not all of it reaches the end user. With the new capacity additions through China Pakistan Economic Corridor (CPEC) and Government’s own push to install new generation capacity, Pakistan will relatively receive new power generation capacity the extent of 10,000 MW which is expected to improve system efficiency and lower fuel cost. However, there remains a substantial capacity which is run down, obsolete, and inefficient and requires rehabilitation. A third of the existing capacity is fueled by fuel oil (“furnace oil”), with attendant pollution and economically onerous foreign exchange requirements. Though Furnace Oil is on a way out to accommodate RLNG in the fuel mix, the delays in existing project commissioning has strengthened operations of furnace oil plants for the time being. Further, end user tariffs are not cost-reflective and together with low collection rates, high transmission/distribution losses, theft, and technical/managerial inadequacies — render the power sector incapable of financing itself. The tariffs are financed primarily through surcharges – which have attracted litigation and have not resulted in industrial competitive disadvantage. The circular debt – last settled in 2013 for Rs. 480 billion – has again surfaced up and has touched a north of Rs. 500 billion already with additional Rs. 500 billion in the accounts of Power Holding Private Limited (PHPL). As such, it seems a challenge to shoulder the continuous O&M price tag to sustain the growing supply base given the operational efficiencies are yet to be improved. With 10% on average of loss in recoveries and 20% on average of T&D losses, the power sector losses 30% of all bills to be collected which poses a continuous liquidity challenge.

The reforms so far have also been unsuccessful. The IMF program intended to cap the circular debt at a ceiling has not been a success and no major operational improvement is yet to be observed in the system. The positive change has been led the State’s own institutions and primarily National Electric Power Regulatory Authority (NEPRA) which has taken a sectoral direction in line with international best practices and initiated a much-needed renewable energy agenda in the last five years. To expedite RE base, NEPRA gave upfront tariffs for wind, solar, bagasse, coal and liquefied natural gas (LNG) which spurred investments in various RE projects of around 2,000 MW. Also, the GOP’s investment push in large- and medium- scale public-private partnerships (PPPs) seek to expand the role of the private sector in generation, transmission, and distribution offer a potential pathway to improving the security, stability, and economic growth.

Presently, the National Transmission and Dispatch Company (NTDC) power system is being operated in a single-buyer mode, where Central Power Purchase Agency (CPPA-G) buys electricity on behalf of DISCOs and provides it to DISCOs in proportion to their actual recorded demand. The total electricity generation in the country during FY2017 was 119,276 GWh (comprised of 107,410 GWh in the NTDC system and 11,866 GWh by KE). The transmission sector is dilapidated and there is an urgent need for higher investments. On the planning side, the n-1 planning is not evident as large tripping continue to occur all over the country. NTDC has been in project partnership with China State Grid for the construction of HVDC line which will bring power down from South to North of the country. Over the years, and in the future, private investments for thermal, hydro and Renewable Energy projects, some smaller transmission lines besides private captive generation have an important role to play in the country’s power sector.

Institutional Environment

Overlapping institutional jurisdiction remains one of many challenges facing power sector governance in the country. A large number of government entities play a role in influencing policy making, governance, and/or management of the power sector, including: the Presidency, Office of the Prime Minister (PM Secretariat), Parliament, courts, four provincial governments, Ministry of Finance (MOF), Ministry of Energy (Power Division), Ministry of Energy (Petroleum Division), NEPRA, Water and Power Development Authority (WAPDA), Private Power and Infrastructure Board (PPIB), Alternative Energy Development Board (AEDB), Privatization Commission, National Transmission and Transmission Company Ltd. (NTDC), Central Power Purchasing Agency (CPPA) (G), 10 state owned distribution companies (DISCOs), and four state owned generation companies (GENCOs) along with 33 privately owned Independent Power Producers (IPPs). All the DISCOs and GENCOs are incorporated under the Pakistani Companies Act 2017, issue shares, have boards of directors, and are controlled and managed by MOE, Power Division essentially as government entities; 100 percent of their shares are titled to the president of Pakistan.

While Pakistan’s 33 major independent power producers (IPPs) are not GOP owned and controlled entities, they have power generation licenses, generate more than half of the country’s electricity, and are a key part of the power sector. The IPPs, from time to time, are embroiled in the settlement of circular debt issues and have faced clashes over the call of sovereign guarantees and non-payment of capacity dues. K-Electric, which serves Pakistan’s largest city of Karachi, is the only vertically integrated utility in Pakistan and was privatized in 2005. KE – though has improved operational and financial performance – has continued to rely on the national grid for the 650 MW of power to meet its demand.