In the 1990s, Pakistan introduced a power policy which attracted considerable private investment in electric power generation. Many thermal power projects were set up by private parties against a regulated price. The price included fixed capacity payments over a number of years to recover the project costs, and charges for power production.
The electricity produced by these power projects was purchased by a single state-owned entity which would sell it to several state-owned distribution and supplier entities. The addition in power generation capacity helped the Federal Government to get rid of supply curtailments and meet the energy demand of consumers including the industry. In the subsequent years, the generation capacity continued to expand, resulting in corresponding rise in capacity payments to power producers.
The capacity payments of the power sector have since been a subject of criticism. Some say that the equation between growth projections and energy demand was never properly assessed. Some doubt the fairness of feasibility of these power projects and issues behind them. Others think that more viable models were available but not employed for investment in power generation. Foreign currency liabilities of the state-owned power purchaser were not hedged against rupee devaluation that hugely increased in the recent years.
With the recent economic challenges causing a reduction in overall electricity demand, several power projects are either producing little or no electricity yet they continue to collect the agreed capacity payments. Some segments of society demand that power purchase agreements may be renegotiated to remove the economic burden of fixed capacity payments which are driving high electricity tariffs. The current noise is perhaps justified yet it appears to have veiled other critical issues that equally hurt the power sector.
Most distribution companies incur high losses, including electricity theft, that have accumulated to trillions of rupees and are constantly increasing by several billions of rupees each year. Bill collection and recoveries by these companies require huge improvement; and their investment in people, systems and technology is too little. The reforms in power sector, including a wholesale market and segregation of different roles, got delayed and have not been fully implemented yet. Most of the generation capacity is owned by the Government itself.
A sovereign party should take abundant caution and observe restraint in interfering with its commercial contracts and policy incentives that have been acted upon by private investors except with mutual consent. First resort must be to fixing the power sector operations and bringing economic efficiency in it. Let’s not forget the outcome of most of our international dispute resolutions, including Reko Diq and Karkey arbitrations!