Power sector Capacity Charges payment... !

Written & Researched by: Rana Asif Shahzad Ali

These days, a public controversy has arisen regarding the capacity charges of IPPs. Let's take a look at its facts and figures. It will be easy for you to decide.

Pakistan has a total electricity generation capacity of 46,035 MW as of January 31, 2024, which includes 28,811 MW thermal, 10,635 MW hydro, 1,838 MW wind, 882 MW solar, 249 MW bagasse and 3,620 MW nuclear.

In recent decades, Pakistan has failed to meet the increasing demand for energy for various reasons, including an over reliance on fossil fuels for power generation, swelling oil prices, climate variation, inadequate alternative energy sources and insufficient technological advancement.

In Pakistan, 41 thermal independent power producers (IPP's) with a total installed capacity of 17 642 MW and 8 hydro IPP's with a total installed capacity of 472 MW are operational.

According to National Electric Power Regulatory Authority's (NEPRA) 2023 yearly report, Pakistan's total installed power generation capacity is 43,775 MW, of which 59% of energy comes from thermal (fossil fuels), 25% from hydro, 7% from renewable (wind, solar and biomass), and 9% from nuclear.

Pakistan produces expensive electricity, as the country gets half of its energy mix from thermal energy. Imported products such as machinery and fuel are used to generate electricity, making Pakistan's energy sector largely dependent on the international market.

8.344 trillion capacity payments have been made to IPPs during the last 10 years. It is estimated that IPPs will be paid a capacity of Rs 2.1 trillion during the financial year 2024-25. According to the Pakistan Economic Survey 2023-24, the installed power generation capacity in 2024 reached 46,035 MW. The maximum total demand from residential and industrial estates is about 35,000 MW, while the transmission and distribution capacity is stalled at about 24,000 MW.

Now we discuss our respective issues. For example, if you lease or rent a car for 3 years and find it too difficult to make the payments after one year, you can stop paying the rent and keep the car. If we unilaterally stop paying the IPPs, won't the IPPs stop supplying us with electricity?

Total payments of capacity charges to IPPs last year were Rs 1,893 billion. Of this, the Pakistan Atomic Energy Commission, which is wholly owned by the Government of Pakistan, was paid Rs 388 billion for 3,300 MW of nuclear power capacity. But PAEC did not keep this money. He used it to repay loans taken from foreign banks and companies to set up nuclear power plants in Pakistan.

Even today PAEC is constructing Chashma 5 nuclear power plant. Do you think the Chinese suppliers will continue to supply us with technology and equipment if we stop paying them for the plants they have already installed? 150 billion rupees were paid for 4800 MW plants running on LNG. Two of these power plants are owned by the Government of Pakistan and two by the Government of Punjab.

Again the money paid to them was used to repay the loans taken for setting up these power plants. Over 10,000 MW of hydel power was paid mostly to WAPDA and some private entities for Rs 229 billion, the most expensive in Pakistan. The electrifying power project Neelum Jhelum is also included. Most of these payments went to WAPDA to repay loans it has taken from local and foreign banks. It should be remembered that even today WAPDA is building other dams in Pakistan with the help and money of China.

Apart from this, an amount of 421 billion rupees was paid for 4500 MW power plants running on imported coal. Two of them are fully owned by Chinese and Qatari investors, one is 75% owned by Chinese investors and only the smallest plant is owned by local investors. 307 billion rupees were paid for 2000 MW plants running on local coal in Thar. All these plants were built with loans from foreign banks.

This accounts for Rs 1,495 billion (or 79%) of the Rs 1,893 billion we paid to state-owned or foreign-owned enterprises last year. This leaves little room for local privately owned IPPs to save money by not paying for capacity.

The PTI government had already successfully struck a deal with local, older IPPs to reduce capacity charges in 2021 with the help of institutions. The current government should try to re-open talks with the IPPs and seek concessions and try to reschedule and delay payments. And also look very carefully whether the extension of IPP contracts by the previous governments is needed or not. In addition to this, to reduce the public burden, this option would not be wrong to eliminate the free supply or subsidy given to various institutions because they have good income and can bear the burden of this cost. This will reduce the load a little. But still there will be a need for reforms.

But defaulting on these debts would mean default and should never be an option.

Main Points: Causes, Description and Remedies.

1- Finally, for coal plants the government should negotiate with foreign authorities and banks to try to reschedule and delay payments. Also try to convert these plants from imported coal to local coal. This will reduce external payments.

2 - In my view, the real issue is another one that there is a cancellation clause in every contract, why is the termination clause not placed here? Perhaps due to this reason, these companies will have to accept the conditions under compulsion.

3 - Why should they be paid for plants that are closed? The crisis is that more power plants have been installed than required. If the private power plants stop providing electricity, then the balance between production and consumption will come. Because according to an assessment, this time the consumption has been 47.67%, but the payment has to be done at 100%. The real issue is that we are generating more electricity then shut them down.

4- In addition to this, the main reason for the increase in the payment of electricity generating companies is that when it was written on the contract that the progress payments will be paid in dollars. And when the agreements were made, the dollar exchange value was 104 rupees, which is now touching 285. So sir, when the dollar exchange value has increased three times, the payment will also increase three times.

5 - The logic of unnecessarily extending contracts is beyond comprehension. What was the compulsion that these agreements had to be extended while there was excess electricity generated from our own sources to meet our country's needs? This is also worth considering. By negotiating with these IPP's, the gap between production and consumption of electricity should be reduced and a case should be made. It is also worth noting that the government is cutting money from the budget of development projects and going towards giving subsidy of 50 billion rupees, but why is it not using the revisit option of the agreements.

6- In addition to this, to reduce the public burden, it would not be wrong to eliminate the free supply or subsidy given to various institutions because they have good income and can bear the burden of this cost. . This will reduce the load on the general public. But still there will be a need for reforms.

 Sources of Information :

1- Ministry of water and power,  Power sector division 

2- Ministry of finance division 

3- Nepra, IPP's consortium of mutual control and Management.