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Circular debt — I

Circular debt issue is getting more serious by the day. Worse has yet to come with the installation of new capacity while demand continues to stagnate. There are projections that it may double the existing level in medium term. It is hoped that economic growth rate grows up so as to increase the electricity demand and capacity utilization. Indeed, the best option is to somehow reduce the capacity charge which has been increasing due to slow demand and higher capacity cost. Increase in tariffs would have political consequences among rising inflation. Even economy and exports may be hurt due to increase in power tariffs.

Recently, there has been good news that the PM inaugurated a huge nuclear power plant, K-2, a symbol of high technology. However, many people would have become nervous on the addition of yet another power plant in the midst of a stagnant power demand. The nuclear power plant would be displacing other efficient plants like RLNG combined cycle power plants which had been installed with a lot of hope and enthusiasm. A bad news that came earlier is that financial closure had been signed off between Public Private Investment Board (PPIB) and the Government of Punjab for a 1263MW RLNG-based combined cycle plant (Trimmu). This happens to be a fourth plant in the series, while three other similar plants have been installed already. The vested interest found this to be an opportune time to quietly get it approved while there is new leadership in the ministry of energy both at minister’s and SAPM’s levels which may take time to fully understand the situation.

Undoubtedly, these are highly efficient plants. The question, however, is whether we needed this plant and whether this plant would be able to operate due to the lack of demand. As is generally acknowledged that our circular debt problem is largely due to a large number of plants having been installed; much more than required. The economic slowdown has further aggravated the problem.

In the last few years, many base load power plants consisting of four coal-fired plants have been commissioned that are working fine and at full load. A few more coal power plants are under construction and will be commissioned shortly. A nuclear power plant has been commissioned and another one will be shortly commissioned. Another 12,000MW project is at various stages of planning and implementation.

Admittedly, there are various legal commitments and one may not be able to wriggle out of the committed projects. However, with some hard work and negotiations, project implementation of additional capacities may be delayed. After all, the present government has been able to extract some concessions from the existing Independent Power Producers (IPPs). And certainly, the government contracts can be postponed for a period when the demand builds up.

However, exactly the opposite has been done. The Punjab government has made it a fate accompli by undertaking construction of Trimmu under its own equity even before the completion of the financial closure. There is a questionable illegality in this.

The three other power plants – Bhikki, Balloki, and Haveli Bahadurshah – each of 1000MW have never been run at full capacity and remain under-utilized. There have been various problems confronting these power plants. These plants are supposed to run on RLNG. Qatar RLNG has been expensive and there are take or pay obligations. Therefore, these were supposed to have a guaranteed minimum gas take-off at 66%. Power Division later managed to get this condition waived off, realizing that these power plants may not be able to achieve a capacity utilization of 66%. In that case, why this fourth plant of even larger capacity? There are gas supply issues as well. Sui Northern Gas Pipelines Limited (SNGPL) has been cajoled to surrender its 150mmcfd of RLNG to the KE for its LNG power plant. Amusingly, there is power shortage in Karachi, while the country is suffering from excess capacity?

The problem is that there are various sources of power influencing the approval of power projects. Pakistan Atomic Energy Commission (PAEC) has strategic division which manages to quietly get its projects approved under the questionable garb of strategic and security reasons. No data is disclosed and approval is disguised. Private parties have their own interests who manage to garner influence for fast-tracking their incomes and profits. Provinces are free-riders as they do not have to share in the circular debt. Provinces, including KPK and Sindh, under various motivations and slogans, also manage to get their projects approved. KPK wants to fast-track hydro, Sindh wants to fast-track Renewables and Thar coal. Punjab has a penchant for gas while it has no gas of its own and wants to impose Weighted Average Cost of Gas (WACOG) on other provinces to reduce its load. And there is a free lunch going on under the aegis of Central Power Purchasing Agency-Guarantee (CPPA-G) with its large aggregation with equally large losses and circular debt. Ironically, nobody accepts responsibility and nobody is held responsible, as the system is so complex and distributed.

Why such insensitivity when problems are clear and economy is suffering under circular debt. As the classical joke goes on; some people are removing water from an over-filled bucket, while others are filling it at the same time. There is a need for an embargo on capacity addition for the next five years; only PM should have the authority in this respect. A powerful board should be constituted to resist unwarranted capacity additions.

Another issue is that the ‘bible’ of PPIB/Nepra and ECC is the Integrated Generation Capacity Expansion Plan (IGCEP) which is prepared for twenty years under certain assumptions of economic growth. IGCEP, once approved, is implemented without any consideration of changes in economic conditions. It should be a rolling plan to be revised every year and adjusted for new economic circumstances. This offers some technical justification for unbridled capacity expansion. However, it is clear that additional capacity is not required and the existing capacity is underutilized. If IGCEP is implemented in its present form, circular debt would be doubled and would not be reduced. It is recommended that a high-powered committee be formed to address this issue to delay the implementation of approved and semi-approved projects.

It may be advisable to consider immediately stopping further construction of Trimmu which in any case would not be utilized. A stranded investment of 25 percent is much worse off than the stranding of 100 percent investment. There are always some arguments on the other side such as improvement in power quality and quantity in the Jhang area. But the question is: Can we afford additional liability of capacity charge of Rs 50 billion per year of an unutilized project?

Admittedly, the fundamental problem is the large difference between the peak winter and peak summer demands. Peak summer demand exceeds 25,000MW and peak winter demand is of around 10,000MW. This is a highly complicated issue which we have dealt with earlier in this space. Suffice is to say here that both tariff and non-tariff steps are required to address this. Electricity demand has to be increased in winter and reduced in summer. One solution is through tariffs – cheap in winter and high in summer. Other, rather wild solution is through banning geysers and gas heaters and promoting electrical space heating and solar water heating. And even more wildly, gas connections to posh areas may be discontinued altogether and be supplied with LPG only. Industries’ winter operations may be incentivized through lower electrical tariff. Cheaper Wind and Hydro power is available in summer. Demand management will have to be a permanent feature in power planning and management for reducing summer peak. Thus tariff optimization may not be an easy job calculated manually. Linear programming and other operations research tools would be required. USAID assistance may be handy in this respect.

Concluding, controlling circular debt is a very difficult job as the die has already been cast by excessive capacity commitment and high tariff agreements. Applying some breaks on the remaining ones is required.

Syed Akhtar Ali, "Circular debt — I," Business recorder. 2021-05-27.
Keywords: Economics , Kamyab Jawan Programme , State Bank , Monetary policy , Monetary fund , Economic recovery , IMF program , Economic diplomacy , Macroeconomic policy , Interest rate , Reza Baqir , Pakistan , FT , IMF

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