The cash-bleeding power sector has faced multiple challenges including inefficiencies in generation, transmission, and distribution systems from top to bottom.
The first and foremost problem faced by the power sector aggravated with the installation of Independent Power Producers (IPPs) since the inception of 1994 when the PPP-led government had found this solution to overcome power outages in the country.
With different power policies, the wrong projections of increased power demand resulted in rampant electricity generation with the help of IPPs. Secondly, the repayment of IPPs linked with the US dollar so depreciation against the dollar also pushed up pressures on capacity repayments which had now ballooned to beyond Rs2 trillion mark.
Now the government has come up with the policy of phasing out obsolete and old IPPs and in the first phase the government packed up five IPPs, having a combined capacity of 2,400 megawatts (MW), to close it down.
It would help the government save Rs411 billion and reduce tariffs by 70 paise per unit. Minister for Power Awais Khan Leghari announced the government’s plan to reduce the electricity tariff in the range of Rs 8 to 10 per unit.
To give impetus to demands for increased electricity, the government is working on a plan to reduce the power tariff for industrial consumers during the winter season. There is a challenge for the power sector to upsurge the demand for achieving two objectives including kickstarting sluggish economic activities and recovering some amount to reduce the burden of capacity repayments.
The rampant increase in rooftop solar installation has multiplied the woes of the power sector because if it further went up it would cause escalation into the burden of capacity repayments manifold because the customers might prefer to disconnect from the national grid and opt for moving towards net metering of the solar installation.
The IMF in its latest staff report has highlighted several challenges for the power sector. Structural energy sector problems continue to hinder Pakistan’s sustainable development. An unreliable energy supply and high and unpredictable costs negatively impact economic activity and development.
Structural inefficiencies (particularly in distribution companies (DISCOs)), guaranteed US$ returns to power producers, and a long-running reluctance to adjust tariffs in line with costs, have led to large losses, accumulation of arrears, and a network of cross-subsidization among different consumer groups.
In addition, inadequate maintenance, declining service, and under-collection lead to the need for ever-higher tariffs. On the gas side, longstanding underpricing against a rapid depletion of indigenous natural gas effectively led to subsidizing demand for greater imports of expensive RLNG.
The energy sector has become a major point of macro-fiscal risk as circular debt (CD) spiked over 2013–21 for power and 2020–23 for gas. The authorities began to significantly adjust tariffs in line with costs beginning in 2021 (electricity) and early 2023 (gas).
This, along with sizeable power subsidies (around 1 per cent of GDP in FY24), broadly stabilized nominal circular debt (CD) flow in 2023-24. However, large persistent power subsidies are not a viable ongoing tool to plug the sector’s gaps. Broad structural reforms must take place aimed at reducing costs and tackling theft, captive power, and inefficiencies in the sector (especially DISCOs.
Continued timely energy tariff adjustments consistent with cost recovery, in parallel with broader reforms to reduce costs, are needed to prevent further CD accumulation. For the power sector, this requires an annual rebasing notification in full by the Power Ministry at a rate consistent with cost recovery, which occurred on July 14, 2024, along with timely implementation of quarter tariff adjustments and monthly fuel cost adjustments.
This, along with the budgeted FY25 power subsidy of PRs 1,229 billion (1.0 percent of GDP), would minimize net CD flow over the fiscal year.
There is no quick fix for this power sector as the government will have to devise a strategy for moving towards resolving IPPs issue gradually, changing the energy mix, privatizing DISCOs for some companies and signing concession agreements, investing in transmission and distribution networks to reduce leakages and above all improving governance at all stages. Last but not least the regulator of the power sector—NEPRA (National Electric Power Regulatory Authority) will have to improve the regulatory regime for implementing reforms by bringing synchronization for the whole sector.
