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Growing capacity payments have been a key hurdle in reducing energy prices and have been the most pressing issue in the power sector along with the build-up of circular debt. Recently, the debate took up a notch as the independent power producers came under fire, and the inquiry report made recommendations to reduce the capacity payments.

While IPPs are generally the centre of attention when such recommendations are made, a recent report by the Institute for Energy Economics and Financial Analysis (IEEFA) has highlighted how Thar coal can lock Pakistan into unsustainable capacity payments. Compared to 3-4 years ago, Pakistan today has excess capacity as the previous government was able to increase the generation capacity of the country with mostly hydel and coal power projects – with many projects under CPEC. Not often highlighted is the fact that all kinds new power plants coming online onto the NTDC system mean increasing capacity payments not only due to the terms of the contracts but also due to the falling power demand in the country.

Electricity consumption was witnessing a slowdown before COVID-19 as the economic activity was already sluggish. COVID-19 has sped up the languishing of power demand, which is being foreseen as increased capacity payments going forward. Capacity payments have increased from around Rs280 billion in FY16, to around Rs900 billion in FY20 and are likely to touch staggering Rs1.5 trillion by FY23-24. The IEEFA report delineates the risk of exorbitant financial burden which will come from over reliance on coal power projects.

The issue raised by IEEFA is valid as these bigger plants such as those under CPEC or non-CPEC coal projects by the Chinese are much bigger sources of capacity payments in the future particularly when the power consumption is likely to continue to stay subdued and increase idle capacity. Two more of Thar coal power projects have reached financial close so far in 2020 – 330MW Thar Energy and 1320MW Thar Coal Block 1 by Shanghai Electric.

One way to mend the capacity charge problem would be to increase the consumption of power, which seems unlikely in the current COVID-19 protracted scenario. Does this mean, Pakistan should look into shelving some projects? Besides the long term coal power projects, there are hydel projects in the pipeline as well. And then there are existing government power plants that are inefficient that have long been a strain on the finances. The report highlights Bangladesh’s rising idle capacity issues and Egypt’s shelving of 6.6GW China-backed coal-fired power plant due to concerns about overcapacity.

IEEFA recommends switching to renewable energy whereby smaller, modular renewable energy additions, grid and T&D improvements can help reduce the risk of overcapacity whilst attracting diverse sources of power finance. The resolve to get into renewables has been shown by the government; the draft renewable policy also recognizes the need for renewables. While shifting to renewables is one part of the solution, other solutions to address capacity payment issues should include not approving any new power plants to curtail the capacity burden; shelving inefficient and retiring plants, and most importantly renegotiating debt and repayments with the likes of Chinese counterparts and the IPPs to spread capacity charge over sustainable timeline.