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The biggest crisis for Pakistan in the coming years is going to be that of circular debt which has the potential to exacerbate the already precarious state of our economy.
This thread will try to explain CD, its causes, remedial measures taken by govt and potential consequences
This thread will try to explain CD, its causes, remedial measures taken by govt and potential consequences
Circular debt is the shortfall of payments at the Central Power Purchasing Agency. How does that happen?
DISCOs incur losses due to which they are unable to pay for the cost of electricity. Consequently, CPPA is unable to pay back GENCOs and IPPs, who subsequently, default on
DISCOs incur losses due to which they are unable to pay for the cost of electricity. Consequently, CPPA is unable to pay back GENCOs and IPPs, who subsequently, default on
their payments to fuel suppliers. This is the electricity supply chain and its problems
Proceeding ahead, we look at the causes of these losses incurred by DISCOs and whether they can be rectified or not.
Proceeding ahead, we look at the causes of these losses incurred by DISCOs and whether they can be rectified or not.
1. Capacity Payments.
Approx half of the energy generation capacity
(~19,000 MW) of Pk is provided by IPPs. Now the problem is that for their investment, previous govts have signed contracts with these IPPs which stipulate that govt has to pay for electricity
Approx half of the energy generation capacity
(~19,000 MW) of Pk is provided by IPPs. Now the problem is that for their investment, previous govts have signed contracts with these IPPs which stipulate that govt has to pay for electricity
whether it is used or not. Govt has to pay the dollar indexed high returns on equity. These fixed charges are a major source for an increase in CD
Govt has renegotiated the contracts with 47 IPPs that were set up prior to 2015. This will accrue ~ 836 Billion over the next 20 yr
Govt has renegotiated the contracts with 47 IPPs that were set up prior to 2015. This will accrue ~ 836 Billion over the next 20 yr
But the elephant in the room is the CPEC energy deal.
The appended pic expounds on the enormity of the predicament. A renegotiation with these IPPs which generate approx 10,000 MW might yield 6000-7000 Billion over the next 30 years.
The appended pic expounds on the enormity of the predicament. A renegotiation with these IPPs which generate approx 10,000 MW might yield 6000-7000 Billion over the next 30 years.
2. Transmission Line Losses
These currently stand at ~ 18.32%. The impact of this is roughly 50 Billion. Though this loss isn't inconsequential, still its rectification will require huge capital investment leading to only marginal improvement in line losses.
Long-term plan!
These currently stand at ~ 18.32%. The impact of this is roughly 50 Billion. Though this loss isn't inconsequential, still its rectification will require huge capital investment leading to only marginal improvement in line losses.
Long-term plan!
3. Recovery Losses
Recovery has a causal relation with the development and writ of the state in a particular area. The attached tables and losses reported by DISCOs lend credence to this assertion. Recovery currently stands at ~88-90% which contributes ~150 Billion to CD.
Recovery has a causal relation with the development and writ of the state in a particular area. The attached tables and losses reported by DISCOs lend credence to this assertion. Recovery currently stands at ~88-90% which contributes ~150 Billion to CD.
There is no short-term solution to this. You just can't improve recovery in QESCO from 36 to 90% in a year or two.
This again will necessitate a long-term solution.
This again will necessitate a long-term solution.
4. Abysmal performance of the regulatory structure
DISCOs, GENCOs, and other SOEs are unfortunately grossly inefficient which further compounds the problem and perpetuates the status quo.
Competitive Trading Bilateral Contract Market (CTBCM) might be the only way forward
DISCOs, GENCOs, and other SOEs are unfortunately grossly inefficient which further compounds the problem and perpetuates the status quo.
Competitive Trading Bilateral Contract Market (CTBCM) might be the only way forward
5. Generation Cost
Since we import fuel, therefore generation cost sees an upward tick due to devalued exchanged rate in conjunction with poor efficiency of generation plants. This also adds to the cost.
Any short-term solution? Apparently, none
Since we import fuel, therefore generation cost sees an upward tick due to devalued exchanged rate in conjunction with poor efficiency of generation plants. This also adds to the cost.
Any short-term solution? Apparently, none
6. Lastly, political governments are reluctant to pass on the burden to consumers. As a result, the gap b/w cost of generation and amount recovered is either subsidized by govt from taxpayers money or it piles on in the form of CD.
Due to electoral imperatives, the last govt never rationalized tariffs and passed the buck to the incumbent govt. THIS WAS CRIMINAL!
Now, they have to increase the price of the unit and bear the brunt of public anger which is detrimental to political capital
Now, they have to increase the price of the unit and bear the brunt of public anger which is detrimental to political capital
Now, the consequences.
Well, IMF has asked Pakistan to hike up electricity rates by roughly 4.5 Rs/unit. We cannot even imagine the impact this will have upon inflation. Probably, Pak will ditch IMF by the end of this year but this CD is projected to touch 4.7 T by 2023
Well, IMF has asked Pakistan to hike up electricity rates by roughly 4.5 Rs/unit. We cannot even imagine the impact this will have upon inflation. Probably, Pak will ditch IMF by the end of this year but this CD is projected to touch 4.7 T by 2023
This might be the defining crisis for the 2nd half of Khan's govt. Tough days ahead!
