Leaking Energy Sector + K-Electric = Security Challenge
Intro: In this Open Letter, authors draw PM Imran Khan’s attention to the country’s energy security and the energy sector that continues to leak and bleed the national exchequer. Inefficient old plants, excessive and unjustifiable tariffs, collusion among producers ( IPPs), the Ministry of Energy (MoE) and other allied entities, including the National Power Regulatory Authority (NEPRA) continue to bleed the country through spiraling circular debt(CD).
Herewith, we would – as concerned citizens – like to invite your attention to the state of energy security in Pakistan (especially Karachi). It is an issue that requires your urgent attention because the Ministry of Energy (MoE) and other allied entities, including the National Power Regulatory Authority (NEPRA) have failed in providing a long-term vision for the energy sector, including the crippling circular debt (CD).
While the Indian establishment declared energy security as a vital element of national security almost two decades ago, the deeply entrenched status quo forces – visionless and selfish bureaucracy and the predatory private sector investors in Pakistan – have colluded to inflict financial pain on the nation through theft, malpractices, lack of innovation and inefficiency.
First, let us lay bare some significant basic facts of the power sector.
Herewith, we would – as concerned citizens – like to invite your attention to the state of energy security in Pakistan (especially Karachi). It is an issue that requires your urgent attention because the Ministry of Energy (MoE) and other allied entities, including the National Power Regulatory Authority (NEPRA) have failed in providing a long-term vision for the energy sector, including the crippling circular debt (CD).
While the Indian establishment declared energy security as a vital element of national security almost two decades ago, the deeply entrenched status quo forces – visionless and selfish bureaucracy and the predatory private sector investors in Pakistan – have colluded to inflict financial pain on the nation through theft, malpractices, lack of innovation and inefficiency.
First, let us lay bare some significant basic facts of the power sector.
Pakistan’s current installed capacity stands at around 39,000 Megawatt
Its maximum high-voltage transmission capacity is barely 24,000 MW in summers
The circular debt (CD) rose from Rs 1.1 trillion in 2018 to Rs 2.28 trillion during the fiscal year 2020-21.???? Need to update this figure. It is projected to hit Rs 4 trillion by 2025. The main reason behind the CD and hike in tariffs is the expensive and excess but idle power capacity.
The new electricity generation capacity commissioned between 2015-2020 is 25% more expensive than comparable regional benchmarks.
This installed capacity is about 40% more than the immediate and medium term national needs. The new power plants were commissioned on the “take or pay” (TOP) basis that has devastated the power sector.
The total ‘obligatory’ annual Capacity Charges were Rs 185 billion (Rs 2.1 per unit) in 2013. These charges rose to Rs 860 billion in 2020, and is projected to be a whopping Rs1,455 billion (Rs 10.82 per unit) in 2023.
These capacity payments amount to 3 percent of Pakistan’s GDP alone. Consequently, the Circular Debt is projected to hit a worrisome 8 percent of GDP in a few years. This is a huge amount that can go into many other public welfare and productive areas.
While the PML-N government over-commissioned power generation capacity, it ignored necessary investment in the high voltage transmission (HVT) and distribution system network, meaning thereby that out of the available 39,000 Megawatt (MW), only about 24,000 MW can be moved through the national grid.
The national economy that was growing by 5.8 % in 2018 has gone into a nosedive, one of the major reasons is the CD, including capacity payments to IPPs. Resultantly,
The escalating cost of surplus power capacity has meant a continuous rise in consumer power tariffs. These have fueled inflation too. But more importantly, higher tariffs cut into industrial competitiveness, which in turn has often necessitated a growing resort to, and reliance on, subsidies on power tariffs to shield export-oriented industries.
Another big cause of the high cost of electricity is the deliberate operation of mostly inefficient power plants such as those operated by K-Electric (KE) in Karachi as well as those in the public sector.
Tragically, they cost us the maximum with minimal output because of the unholy nexus that exists between the operators, investors, the watchdog (Ministry of Power) and the regulators (NEPRA).
Two glaring examples of non- or underutilization of plants with minimal output are the 1,200 MW HUBCO, and the 1,600 MW KAPCO for Karachi. Particularly, the 1200 MW HUBCO almost remained idle for the last two years, yet at the same time both IPPs claimed charges at 60% of their installed capacity.
The Hub Coal Power plant falls within KE territory but in the absence of grid connectivity with the KE transmission system. NDTC data reveals that though the cheapest coal-fired power plant, it generated only 382 million units at the fuel cost of Rs 6.3 per unit, in July 2021 against the installed capacity of over 870 million units.
The table shows that KE drew electricity from the national grid at the rate of Rs 5.74 per unit (KWh), while the 1250 MW Bin Qasim-I power plant generated 203 million units (KWh) of electricity at the rate of Rs 21 per unit using the furnace oil as fuel.
Non-use or underutilizing of the efficient power plants not only deprives the motherland of available cheaper electricity units but also increases the burden on the national economy in the form of capacity payments for unutilized capacity.
Respected Prime Minister,
Karachi also needs your urgent focus if you want it to drive industrialization and exports. The city of 20+ million people is deprived of cheap and consistent electricity. The large parts of it are regularly plunged into darkness.
K-Electric is responsible for providing electricity to the city. KE was privatized in 2005. It has an installed capacity of 1875 MW against a demand of nearly 5,000 MW in Karachi. The current management added only 1,000 MW since 2009 despite repeated commitments to enhance generation capacity for meeting the industrial and commercial demand in the port city.
It is unprecedented that in Pakistan, NTDC (now Central Power Purchasing Agency or CPPA) and KE maintain two separate generation baskets in their respective areas and the Economic Merit Order (EMO) for the operation of power plants is being determined separately.
These two EMOs result in the operation of inefficient power plants despite the availability of efficient generation capacity in the country. The cost-effectiveness in power generation can be achieved through one EMO in the country.
In comparison to most of the older IPPs, freshly built Chinese plants are much more efficient and cheaper. Why fund corruption, inefficiency and wind-fall profit making while better options are available for power generation?
Why allow K-Electric to fleece the public through profit-maximizing business practices and countless mishaps leading to prolonged blackouts and frequent load shedding?
Respected Prime Minister,
You have repeatedly demonstrated your commitment to climate change issues. Your Billion Tree Tsunami and its sequel the Ten Billion Tree Tsunami have made headlines across the world . But, unfortunately, increasing efficiency of thermal plants is missing in your priorities. The power sector in Pakistan is one of major contributors to GHG emissions in the country. The main reason of high carbon emission is low efficiency of thermal power plants.
Respected Prime Minister, KE never considered improving the efficiency of Bin Qasim-I power plants. This is the most significant point of this letter: KE is deliberately running Bin Qasim-I on furnace oil for fetching enormous annual illegal and unjustified Tariff Differential Subsidy (TDS) which has been paid to KE in connivance with NEPRA for the last decade.
During this fiscal year 2020-21, the state again allocated 85 billion to KE as the TDS (Federal Budget 2020-21 Brief, page 16, table 12-subsidies). KE since privatization has fetched more than Rs 500 billion illegal subsidies by operating inefficient power plants with the connivance of NEPRA and officials of the MoE.
In India, almost all oil and gas-fired power plants have been modernized and converted into fuel-efficient plants to the multifarious benefits. The initiative ultimately helped to reduce the tariff for all types of consumers including Industrial consumers.
What needs to be done?
Firstly, investigate why three main actors: i.e., KE, MoE, and NEPRA, sabotaged the national economy by allowing the operation of inefficient power plants. The CD Commission set up to address this thorny issue, did not investigate or address the fuel component of the tariff. Resultantly, the menace of CD and capacity payment still strains the national economy with increasing potency.
Secondly, an integrated strategy is required to deal with the leaking sector and its multifarious problems. For this we hereby submit the following steps:
We strongly recommend that 1250 MW Bin Qasim-I along with two IPPs GUL AHMED and TAPAL must be retired immediately. The fuel (gas or oil) for these power plants may be allocated to other efficient power plants connected to the national power grid having higher efficiency to reduce the cost of electricity.
we request you to direct the MoE to dedicate the electricity generation of 1320 MW Port Qasim Coal Plant, 1320 Hub Coal Power Plant, 1200 MW HUBCO and 11OO MW KANUPP-2 (Karachi Nuclear Power Plant) to Karachi along with upcoming 660 MW Lucky coal electric power and 1100 MW KANUPP-3.
All the EPC costs of 1200 MW HUBCO power plants have been paid by the public through tariff, so now the GOP ought to take control of this power plant.
There is a need to set an independent technical commission to hold an inquiry against the officials of NEPRA and MoE involved in this most sophisticated crime of awarding TDS to KE since its privatization, which has placed the country at the verge of financial collapse.
We will request you to kindly direct the MoE to supply surplus electricity from the national grid to KE by constructing new 500 KV KKI and 220 KV interconnections. This action will help to meet the electricity demands of KE, as well as help to avert huge capacity payments to idle power plants connected to the national grid. This task can be completed in a maximum of six months.
We strongly recommend setting up an Energy Security Unit at the Prime Minister’s Secretariat to conduct a Heat-Rate Audit of all thermal power plants as a top priority. It is a hard reality that Pakistan’s power sector is one of the major contributors to GHG emissions due to the low efficiency of fossil fuel-based thermal power plants. This request is in the interest of Pakistan and the global community at large.
We are offering the most practical technical solutions to address the challenges faced by the motherland in the energy sector. Our recommended solutions can be rechecked or reevaluated by WB, UN, IEA, or any other multilateral or international institution.
The Prime Minister of Pakistan must embrace this critical transition in the power sector to reduce the cost of electricity generation, facilitate the industrial boom and provide relief to people of Pakistan. Your intervention can help start a new era of economic prosperity for Pakistan.
