In FY2017, capacity payments in Pakistan were Rs384 billion, but with the introduction of new independent power producers (IPPs), this figure has now surged to Rs2,142 billion. Back in 2015, when the average electricity consumption was 13,000 megawatts, the total generation capacity was 20,000 MWs, leading to capacity payments of Rs200 billion. By 2024, while the average demand remained at 13,000 MWs, production capacity has grown to over 43,000 MWs, including 23,400 MWs from new IPPs. Consequently, capacity payments have increased tenfold to Rs2,142 billion.
The average capacity tariff for IPPs was Rs2.78 per unit during the 2015-16 tariff determination but has now escalated to Rs18.39 per unit for FY2025. This rise is due to the addition of power plants under the 2015 power policy and the massive devaluation of the Pakistani rupee, which has depreciated from Rs97 to Rs278 against the US dollar. Additionally, the London Interbank Offered Rate (LIBOR) has climbed from 0.45% to 5.5% per annum, and the Karachi Interbank Offered Rate (KIBOR) has also increased, further raising the debt servicing component of the capacity payments. Reduced electricity consumption, driven by the highest tariffs in the region, has also contributed to the escalation in capacity payments.
Out of the Rs2,142 billion in capacity payments, consumers currently pay Rs1,083 billion annually for debt servicing related to loans borrowed primarily for new power generation under the 2015 power policy. Additionally, Rs218 billion goes toward fixed operation and maintenance (O&M) charges, Rs596 billion as return on equity (RoE), and Rs254 billion for other related costs.
The capacity payment for the Sahiwal coal power plant alone exceeds that of all the IPPs established under the 2002 policy combined. Government plants, including nuclear, hydel, and RLNG facilities, account for five times the capacity payments of all older IPPs combined.
Capacity payments are fixed amounts paid to power producers under a take-or-pay arrangement, covering capital recovery (including project debt in the first 10 years) and operating expenses. These charges constitute 31% of the total consumer tariff. Given that the Central Power Purchasing Agency (CPPA) is the sole buyer in Pakistan, no plant can operate without capacity payments, considering the need for debt servicing and essential expenditures for safe and reliable operations.
Of the approximately Rs2,142 billion in capacity payments, around Rs25 billion (1.25%) is allocated to private request-for-offer (RFO)-based plants under the 2002 policy, while Rs70 billion (3.48%) is attributed to all IPPs established under the same policy. If the government seeks to reduce the power tariff, it must closely examine its own power plants—RLNG-based, nuclear, and hydropower projects—that generate 52% of the country’s electricity but consume Rs840 billion annually in capacity payments, including Rs235 billion as RoE.
IPPs established under the 1994 and 2002 policies currently consume Rs130 billion in capacity payments, including Rs31 billion as RoE. These IPPs have already capped their US dollar value at Rs148, which has reduced their capacity payments, and most have paid off the majority of their loans. Furthermore, many of these IPPs have agreed to reduce their USD-based internal rate of return (IRR) from 15% to PKR-based returns, effectively reducing their guaranteed US dollar returns to approximately 9%.
If the capacity payments of all IPPs under the 2002 policy were reduced to zero, the savings would only amount to Rs0.85 per unit based on FY25 reference pricing, and Rs0.54 per unit for the 1994 policy IPPs, totaling Rs1.39 per unit in pre-tax bill savings. However, government power plants and China-Pakistan Economic Corridor (CPEC) projects charge capacity payments at the current dollar value of Rs278, which indicates that the main issue lies with these government and CPEC power plants, not with the IPPs under the 1994 and 2002 policies.
Most of the IPPs established under the 1994 and 2002 policies are nearing retirement as their power purchase agreements (PPAs) will end in two to three years, with some already transitioning to a take-and-pay model, resulting in no capacity payments. However, the power plants under the RFO umbrella, fully funded by Chinese commercial bank loans, receive Rs650 billion annually in capacity payments, including Rs168 billion as RoE. Additionally, locally-owned CPEC projects based on Thar coal receive Rs230 billion in capacity payments and Rs76 billion as RoE, while private hydel, solar, and wind power plants receive Rs270 billion annually, including Rs80 billion as RoE.
This situation raises critical questions: Will the government consider amending the PPAs for government-owned plants to convert their dollar-based IRR into rupee-based IRR, with a capped US dollar value at Rs148, as was done in 2021 for the IPPs established under the 1994 and 2002 policies? And will the government reduce the capacity payments of its power plants from Rs840 billion to Rs400 billion, including RoE of Rs235 billion? Addressing these questions could provide significant relief of Rs4 per unit to inflation-stricken consumers. Furthermore, if the government manages to reduce electricity theft from Rs589 billion to Rs100 billion annually, consumers could see an additional relief of Rs4.89 per unit in tariff.
However, the situation remains challenging as circular debt has increased to Rs2.655 trillion in the first 11 months of FY24, with line losses swelling to Rs230 billion despite efforts to combat electricity theft. Moreover, the system continues to face recovery losses of Rs279 billion. The government is still unable to transmit cheaper electricity from the south to Punjab, leading to the generation of more expensive electricity and a further increase in the basket tariff for end consumers. These issues urgently need to be addressed by the Power Division.
The government also needs to prioritize reducing transmission, distribution, and recovery losses, which could lead to an additional relief of Rs1.25 per unit. Furthermore, diplomatic efforts should be expedited to renegotiate the profiling of Chinese loans obtained for CPEC projects from 10 to 20 years, potentially offering an additional relief of Rs4 per unit. Finally, the Power Division must ensure the immediate integration of cheaper electricity into the system to the load center of Punjab from Sindh, which could provide further relief of Rs1.90 per unit.
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