Power sector under extreme financial pressure: Nepra
ISLAMABAD: National Electric Power Regulatory Authority (Nepra) has accused the Power Division of controlling Distribution Companies (Discos), which use it as a shield, which leads to competition and opening of the sector.
The regulator, in its State of Industry Report 2019, released Friday, has said that the power sector is under extreme financial pressure due to high cost of electricity supply and poor performance of distribution sector. Coupled to the higher costs are shrinking energy sales, which has resulted in higher cost for the end-consumers; further damping energy usage.
“Distribution losses and recovery ratio have stayed where they were about five years back. For any recovery of the sector, Discos have to be made independent, while total or partial privatization of Discos must be undertaken immediately,” the report added.
The existing setup, with Pepco assuming central control, is not capable of delivering the necessary improvement in the system and controlling accumulation of circular debt. For arresting circular debt, the accounting measures only would not be enough and structural changes are required to be made. In this respect besides allowing due independence as foreseen under the 1992 power sector reform plan to Gencos and Discos , total privatization or public-private model may be explored by the Federal Government.
Nepra, is of the view that the vicious circle has to be broken to expect any upturn of the sector. Consequently, the Federal Government has to grapple with diverging objectives of viability of the entities and affordability of consumers to pay higher tariffs.
However, Nepra has backed out from its earlier figures of circular debt of Rs 1.9 trillion, revising it down to Rs 1.6 trillion but adding that its continuing accumulation calls for immediate corrective measures.
Nepra, which was hand in glove in destruction of power sector from giving higher tariff to ignoring bad performance of Discos, had in its report maintained that there are many factors which aggravated over years of bad governance, flawed planning and absence of balanced policies. Therefore, the new government has to face tremendous challenges it inherited from the past.
Although the electricity sector of Pakistan presents complex settings to solve, lessons can be learned from the efforts made earlier. In this respect, measures such as injection of cash in the sector would only provide temporary support as long as the real issues are not addressed. Similarly Discos’ practice of conducting load shedding on so called “high loss” distribution circuits may show short term gains, however essentially they will negatively impact overall sales growth. During last year, however the Ministry of Energy (Power Division) had embarked upon specifically controlling losses on the high loss making feeders and improving recovery ratios in Discos, the two fundamental factors hurting the most. Nepra fully supports the government in its efforts as reduction in number of “high loss” feeders will also result in sales growth so critical for overall reduction in consumer-end tariff. At the same time, efforts on war footing are to be initiated in all of the Discos so that high losses are brought to acceptable levels.
Nepra says that another major contributor to the high cost of electricity generation is the operation of RLNG based power plants having long-term supply contracts. These plants due to nature of their contracts are required to operate in preference over other cheaper power plants. As a result, system operator is required to compromise overall economic merit order operation of power generation plants most of the times. Due to technological advancements and steep decline in costs over the past few years, renewable energy is now challenging major conventional technologies as a choice for grid connected power generation.
There are demonstrated innovative solutions to overcome intermittency and forecasting issues once considered as major bottlenecks to induction of renewable(s). Hybridization of renewable energy power plants is providing answers to many of the concerns for new renewable energy projects. For instance wind and solar or combination of hydro and solar have proved to overcome the intermittency issues while improving the overall capacity factors and efficient utilization of transmission capacity. It is however, the consumers, who have shown tremendous interest in going for Nepra net metering regime mainly using solar panels. Discos on the other hand have continued to resist net metering regime as such. Although Discos have not been able to demonstrate through any analysis, they have claimed that the net metering regime is going to hurt them financially. Similar response by Discos is noted on “wheeling” regime introduced by Nepra in 2016. Nepra is presently carrying out consultations with all stakeholders to address their relevant concerns.
Although preparation of short and long-term expansion plans by National Transmission and Despatch Company Limited (NTDC) is one of the main requirements of the Grid Code, this critically important function was completely ignored for the last many years. Presently on Nepra’s directions, a long-term Indicative Generation Capacity Expansion Plan (IGCEP) is being developed by NTDC. Nepra has held a number of consultative sessions to ensure that all the “inputs” to the expansion plan like “demand forecast” are thoroughly analysed by the stakeholders including private sector experts. Nepra expects to conduct more such consultative sessions before final approval of the Plan. Recently approved Renewable Energy Policy by Council of Common Interests (CCI) would also redefine the directions of long-term generation capacity expansion plans.
“The real dilemma of the sector is that due to continued centralized control at every level, the Discos tend to seek shields against any measure, which leads to competition and opening of the sector. It is to be understood by the relevant agencies managing and in control of Discos that new concepts of electricity supply and delivery are being introduced at a fast pace,” the report maintained.
The Nepra Amendment Act, 2018 has also entirely changed the concept of Discos’ exclusivity to distribute electricity to consumers in their respective service territories. Therefore, continuity of those inefficiencies, which were accumulated earlier by Discos, cannot be allowed as such, with their new roles under the Amendment Act, 2018. Nepra in its earlier reports has kept on stressing that the prevailing governance model has totally failed to deliver and it would not be out of place to mention here that the present problems have emanated from centralized control.
Persisting with this model would only reinforce the failure. Therefore, for any recovery of the sector, Discos have to be made independent, while total or partial privatization of DISCOs must be undertaken forthwith. NEPRA also supports the Federal Government efforts for the possible privatization of two RLNG based combined cycle power plants at Balloki (District Kasur) and Haveli Bahadur Shah (District Jhang) having combined generation capacity of 2,453 MW. The proceeds from privatization would provide critical financial support to the country. NEPRA had already determined tariffs of these plants. In order to fetch maximum sale price out of these the Federal Government would like to make them attractive for the prospective bidders and tariff allowed by NEPRA to these power plants is one of such factors closely examined by the bidders. Nevertheless, NEPRA is mandated under the Act, to strike a balance to safeguard interests of investors and electricity consumers alike. In order to make timely availability of transmission facilities and for provision of reliable electricity supply, NEPRA has granted licence to the first Provincial Grid Company as foreseen under the Amendment Act. Sindh Transmission and Dispatch Company Limited obtained a licence and is now authorized to engage in transmission of electric power within the territorial limits of the Province of Sindh. Nepra expects that such licenses would promote competition in the transmission sector also, which is generally considered as a monopoly function.
The report has acknowledged that taking cognizance, the policy makers at that time pursued a single point agenda to eliminate load shedding and more than 12,000 MW of power generation plants have already been added over a period of three years. Installed power generation capacity of Pakistan as of June 30, 2019 stands at 39,145 MW, of which 36,061 MW is connected with NTDC system whereas 3,084 MW is connected with K-Electric Limited (KE) system.
It further says that domestic gas, which is one of the scarce resources of the country, is being provided to the captive power plants who use it for running smaller size machines with very low efficiencies. If such gas is diverted to efficient machines, the cost of supply to the grid may be brought down. Similarly, long-term contracts for RLNG import have added constraints for the system operator to operate it optimally.
At the same time, the transmission and distribution sectors have been ignored completely. As also pointed out by Nepra in its earlier industry reports the centralized governance model for Discos has failed to bring any noticeable improvements over a period of more than 15 years now. The distribution losses and recovery ratio have stayed where they were about five years back. The skill set and capacity of Discos to handle problems and their ability to meet the challenges of regulatory regime under the Amendment Act, 2018 is non-existent.
Nepra has recommended that in order to reduce the cost of expensive energy mix, the Federal Government must take an early decision on the fate of inefficient Gencos. The Regulator considers that inefficient power plants are needed to be retired on top priority.
Sales growth policies are to be vigorously pursued for bringing more consumers to the Discos’ network and for retaining the existing consumers, there is a need to ensure affordable and reliable supply of electricity. Load-shedding policies must be targeted to the areas with least recovery for short term. Separation of feeders may be considered to isolate paying and non-paying areas. Regressive policies to impose load shedding on larger areas would result in higher tariffs for the rest of the paying consumers.
NTDC must continue its work on improving the quality of its network so that constraints are removed expeditiously. Similarly, the overloading of its transformers should be addressed so that no further hotspots are introduced. Its planning and monitoring functions are expected to be swift to timely notify about such conditions.—MUSHTAQ GHUMMAN