Amir Khan

Pakistan’s real economy is faltering primarily because of the troubled energy sector – a critical issue that has been overlooked for decades. Talking to WealthPK, former federal minister for industries and production Gohar Ejaz highlighted the detrimental effects of unaffordable energy costs on both the industrial sector and households. Ejaz noted that the rising energy expenses had rendered the industries less competitive and significantly strained the household finances. Although the problem has been discussed by many, the underlying cause — financial mismanagement — has not been sufficiently explained. The flawed Power Purchase Agreements (PPAs) for the Independent Power Projects (IPPs) have played a significant role in the current crisis. The National Transmission & Distribution Company Limited (NTDC), a government-owned entity, is the sole purchaser of power generated by the IPPs. This arrangement was manageable until substantial exchange rate fluctuations and the rising fuel prices disrupted the scheme, now threatening the national economy.

The problem is compounded by the policy of 100% uncapped indexation to the dollar, resulting in a 300% average tariff increase. In contrast, India’s model includes a cap on indexation, making their system more sustainable and less burdensome for consumers. The maximum total demand from the residential and industrial estates stands at nearly 31,000MW, whereas the transmission and distribution capacity is stalled at approximately 22,000MW. This demand is not met due to a mismatch with generation and inefficiencies in the transmission system. As per data, power generation declined by 1.2% YoY to 13,715GWh (19,048MW), compared to 13,876GWh (19,272 MW) in June 2022. However, on a month-on-month basis, generation increased by 11.7%. For the entire FY23, the generation sloped by 9.5% YoY to 129,590GWh (14,793MW), compared to 143,193GWh (16,346MW) in FY22. This means there is substantial excess capacity.

If the average generation based on data is taken at 17,000MW, then it means that for the year 2024, there will be an excess capacity of 20,000MW. Even if the same is discounted, there is no reason to state that at least 15,000MW is excess capacity in the NTDC system. Out of the total capacity, around 20,000MW is the capacity with the IPPs for which a capacity charge is being paid by the NTDC. Talking to WealthPK, Additional Secretary Industries and Production Muhammad Asad Aslam said the economy had suffered in three significant ways due to the foreign-funded plants. Firstly, the consumers are burdened by capacity payments, increasing the costs. Secondly, foreign exchange is being spent on servicing loans for unused assets, which has negatively impacted the industrial sector and export-oriented industries. This has stunted socioeconomic growth. To boost Industrial growth, Aslam suggested that the government must implement policies to improve energy affordability and enhance competitiveness in the international market.

Credit: INP-WealthPk