Reducing power sector circular debt hinges on curbing T&D losses

February 22, 2024

Muneeb ur Rehman

Pakistan's energy sector circular debt is rising steeply, causing deep fiscal imbalances, and to effectively reduce it, the primary focus should be on reducing transmission and distribution (T&D) losses. Talking to WealthPK, Tauseef Farooqi, former chairman of the National Electric Power Regulatory Authority (Nepra), suggested a few policy options for curbing T&D losses. He said that the substantial transmission and distribution losses incurred by the distribution companies (Discos) contributed significantly to the escalating circular debt. "In the presence of huge T&D losses, the goal of bringing the circular debt down would remain a distant dream." He said that a shift towards a competitive electricity market was essential for meaningful change. "Introducing competition is crucial to instil efficiency in the system, similar to the successful models established in our telecommunications and banking sectors," Farooqi asserted. Keeping in view the challenge of circular debt in the power sector, he suggests that Nepra make a transition from the existing state-led, single-buyer model to a competitive multiplayer market that aims to eliminate the monopoly of Discos within their respective territories.

As the Ministry of Power reported, T&D losses in Pakistan's power sector increased to Rs520.3 billion in FY23, marking the highest-ever deficit within a single financial year. The Islamabad Electric Power Company recorded losses at a rate of 8.18%, resulting in a financial impact of Rs21.9 billion. Gujranwala Electric Power Company experienced losses at a rate of 9.07 %, amounting to Rs24.7 billion. Lahore Electric Power Supply Company reported losses at a rate of 11.52%, equivalent to Rs72.7 billion. At the start of FY23, the circular debt rose to Rs2.309 trillion, up from Rs2.252 trillion in FY22. In FY23, the recovery rate was 92.4%, leading to an additional Rs236 billion being accrued in the circular debt. Mubashir Ahmad, a member of the Board of Directors of K-Electric, said that the inefficiency of the distribution companies was the root cause of transmission and distribution losses. "At the heart of this narrative are inefficient, financially struggling distribution companies, contributing to the accumulation of a substantial power sector debt of almost Rs3 trillion over the past decade despite frequent tariff hikes," he pointed out.

However, he expressed optimism about the positive outcome of the reforms that the government was undertaking in the power sector. Ahmed agreed with Farooqi's suggestion of privatising the power sector entities. "The establishment of a competitive market following privatisation will provide consumers with options and flexibility, attract both local and foreign investments into the power industry, enhance distribution networks, introduce new technologies, and elevate efficiency and service quality."  Among the recent initiatives taken in the power sector, the noteworthy endeavours include the Competitive Trading Bilateral Contract Market (CTBCM), the Indicative Generation Capacity Expansion Plan (IGCEP) and the Transmission System Expansion Plan (TSEP). These initiatives are poised to reduce the power sector losses in the future.

INP: Credit: INP-WealthPk