Amir Khan

In a worrying sign, Pakistan's energy sector finds itself trapped in a perilous cycle of debt, compounded by the inefficiencies of distribution companies (Discos). As of 2023, the circular debt has reached a historic high, standing at Rs2.5 trillion, equivalent to 3 percent of the GDP, posing a severe threat to the nation's progress. Numerous factors contribute to the sector's vulnerability, including transmission losses, power theft, and an aging infrastructure that inflates the cost of electricity delivery. The failure of tariffs to cover these costs has led to a perilous accumulation of debt, making it imperative to address the operational bottlenecks through modernization and technology adoption for the sector's stabilization, said Faraz Khan, energy expert at Islamabad-based Pakistan German-Renewable Energy Forum (PGREF). In an interview with WealthPK, he said one of the major contributors to the circular debt crisis was delayed or incomplete payments by the government entities, creating a domino effect of non-payments throughout the supply chain. He suggested that implementing streamlined payment systems and imposing penalties for payment defaults could alleviate this burden significantly. Bureaucratic delays and political considerations in tariff adjustments have hindered the prevention of circular debt escalation.

He emphasized the necessity of transparent and efficient regulatory mechanisms to establish a fair and sustainable energy pricing structure. Pakistan's heavy reliance on imported fuel exposes the nation to global oil and gas price fluctuations. To mitigate this vulnerability, he called for a diversified energy mix, incorporating renewable sources, to buffer against the volatility of fossil fuel prices. The alarming situation is further fuelled by the Circular Debt Management Plan (CDMP) overruns of Rs387 billion relative to the early FY23 projections. The power producers, facing financial instability, struggle to procure fuel and maintain operations, risking reduced energy production and increased power shortages. The circular debt crisis has deterred potential investors, resulting in a lack of crucial infrastructure upgrades and modern technologies in the energy sector. The financial constraints on the power producers not only increase the risk of power shortages and blackouts but also disrupt daily life and strain the economy. Industries, grappling with inconsistent power supply, witness reduced production, contributing to an economic slowdown.

The funds redirected to tackle circular debt detract from the critical infrastructure and social development projects, exacerbating the situation. “Frequent power outages and declining service quality erode consumer trust, leading to increased payment defaults. The regulatory bodies are urged to ensure timely tariff adjustments that reflect the true cost of power generation and distribution,” he highlighted. He suggested that modernizing infrastructure, leveraging technology, and implementing measures against power theft could significantly reduce the operational costs. Digital payment solutions and timely payments from government entities are crucial to alleviate a substantial chunk of the debt. Investing in renewable energy emerges as a strategic solution to reduce dependency on volatile global fuel markets. Public awareness campaigns highlighting the repercussions of power theft and importance of timely bill payments are recommended to mitigate the issue.

Credit: INP-WealthPk