THE second half of fiscal year 2014 proved to be another difficult period for independent power producers, as the National Transmission and Despatch Company again failed to make timely payments.

The Rs480bn circular debt transaction was not followed by any major structural changes, allowing the circular debt to resurface again. Despite the approximately 30pc power tariff hike, distribution companies (discos) continue to default on their payments to power producers, as recoveries declined from 87pc to 75pc.

Moreover, transmission and distribution losses for discos averaged at 17.55pc, well above 12.82pc losses allowed by the National Electric Power Regulatory Authority (Nepra). Rapid increase in circular debt during FY14 was partly due to the expensive generation mix, as the contribution of furnace oil-based generation rose to 36pc in the first nine months of FY14 (9MFY14), against 33pc recorded during the same period last year.

As a result, receivables for Hubco, Kapco, Nishat Chunian Ltd (NCL) and Nishat Chunian Power Ltd (NCPL) rose to Rs164bn during 9MFY14, close to the levels witnessed before the Rs480bn liquidity injection in June 2013. Worsening liquidity threatens to choke the energy chain once again.

Cut in power subsidy warrants tariff hike: In-line with IMF conditions to cut the fiscal deficit, the government has reduced the power subsidy for FY15 to Rs185bn from Rs309bn paid during FY14. Given the current levels of generation, the government will need to raise power tariffs by about Rs2-3/unit to meet the targeted amount.

Meanwhile, in an attempt to attract local and foreign investment in coal-powered projects, Nepra recently revised the upfront tariff for coal-based power plants, offering a return on equity (ROE) of as high as 30pc. This high ROE has attracted many investors and about 12,000MW of coal-based power generation capacity is expected to be added to the grid in the coming years.

On the other hand, despite deteriorating liquidity, independent power producers are expected to maintain a high payout ratio in the quarter ended June 30. Hubco and Kapco remain the safest bet as they carry fuel supply guarantees by PSO and have the ability to delay fuel payments.

—Sharoz Hameed, Global Securities

Published in Dawn, Economic & Business, July 7th, 2014