Nepra report

May 18, 2020

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THE State of the Industry Report for 2019 released by Nepra, the power regulator, has brought the focus back on the real problems dragging down the power sector. The recently leaked government-mandated report on IPPs had shifted the direction of the debate on issues plaguing the power sector to the validity of power purchase agreements executed with private producers, as well as ‘excess’ payments made to them at the expense of hapless consumers and the accumulation of a massive circular debt. Indeed, it can be argued that the agreements executed with private thermal power producers since 1994 could have been less generous to the investors, and more favourable to government and consumers had those been negotiated properly. Nevertheless, it is misleading to blame IPPs for the chaos in the power sector. The capacity payments and other costs of IPPs may have contributed to making electricity more expensive for consumers and to a huge circular debt, but governance and other issues raised by the regulator are the real cause of distress in the power sector.

The regulator has called for meaningful governance reforms in the power sector to make it efficient and reduce generation, transmission and distribution costs. It has also advised the government to deregulate and decentralise decision-making powers for improvements in the performance of public-sector distribution firms and follow it up with their privatisation. The report has rightly raised questions over the use of inefficient state-run power plants instead of employing efficient generation capacity and pointed out that the centralised governance model for distribution companies had failed to bring about noticeable improvements in performance over a period of more than 15 years. The companies continue to face distribution losses because of theft, corruption and lack of investment in a crumbling power transmission and distribution network. The previous government had added more than 12,000MW to the system to end rolling outages but failed to invest anything in the distribution network. Then, the distribution firms are unable to fully recover their bills, resulting in a significant rise in the unrecovered amount to Rs1.1tr, or more than half the current circular debt.

These and other inefficiencies of state-run power companies, together with the impact of poor governance, have added to the cost of electricity generation and distribution, which is eventually passed on to consumers through Nepra. The inefficiencies and losses that cannot be recovered through tariff increases are added to the circular debt. The power sector is in dire need of policy, governance and pricing reforms. This effort should focus on eliminating inefficiencies and losses in the power sector rather than a witch-hunt against private producers. But that should not stop IPPs from playing their part and making adjustments in their agreements to help the government reduce electricity prices for consumers who are in trouble because of the economic slowdown and loss of jobs in these times.

Published in Dawn, May 18th, 2020