The story of Pakistan’s power sector is a tale of bad policy choices made by successive governments. Inefficient, loss-making distribution companies have been at the centre of this story, which has accumulated a huge power sector debt of nearly Rs3 trillion over the last decade despite frequent tariff increases.
Last summer, the base tariff was raised by 40 per cent or Rs7 per unit, and now a surcharge of Rs3.82 is being imposed to control the debt. High aggregate transmission & distribution (T&D) and commercial losses of ex-Wapda distribution companies (Discos) remain the major contributors to the debt, which is now imposing punishing costs on the economy and hapless consumers.
It, therefore, is rightly believed that the power sector mess is one of the country’s foremost macroeconomic challenges. Different options have been looked into and pursued, but none succeeded. The attempts to privatise these large companies with monopolies over the distribution of electricity in their territorial jurisdictions failed, barring the exception of K Electric (KE) in 2005.
There’s sort of consensus that distribution companies can’t control their losses that are feeding into the circular debt without massive capital investments in the network across the chain, just like KE has cut its T&D losses to 15.5pc, below the National Electric Power Regulatory Authority (Nepra) benchmark of 15.95pc, and plans to reduce it further to 12.8pc by 2030.
Nepra is moving away from the current state-led, single-buyer model to a competitive multiplayer market by ending the monopoly of Discos in their territories
This cannot happen without exposing the Discos to competition, as has long been underscored by people like Mian Mohammad Mansha, one of the country’s largest businessmen. He has been calling for privatising power distribution companies or opening them to competition to fix the power sector and plug their financial haemorrhage.
He often refers to the privatisation of power distribution in New Delhi, a success story that has seen aggregate transmission and commercial losses fall from 55pc in 2002 to just 7pc in 2022 through better use of technology, investment in the distribution network, automation, accurate load forecasting, etc.
“Unless we move to a competitive electricity market, things will not change. Let there be competition to bring efficiency to the system just like we’ve already successfully done in our telecom and banking sectors,” Mian Mansha has repeatedly said.
Things seem to change now as Nepra, the power-sector regulator, moves from the current state-led, single-buyer model to a competitive multiplayer market by ending the monopoly or exclusive rights of the Discos on electricity distribution in their territorial jurisdictions.
“We are moving towards competition in the power sector now just like we have done in the telecom industry to improve the service quality, reduce inefficiencies and losses, and ultimately reduce prices,” Nepra chairman Tauseef H. Farooq told Dawn last week by telephone from Islamabad.
The move is being made under the Competitive Trade Bilateral Contract Model (CTBCM) framework that will allow competition to enter the market once the exclusivity of Discos ends. It will allow consumers to enter into direct contracts with power producers, potentially at lower costs than what is available from the national grid.
Initially, the facility will be available to large consumers using more than 1MW who will receive electricity from the existing transmission and distribution networks of the Discos. But, as Mr Farooqi says, it will eventually be taken down to the retail level. It will also pave the way for more private distribution companies. “The word ‘territory’ is gone now,” he says.
However, this is not going to be an easy journey. The Discos are not prepared for competition and are asking for the renewal of their licenses on the same terms to maintain their monopolies. At a hearing back in December, the Disco representatives called for leaving their exclusive right untouched in areas where they had built the power distribution infrastructure.
They said that new players could function in areas where Discos had no infrastructure of their own. Sources say they may even move the courts to block the implementation of a competitive electricity market to provide better consumer services. But Mr Farooqi says the Discos cannot delay this any more as the Nepra Act is clear, appreciating that KE is the only company that has filed for a non-exclusive license from July to June 2030.
“KE has realised that this is the way forward and cannot be avoided. Others will also fall in line unless they can get the law of the land changed by the parliament. These companies are currently operating under provisional licenses, and new licences will take away their exclusive rights, which has created a mess in the electricity market. Public interest prevails over the principle of exclusivity,” Mr Farooqi explains. “We want to sustain the power sector by implementing a competitive market framework and bringing new investors.”
KE CEO Monis Alvi says market liberalisation is essential for the sustainability of the power industry and allows consumers a choice to buy electricity at potentially cheaper rates.
Once the exclusive distribution rights are done away with, the Discos will be forced to invest in their infrastructure to cut losses and improve service delivery for sustaining competition. KE has proposed an investment plan of Rs484 billion in anticipation of competition and growth of its customer base from the existing 3.4 million to 5m in its multi-year tariff petition for 2023-30.
The plan focuses on growth, safety and reliability, and, according to Mr Alvi, it will maintain a balance between affordability, availability and sustainability of power supply. The electricity demand in KE’s territory is projected to jump from the present 3,400MW to 5,000MW.
The petition also seeks to review growth projections and investment plans after every two years to account for the changes required due to the growth of demand, technology and other factors to help it adjust the planned spending according to the changes in forecasts. The new investment plan seeks to grow the share of renewables — solar, wind and hydel — in its generation supply from the present 3pc and reduce power outages by another 30pc.
The emergence of a competitive market will offer choice and flexibility to the consumers, attract local and foreign investment in the power industry, improve distribution networks, bring new technology and improve efficiencies and service quality. The first step towards this goal is the elimination of the exclusivity of Discos.
As Mr Farooqi underlines, competition is the only way forward to protect consumer interests and save the economy, which is what the Discos must understand and thus brace themselves for competition.
“We could have allowed the Discos to retain their exclusive rights in their territorial jurisdictions if they were performing and protecting the interests of their consumers. But they have done a lot of damage to the country and this needs to be changed now,” concludes the Nepra chief.
Published in Dawn, The Business and Finance Weekly, March 6th, 2023