Electricity Defaulters Add Rs 900B to Circular Debt In Power Sector

Salman Khan:
The electricity defaulters have added Rs 900 billion to circular debt in power sector during the financial year 2023-24.

The poor recovery of electricity bills by power distribution companies (Discos) has also added Rs Rs. 276 billion to the circular debt during the period under review.Pakistan GDP grew 0.92% in 1QFY25; Full year FY25 GDP growth estimated around 3%

In state of industry report 2024, the power regulator National Electric Power Regulatory Authority (Nepra) said that the Distribution Companies (DISCOs) in Pakistan face significant governance challenges that hinder effective management and prevent them from paying for power purchased through the Central Power Purchasing Agency (Guarantee) Limited (CPPA-G), exacerbating power sector circular debt. Inefficiencies, lack of accountability, and mismanagement make it difficult for DISCOs to recover costs from consumers, leading to unpaid dues that increase the circular debt.

The regulator says that situation calls for an organizational overhaul with a focus on accountability. Strategies should include outsourcing recovery efforts and addressing low-recovery areas through targeted actions against defaulters, rather than resorting to feeder shutdowns, which lead to greater revenue loss for DISCOs.

This situation undermines the financial viability of power producers, deters investment, and strains energy infrastructure. Circular debt, escalating to Rs. 2,393.370 billion as of June 30, 2024, remains a formidable challenge for both the power sector and the country’s economy as a whole. The growing circular debt, compounded by defaulters owing Rs. 900.82 billion, has hampered the operational efficacy of DISCOs.

Report further revealed that high Transmission and Distribution (T&D) losses and less than 100% recovery of billed amounts contribute to the accumulation of circular debt. The T&D losses, recorded at 18.31% for FY 2023-24 compared to the allowed 11.77%, have added Rs. 276 billion to the circular debt during the year. Higher T&D losses reflect inefficiencies and outdated infrastructure, requiring a comprehensive review and urgent improvement of T&D systems.

Excess losses need to be curbed through targeted improvements, prudent investment practices, and better management to prevent the escalation of circular debt and stabilize the sector’s financial health. The low recovery rate of 92.44% has added Rs. 314.51 billion to the circular debt during FY 2023-24. This low recovery rate reflects the underperformance of DISCOs, largely due to poor governance.

The huge receivables of all DISCOs, including KE, which surged to Rs. 2,320.88 billion in FY 2023-24, necessitate investigations into possible billing manipulations and accurate assessments of non-receivables. Committees with representatives from DISCOs as well as independent professionals may be established to validate the correctness of receivables.

The practice of cross-subsidization, where more efficient DISCOs bear the financial burden of less efficient counterparts, must also be addressed as a priority. This policy decision, while aiming to ensure that electricity remains uniform for all consumers, inadvertently creates a system where inefficiency is rewarded, and operational shortcomings are obscured. Timely subsidy payments from the Federal or Provincial Governments are necessary to curb the further escalation of circular debt.

In short, a robust governance structure, technological innovation, and financial reforms are necessary in the distribution segment to ensure sustainable growth and energy security. To stabilize the power sector and break this cycle, it is essential to implement improved management practices, accountability measures, and strategic reforms.

The rise of off-grid solar installations, particularly in rural areas, highlights a growing shift towards renewable energy. In FY 2023-24, a large number of solar panels, amounting to thousands of megawatts, were imported, signaling increased reliance on solar solutions. This trend requires careful planning by policymakers to align with future energy demands and update the overall energy framework accordingly.

One of the biggest challenges facing Pakistan’s electric power sector is the underutilization of its generation capacity. This low utilization leads to high electricity costs in the country.

By the end of FY 2023-24, Pakistan’s installed electric power generation capacity reached 45,888 MW, including KE, while the average annual utilization during the same period was only 33.88%. As a result, electricity consumers ended up paying for 66.12% of unutilized capacity, which includes the cost of intermittency in the case of renewable energy (RE) power plants.

The generation cost, which accounts for around 83% of the overall consumer-end tariff, remains the largest cost component. Optimal utilization of available excess generation capacity is key to reducing electricity tariffs.

However, power regulator said that despite an installed capacity of 45,888 MW, multifaceted issues, including operational constraints in the transmission sector and governance problems in the distribution sector, have hindered the optimal use of generation capacity.

The underutilization of power plants results in capacity payments for unutilized capacity, contributing to higher per-unit electricity costs for consumers. Poor service quality, high electricity tariffs, and reduced affordability have stimulated a rapid shift toward distributed generation, especially rooftop solar.
The negative impact of high electricity costs on the economy and the daily lives of the people calls for urgent reforms in the power sector to ensure a reliable power supply at affordable rates, supporting economic growth in the country.

The peak demand within a year significantly exceeds the average demand, showing a disparity between maximum and average load requirements. If the supply side—i.e., generation capacity—is planned to meet the maximum peak demand, which lasts only for a few hours annually, it adversely affects the economics of the power sector. This approach results in higher electricity costs for consumers due to the underutilization of capacity during low-demand periods.

At the close of FY 2023-24, the installed generation capacity in the CPPA-G system was 42,512 MW. During the same fiscal year, the CPPA-G system experienced a maximum demand of 30,150 MW and a minimum demand of 7,015 MW. In contrast, the CPPA-G system was able to serve a maximum load of only 25,516 MW, and that was only for a limited duration. The average annual load served by the CPPA-G system during FY 2023-24 was 18,463 MW.

The consumer-end tariff comprises the Energy Purchase Price (EPP), Capacity Purchase Price (CPP), the impact of T&D losses, Distribution and Supplier Margins, Transmission Charges, Market Operator Fees, and Prior Year Adjustments.

For FY 2023-24, the tariff breakdown reveals a substantial allocation towards capacity-related costs. The EPP accounted for approximately 39% of the total tariff, while the CPP constituted about 61%. This trend is expected to continue into the next fiscal year, with the CPP projected to rise to 62%. It is important to note that during FY 2023-24, the determined average per-unit EPP was Rs. 7.62/kWh, whereas the CPP stood at Rs. 17.01/kWh.