ONE of the main reasons often cited to rationalise high electricity charges is the high cost that has to be paid to independent power producers (IPPs) under the sovereign power purchase agreement signed with them by the authorities concerned.

As a matter of fact, the fault lies with the officials, who directly or indirectly are concerned with framing power policies, drafting of contract documents and their approvals, and finally signing these, after which adherence to these become binding on the parties concerned. Raising a hue and cry will not help now. If there are flaws adversely affecting the power purchaser, these should have been taken care of before signing the contracts.

One of the major objections raised by the purchaser is the high capacity charges that are to be paid to the IPPs under the agreement even if their power plants are shut and no power is drawn by the purchaser. The main IPP charges are made up of fuel cost in case of thermal plants and fixed charges based on the capacity of the plants that are required to be available on demand whenever the buyer so demands. Besides, profits of the IPPs are included.

So even if you are not using electricity, you still pay them on their capacity to generate and deliver. It is estimated that consumers have to cough up Rs1.3 trillion as capacity and fixed charges to the IPPs during the 2023-24 fiscal.

Capacity charges over the last five years have increased from one-third to two-thirds as further generation capacity has been added.

Also, net hydel profits are being paid to Khyber Pakhtunkhwa (KP) and Punjab, which also raises consumer bills.

According to the tariff structure, fixed charges add up to two-thirds, whereas the fuel charges are one-third of the total charges of a typical thermal IPP under the ‘take or pay’ contracts that have been adopted in Pakistan.

The main drawback of these contracts is that they were mostly awarded without following the process of calling competitive bids. Neither professional expertise was available with the purchaser nor were the services of any neutral consultant hired to deal with so many IPPs. Under the contracts, it is mandatory to buy a minimum fixed percentage of power from the IPPs.

Electricity tariffs cannot be lowered in the presence of capacity and fixed charges. No efforts have been made to neutralise or mitigate these charges. One way is to sell the electricity from such power plants at reduced rates to a group of selected consumers, doing away with all the add-ons of distribution and transmission system along with taxes and duties, surcharges, including net hydel profits of KP, Punjab, etc.

The idea is to cut down the payments to idle IPPs or those operating below the minimum guaranteed takeoff, and to give incentives to select categories of industrial, agricultural and other consumers whose greater outputs would be in the larger national interest.

For example, the export industry can become more competitive in the international market because of lower input cost due to cheaper electricity. Besides, there will be incentive for it to boost production.

The role of the National Electric Power Regulatory Authority (Nepra) in handling the tariff has been questionable. It indulges in simplistic exercises and public hearings only. Proper due diligence in determining tariffs is not exercised.

The coal power plant at Jamshoro is a classic example. It emerged as the cheapest power plant because the required expertise and handling was available. Another example is that of regassified liquefied natural gas (RLNG) power plants where competitive bids resulted in low prices.

The ‘take or pay’ contracts are feasible only if the country has professional expertise in their administration, and the contracts are awarded through competitive bidding to protect the commercial interests of the purchaser.

Riaz Bhutta
Islamabad

Published in Dawn, December 2nd, 2023