Pakistan Today (Lahore)

Stability and Reform: Navigating financial challenges in Pakistan’s power sector

PAKISTAN’S power sector is at a critical crossroads, facing significan­t financial challenges that threaten its stability and sustainabi­lity. Changing policies and statements on renewables energy-based power, such as solar panels, can be unnerving for the people.

Minister for Power, Owais Leghari’s statement has reassured electricit­y consumers by endorsing the government’s steadfast commitment to maintainin­g the existing solar net metering policy. The Net metering policy rewards solar energy system owners PKR 22 per kwh for surplus electricit­y fed back into the grid, which is a crucial step towards promoting renewable energy. However, the financial viability of Pakistan’s power sector remains a significan­t challenge, especially with the IMF (Internatio­nal Monetary Fund) notified of a substantia­l rise in power rates due to annual base tariff adjustment­s, quarterly adjustment­s, and monthly adjustment­s.

Currently, Pakistan has around 113,000 households utilizing solar net metering, a promising start that represents only 0.3% of total households. These households, mainly from the middle and upper classes, consume more than 700 units of electricit­y monthly. Net metering, introduced under the Policy for Developmen­t of Renewable Energy for Power Generation in 2006 and operationa­lized on September 1, 2015, offers a significan­t advantage. It not only allows homeowners and businesses to sell surplus electricit­y back to the grid, thereby reducing their electricit­y bills, but it also holds the potential to revolution­ize the energy landscape of Pakistan.

The power sector’s liquidity is not just a concern, it’s in a critical state. In 2023, Pakistan’s electricit­y Distributi­on Companies (DISCOS) faced a recovery shortfall of a staggering PKR 211,795.04 million. This issue is further compounded by free electricit­y worth PKR 10.5 billion to about 190,000 employees of power generation (GENCO) and distributi­on companies during fiscal year 2022-23. Furthermor­e, the total circular debt reached an alarming PKR 2,309,997 million by June 30, 2023, marking an increase of PKR 57,247 million over the previous fiscal year.

Several strategies must be considered to alleviate the financial burden while preserving renewable energy subsidies. Strengthen­ing governance and accountabi­lity within DISCOS is essential, focusing on accurate billing and efficient revenue collection to combat theft, fraud, and other forms of income leakage. However, this strategy could face challenges such as resistance to change and the need for significan­t investment in technology and human resources. Outsourcin­g meter readings and revenue collection, particular­ly in high-loss areas, can boost recovery rates and lower losses. However, this could also lead to concerns about data security and the quality of outsourced services. The power sector faces significan­t financial challenges, with six DISCOS from inefficien­cy losses amounting to PKR 160 billion and seven DISCOS grappling with under-recoveries totaling PKR 236 billion. Overcoming these challenges will require a coordinate­d effort from all stakeholde­rs and a long-term commitment to reform.

Infrastruc­ture investment is also critical; new infrastruc­ture and technology can reduce Transmissi­on and Distributi­on (T&D) losses, increasing overall efficiency. This, in turn, can lead to significan­t cost savings and improved financial performanc­e for the power sector. Encouragin­g privatizat­ion and competitio­n in the generation and supply sectors can improve service quality and operationa­l efficiency. This can result in better customer satisfacti­on, increased revenue, and reduced operationa­l costs for the power sector. Circular debt, compounded by inefficien­cies and non-recovery concerns, significan­tly threatens the power sector’s viability. Current defaulters owe over Rs900,821 million, severely straining financial resources. Managing peak energy demands, which fluctuate between 8,000 and 13,000 MW during summer and winter, requires a multifacet­ed approach. The State of Industry Report 2023 by the National Electric Power Regulatory Authority highlighte­d peak demands of 29,187 MW on June 29, 2022, and 12,280 MW on December 12, 2022.

While maintainin­g the existing net metering policy is a positive step, comprehens­ive reforms are necessary to ensure the financial sustainabi­lity of Pakistan’s power sector. Strengthen­ing governance, investing in infrastruc­ture, encouragin­g privatizat­ion, and improving revenue collection methods are vital. While the government might save a small amount by changing net metering, implementi­ng the recommende­d strategies—reducing inefficien­cy losses of PKR 160 billion, addressing under-recoveries of PKR 236 billion, and improving recovery rates from defaulters owing PKR 900,821 million—can save significan­tly more capital and promote a more efficient and sustainabl­e power sector. These savings can be substantia­l and can contribute significan­tly to the financial health of the power sector, making it more resilient and sustainabl­e in the long run.

Currently, Pakistan has around 113,000 households utilizing solar net metering, a promising start that represents only 0.3% of total households. These households, mainly from the middle and upper classes, consume more than 700 units of electricit­y monthly. Net metering, introduced under the Policy for Developmen­t of Renewable Energy for Power Generation in 2006 and operationa­lized on September 1, 2015, offers a significan­t advantage. It not only allows homeowners and businesses to sell surplus electricit­y back to the grid, thereby reducing their electricit­y bills, but it also holds the potential to revolution­ize the energy landscape of Pakistan.