Power Agreement

IN what is being described as a breakthrough, the government got what it had long been seeking: wind power plants/IPPs set up under the 1994 and 2002 power policies have agreed on revising their power purchase agreements to give up part of their overall returns. Shortly after the MoUs between the government and the power producers had been signed, the prime minister took to Twitter to “congratulate the nation because we are fixing the damaging structure we inherited in our power sector”. The agreement will help bring down generation costs and result in ample savings for the government by slowing the pace of circular debt and decelerating consumer tariffs in future. Yet the real benefits will accrue only when the larger IPPs (established or being set up under or outside the CPEC initiative), public-sector generation companies and hydropower and nuclear power projects — all of which claim more than 75pc of the total capacity payments — also agree to revise their contracts along the same lines. That part may prove more difficult because of the involvement of Chinese firms — many of which were given upfront tariffs — and the absence of any ‘stick’ to scare the power producers, at least for now. In return for their ‘voluntary’ concessions, those who have signed will no longer be hounded by anti-corruption outfits, and ongoing investigations against them will be dropped. Nor will they be slandered in the media. A fair exchange, no?

There’s little doubt that IPPs are getting unjustifiably high returns on their investment and a reduction in profits would help rationalise consumer electricity prices. But the country’s collapsing power sector cannot be fixed just by forcing power producers to part with some of their profits. Nor will the circular debt get liquidated. The real elephant in the room are the massive distribution and transmission losses and power theft, and the inability of distribution companies to recover billed amounts in full. These losses account for more than a third of the total units of electricity produced. Nothing has been done in the last two years to ensure complete recovery of the bills from powerful defaulters or to plug theft or distribution losses. Instead, the honest consumer has been saddled with these costs.

The benefits the government or consumers stand to accrue in the wake of the revised contracts notwithstanding, the way the entire process has been conducted reflects poorly on future investment in the power sector. With NAB going after some prominent businessmen on the mere allegation of wrongdoing, the forcible modification of commercial agreements will increase the risk premium that investors demand before investing in Pakistan. Any future agreement would require greater, guaranteed return as the government will be seen as an unreliable partner. We have seen it before. That was the major factor behind Nepra’s failure to implement the tariff-approval procedure based on competitive bidding.

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