August 21, 2019 (MLN): Pakistan’s power sector has been pierced with problems. There was a time when we had surplus electricity and now overly regulated, under supplied and being strangled by financial and administrative issues are the factors that broadly characterize Pakistan’s power sector.
However, things are improving at a rapid pace now. Having acknowledged that energy is the most important determinant of growth, successive governments in collaboration with international donor agencies have tried to initiate reforms in order to bring the sector out of the deep end.
The addition of c10,700 MW of cheaper generation sources has helped address the load shedding woes and the national transmission company has brought its losses under target levels, revealed a research report by EFG Hermes.
Moreover, multi-year tariffs have been awarded to 3 out of 10 distribution companies, cheaper sources of generation are being inducted, tariff determinations are being done at a quicker pace, recoveries are expected to increase, efficient ways are being adopted to tackle the circular debt issue, and efforts are being made to migrate towards a liberal electricity market.
While the fruits of the investments under the CPEC and Power Policy 2015 are still to be fully reaped, the sector has received much needed support from gov’t authorities, as the amendment to the NEPRA Act in 2018 will serve as a major milestone in migrating to a more liberal market structure. Further action under the IMF programme will continue to refine the sector and bring it to par with other developing nations, the report added.
As nothing comes without a cost, the report further highlights that annual capacity payments to power plants will soon touch the cPKR900 billion mark, while the break-even tariff will go north of cPKR17/KwH. Also, circular debt still continues to plague the energy chain.
Although the government is determined to clamp down on losses, increase recoveries and replace the payables by issuing energy sukuks (lowering the cost marginally), eradication of circular debt seems impossible given the socio-economic and political problems in various areas. Whereas a complete pass on would mean further inflating tariffs and not doing this implies that circular debt stock will continue to accumulate at cPKR170-200bn annually.
With regards to investment perspective, the report highlighted that as Pakistan has recently gone through massive macro adjustments, which means the investment case for IPPs has unarguably become more exciting and worth considering.
In current macroeconomic environment with PKR-USD exchange rate, interest rates and inflation built in to the tariff, IPPs provide a high level of earnings certainty. Moreover, since the IPPs can sell power only to one single customer – government owned CPPA-G – the Power Purchase Agreement (PPA) also provides sovereign guarantees to IPPs against default on contractual payments. This makes the earnings of the IPPs resilient to adverse economic conditions and sets up an attractive investment case, said a research report.
Moreover, given a burgeoning population, and industrial growth, which is bound to pick up pace again after a slowdown, the next expansionary cycle in Pakistan will be more sustainable, calling for higher, consistent, and cheaper energy supplies.
Copyright Mettis Link News
29518
