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   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.

Arsh Afroz
Arsh Afroz
The writer is a freelance columnist

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