Capacity Payments Soar to Rs2,142 Billion. In FY2017, the cost of capacity payments was Rs384 billion. However, with the addition of new independent power producers (IPPs), this amount has surged to Rs2,142 billion.
In 2015, Pakistan had an average electricity consumption of 13,000 megawatts and a total generation capacity of 20,000 megawatts. The capacity payments then were Rs200 billion. By 2024, even though average demand remains at 13,000 megawatts, the generation capacity has expanded significantly to over 43,000 megawatts, with 23,400 megawatts coming from new IPPs. As a result, capacity payments have increased tenfold to Rs2,142 billion.
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In 2015-16, the average capacity tariff for Independent Power Producers (IPPs) was Rs2.78 per unit. However, by FY2025, this tariff has risen dramatically to Rs18.39 per unit. This increase is largely due to the addition of new power plants under the 2015 power policy and the significant devaluation of the Pakistani rupee, which fell from Rs97 to Rs278 against the US dollar. Additionally, the London Interbank Offered Rate (LIBOR) climbed from 0.45% to 5.5% annually, and the Karachi Interbank Offered Rate (KIBOR) also rose, which increased the debt servicing costs included in capacity payments. The rise in electricity tariffs has also led to reduced consumption, further driving up capacity payments.
Currently, out of the total Rs2,142 billion in capacity payments, consumers contribute Rs1,083 billion annually for debt servicing related to loans primarily for new power generation under the 2015 policy. This is in addition to Rs218 billion for fixed operation and maintenance (O&M) charges, Rs596 billion for return on equity (RoE), and Rs254 billion for other expenses.
The capacity payment for a single Sahiwal coal power plant exceeds the combined payments for all IPPs from 2002. Moreover, the payments for government plants (nuclear, hydel, and RLNG) are five times greater than the total for all older IPPs.
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Capacity payments are fixed amounts paid to power producers to cover capital recovery (including project debt in the first 10 years) and operating costs. These payments account for 31% of the total consumer tariff. In Pakistan, where the Central Power Purchasing Agency (CPPA) is the sole buyer, no plant can operate without capacity payments due to the need for debt servicing, operational costs, maintenance, and manpower. Additionally, some return for investors is necessary. Taxes, surcharges, and duties make up another 32% of the consumer tariff, added on top of the actual cost of electricity.
Of the Rs2,142 billion in capacity payments, approximately Rs25 billion (1.25%) is allocated to plants under the 2002 policy based on a request for offer (RFO), and Rs70 billion (3.48%) is attributed to all IPPs under this policy.
To reduce power tariffs, the government needs to closely examine its own power plants: RLNG-based, nuclear, and hydropower projects, which together generate 52% of the country’s electricity but cost Rs840 billion annually in capacity payments, including Rs235 billion in RoE.
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IPPs established under the 1994 and 2002 policies account for Rs130 billion in capacity payments, including Rs31 billion in RoE. In 2021, the value of the US dollar for these IPPs was capped at Rs148, which reduced their capacity payments to Rs130 billion, and they have repaid a significant portion of their loans. In 2012, these IPPs agreed to lower their USD-based internal rate of return (IRR) to PKR-based returns, reducing their guaranteed USD returns to about 9%. Eliminating the capacity payments for 2002 IPPs would save just Rs0.85 per unit, and Rs0.54 per unit for 1994 policy IPPs, totaling Rs1.39 per unit in pre-tax bill savings.
The main issue lies with government and China-Pakistan Economic Corridor (CPEC) power plants, which are charging capacity payments based on the current dollar value of Rs278. Most IPPs from the 1994 and 2002 policies are nearing the end of their contracts, with some already transitioning to a take-or-pay mode, receiving no capacity payments.
CPEC projects, funded by Chinese commercial banks, are receiving Rs650 billion annually in capacity payments and Rs168 billion in RoE. Locally owned CPEC projects using Thar coal account for Rs230 billion in capacity payments and Rs76 billion in RoE. Private hydel, solar, and wind power plants receive Rs270 billion annually in capacity payments, including Rs80 billion in RoE.
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The government faces several questions: Will it adjust power purchase agreements (PPAs) for government-owned plants to convert their dollar-based IRR into rupee-based IRR, as was done in 2021 for IPPs from the 1994 and 2002 policies? And will it reduce the capacity payments for government power plants from Rs840 billion to Rs400 billion, including RoE of Rs235 billion?
Addressing these issues could provide substantial relief, potentially lowering tariffs by Rs4 per unit. Additionally, if the government can cut electricity theft from Rs589 billion to Rs100 billion, the tariff could decrease by Rs4.89 per unit.
Unfortunately, circular debt has risen to Rs2.655 trillion in the first 11 months of FY24, with line losses reaching Rs230 billion despite anti-theft measures. Recovery losses amount to Rs279 billion, and the government continues to struggle with transferring cheaper electricity from south to Punjab, resulting in higher tariffs. Immediate action by the Power Division is needed to address these issues.
The government should also focus on reducing transmission, distribution, and recovery losses, which could offer a relief of Rs1.25 per unit. Efforts should be made to renegotiate Chinese loans for CPEC projects to extend their repayment period, potentially saving Rs4 per unit. Finally, expediting the transfer of cheaper electricity to Punjab could provide an additional relief of Rs1.90 per unit.
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