The illogical vilification of investors

EDITORIAL: Bashing IPPs (Independent Power Producers) – especially those under the CPEC (China Pakistan Economic Corridor) – has become a norm, which is sending a wrong signal to prospective investors that are hard to come by in this country.

Without a question, the energy industry—particularly the electricity sector—is unsustainable in its current configuration.

Nonetheless, the situation we find ourselves in may be attributed to our own authorities and decision-makers. Blaming the Chinese, who made an investment while no one else was around, is, to put it mildly, utterly unjust and unnecessary.

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The administration of the Pakistan Muslim League-Nawaz (PML-N) was the one that referred to the China-Pakistan Economic Corridor (CPEC) as a revolutionary initiative and kept tight contracts under wraps. Regretfully, nevertheless, the same individuals claim that the electricity industry is becoming unsustainable as a result of the CPEC projects.

In 2013, there were 8–10 hours of load shedding, and businesses had to rely on pricey captive plants. “No power is more expensive than power at any cost” was the association’s slogan.

They are doing a radical U-turn now that power is involved, claiming they cannot afford it and even want to be kept in captivity.

The issue is that the transmission and distribution systems are not adequately planned for or funded to handle the increasing generating capacity.

For instance, the majority of cost-effective facilities (thar coal and nuclear) are located in the south, despite the fact that the majority of demand is located in the Sindh province north of Guddu.

But instead of building an appropriate transmission network, costly facilities in the north are being run while the less expensive ones in the south sit idle.

It is not the Chinese’s fault that they have not followed the merit order. Although they provide 20–25 percent of the capacity payment and have nearly zero marginal costs, the nuclear plants—which are not a part of the CPEC but do involve Chinese debt—are not run at maximum efficiency because of transmission limitations.

It is important to remember that the Chinese have already consented to a two-year suspension on the principal repayment of nuclear project debt, which will run from July 2023 to June 2025.

In the fiscal year 2023–2024, Pakistan failed to pay that share of the capacity charge. It is still reflected in the tariff, though, because the regulator is refusing to approve it because they believe that paying a high interest rate for two years is an extra expense. It appears that the regulator is unaware of the time worth of money.

It is significant to note that, despite the fact that nuclear plants had previously been considered by our relevant authorities or decision-makers, not only were RLNG projects being added, but also hydroelectric expansion projects were in the works. Thus, one of the issues that has to be addressed is the rationale behind the government’s decision to establish factories using imported coal as part of the CPEC.

Other concerns that also require convincing answers are: why was an imported coal plant built in the north, increasing the expenses associated with transportation and the environment?

Was it of our people or Chinese? That has to be looked into. Pakistan should be grateful to China for making the dream of Thar Coal a reality, since this would provide the nation with an affordable, domestic base load in the long term.

However, we can’t ignore the reality that the Chinese did not enter the nation voluntarily. We made them put money down. It was obviously a quid pro quo, or a benefit or favor received in exchange for something.

In exchange for our request that they develop electricity infrastructure, the Chinese sought to revive the ancient Silk Road. They were, very correctly, focused on our strict regulatory framework, in which the government plays a central role, as well as the notorious circular debt. Then, in contrast to the cost plus of the 2002 program, the 2015 IPP rate was upfront.

Nepra, the electricity regulator, changed the pricing on CPEC projects, bringing it down from the initial projected amount. Should we not hold our regulator accountable for allowing the over-invoicing to continue right under our nose? Was Nepra dozing at the time?

The problem in the generating industry is that capacity costs have risen to prohibitive levels as a result of too many projects being undertaken in too short a time and significant currency fluctuations. The projects have a 25–40 year useful life, and 20 percent of the project expenditure is returned on equity.

Eighty percent of the total is debt that needs to be repaid in ten or twelve years. That is avoiding the projects’ ability to generate economic value. Re-profiling the debt is necessary, and this would cut the tariff—albeit only somewhat. In order to guarantee that the system has enough capacity to evacuate electricity to the assigned load centers, the transmission and distribution difficulties must then be resolved.

More significantly, there needs to be less government involvement in the industry. If this isn’t done, any bargain can temporarily lower the cost of power.

Not to mention that despite our previous two attempts at discussions, the sector remains in disarray because the government has not been able to address the fundamental issue of its involvement in the energy industry.