K-Electric was privatized in a rush in 2005 to a motley crowd of invisible investors. The company — KESC then — was, indeed, in deep trouble suffering from excessive local political interference and heavy losses and theft, which motivated an early offloading of the company, having assumed privatization to be a panacea.
No meaningful improvement occurred and KE happens to be a larger recipient of the dole from the federal government than other DISCOs. KE’s major shareholder was offloading its shares to a Chinese company after accumulating a lot of unpaid liabilities under a confused arrangement which has been stopped due to the stand taken by some brave bureaucrats. The current problems of the major shareholder of KE further complicate its sale. It is again being assumed that the buyout by a Chinese company would be a panacea. There are several issues that need to be handled and rationalized before any further complications are introduced in KE by the inclusion of a powerful actor which may further preclude or complicate the options of the required reforms in KE. We will discuss here the reforms and restructuring which are urgently required in KE’s affairs.
KE was an integrated utility, like Wapda. After Wapda was restructured, DISCOs were formed along with a transmission company NTDC — and later IPPs were introduced to take care of the generation function. For some strange reason, probably because it was a public shareholding company, KE 9(ormerly, KESC) was not decomposed like Wapda and was privatized as an integrated utility the way it is today. This unique status of KE is creating problems which we will describe in the following paragraphs.
Although the federal government continues to pay a heavy dole out to KE, Karachi’s electricity issues have been offloaded to the whims of the private sector which remains underdeveloped in this country. KE is given a concession/monopoly for providing for all the generation, transmission and distribution requirements of Karachi. First of all, let us wonder whether it is wise to leave the electricity issues of a major economic and social centre of the country to the whims of a private coterie. KE is not supposed to get any share from the new generation capacity that is being added from time to time, and now under CPEC, except for a 600 MW arrangement made some time ago. It is a separate matter though that the federal government has all the powers to apportion additional capacity any time it chooses to do so. But it has not done so till now.
All sorts of complications are being created. Furnace oil power plants have been discontinued in the country as a matter of policy, since they produce expensive electricity. Coal power plants, imported and local, and RLNGCC power plants have been installed instead. However, KE continues and has been allowed to continue with furnace oil. This has caused great but unavoidable dislocation to the local refineries which keep producing furnace oil, as a co-product of HSD and petrol. One has to close down the whole refinery if furnace oil is not to be produced. As a result, furnace oil is being produced and stored at various storage facilities. There is a risk that storage capacities may run out before alternative exports arrangements are made for the short term and refineries are restructured in the medium term.
PSO has stopped importing furnace oil, but for some strange reason KE/PSO has been allowed to import furnace oil again for the coming high-demand period. This is despite the brimming furnace oil stored in the country. To top it all, KE is preparing to enter into new PPAs with its IPPs running on furnace oil and currently supplying electricity to KE. This is happening despite a reported surplus and heavy payout of capacity charge of Rs446 billion and an ever-mounting circular debt of Rs1.6 trillion by now. Moreover, a coal power plant project approved in 2015 based on imported coal is being revived by KE, despite capacity surplus and current account deficit and a policy decision not to install new imported coal power plant anymore. There are many power plants that have already been installed and are to be added shortly, namely Port Qasim Coal Power Plant, Hub Power, and PAEC nuclear power plants. There are many other problems due to the integrated utility status of KE.
The solution is to take away the generation and transmission function from KE and convert it into a DISCO like others. KE’s generation facilities may be converted into IPPs like others, while being still owned by KE under separate company units. The NTDC’s domain is expanded to include Karachi region which comes under one merit order .This issue, if not resolved, may later fester into a political dispute when there would be surplus in one part of the country and deficit in the other, apart from the expenses involved in buying unrequired (otherwise) excess capacity for Karachi. After all, the dole and subsidy is coming out of a common kitty.
This may be an ideal time to undertake a major restructuring of KE due to its unpaid accumulated liabilities and the risks and problems generated due to the international legal suits being faced by its major shareholder. This should be done before it is handed over to a powerful Chinese investor. Karachi is a sensitive city housing many ethnicities with political undertones and KE has suffered under it. A foreign owner may get a handle into the local peculiar issues. Serious consideration should be given before making a final decision in this respect.
What can be done immediately is to give an informal DISCO status to all the planning and supply issues and for KE be considered part of the NTDC system. Its transmission linkage is enhanced and KE can be provided additional power share to obviate any need of entering into an additional PPA, especially of the to-be-shut-down furnace oil power plants. The merit and mode of continuing with the older plants under a new PPA should be examined separately on a country-wide level and not in the KE context alone. The old power plants have low thermal efficiency of under 40 percent as opposed to new steam plants of 50 percent efficiency and gas plants of 60 percent efficiency. This factor is to be balanced against the benefit of written-down plants apart from the general policy moving away from furnace oil. Old plants may be considered under a Take and Pay arrangement as opposed to the prevailing Take or Pay arrangements under which they become a permanent liability irrespective of actual need or not.
The old power plants may be considered under the new electricity market regime being considered by CPPAG. If something is useful, it should prove its worth and compete in the market. However, the CPPAG has to hurry up in its considerations, as many power plants are to be retired in the coming years looking for further uses.
The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s EnergyIssues: Success and Challenges’.
Published in The News, May 06, 2019.
