Daily Times

The governments may come and go, but the term “circular debt” is here to stay.

With the energy sector facing availability and affordability issues, the exponential rise in the circular debt has alarmed the Prime Minister of Pakistan, who presided over the cabinet meeting on agenda to reduce the circulating debt of the power sector. In a world where modern economic debate is revolving around the notion of “circular economy” we are stuck in the “circular debt.”

Well, the notion of circular economy is not new in economics, but it is in the spotlight due to climate change. The economies are now focusing on designing products in such a way that they are used/consumed; easily repairable; easily salvageable and easily recycled so that they become a part of the production process. Hence, actively reducing waste and recycling result in efficient production where input loss is minimum to produce output. However, the term circular debt is quite new in economics, particularly in the energy sector. In fact, we are responsible for making this term famous back in 2010, when the energy crisis in Pakistan started to intensify, and so on.

So, what is circular debt? It is contrary to the circular economy, where efficient use and recycling of inputs are given paramount importance. In circular debt, the main source is the inefficient production-consumption cycle (generation, transmission, and distribution of power). It is the surge in debt of energy sector stakeholders. It starts from the non-recovery of electricity bills from end-users and unbudgeted tariff differential subsidies by the government combined with inefficiencies of the distribution system. As a result, electricity distribution companies (DISCOs) fail to pay Central Power Purchasing Authority (CPPA). This delay in payments tumbles down to Power producers (IPPs and GENCOs). Eventually, the fuel suppliers, mainly publicly owned Pakistan State Oil (PSO), do not get their full payments, and the loop is closed. It starts with the public (general public and government) and ends with adding to the public debt, which eventually burdens the end-consumers and government.

The immediate and more sustained solution to the circular debt problem lies in the efficient management of the sector.

The composition of this vicious circle of debt primarily has four major drivers, according to the Asian Development Bank (ADB), 35 per cent of circular debt is due to delayed tariff adjustments; 31 per cent of circular debt is due to inefficiencies of DISCOs; 18 per cent comes from unbudgeted subsidies and rest is the financial cost in terms of interest payments of existing debt. Thus, there are at least five key factors that come into play. First, (and the most obvious) is the high cost of electricity generation. Second, the delay in tariff determination. Third, high system losses (losses that are attributed to transmission and distribution systems) and poor revenue (electricity bill) collection by the DISCOs and K-Electric. Fourth, Tariff differential subsidies (TDS) are the payments that government partially pays to the DISCOs. Lastly, the higher financial costs on borrowing and surcharges as late payments penalties on CPPA by Power Holding Private Limited (PHPL). The total stock of circular debt was Rs 450 billion in the Fiscal Year 2013, and now it has reached Rs 2437 billion; registering an alarming 541 per cent growth over 10 years.

What are the sustainable-policy-oriented solutions to this problem? This problem requires a dynamic and two-pronged approach.

The first approach is the supply side of energy or capacity building, which is, currently, dependent on imported fossil fuel, and is vulnerable to global supply shocks and price fluctuations. In this regard, the way forward is to reduce import dependency in the electricity generation mix. Currently, Pakistan imports 33 per cent of primary energy supplies, and these imports are 26 per cent of the total import bill. This reduction requires a gradual and integrated process. The Indicative Capacity Expansion Plan – 2022-2031 (IGCEP) is a step in the right direction, but it is still a plan, which requires due diligence and commitments to be transformed into actions. Further, to curtail the flow of circular debt, National Electric Power Regulatory Authority is required to assure automatic quarterly tariff adjustment protocols combined with the implementation of targeted and fully budgeted electricity-related subsidies. Thus, the cost of generation can be brought down through renewable and local resources and better financial management can be done.

The second approach is the demand-side-management. The immediate and more sustained solution to the circular debt problem lies in the efficient management of the sector. Many experts believe, a solution to energy sector woes is more management than a capacity issue. In this context, the following policy instruments can be employed: First, entities like, Private Power Investment Board (PPIB) can bring private investment in improving and enhancing transmission and distribution systems, like, the 660 KV HVDC Matiari-Lahore Transmission line Project. This will reduce the distribution losses and more purchased electricity will be sold. Moreover, Advocacy and awareness campaigns to control electricity theft, effective use of detection bills and better reporting incentives are the ways forward to curb theft-related unbilled electricity. Second, for better management of DISCOs, more DISCOs can be formed. Currently, Peshawar Electric Supply Company (PESCO) and Quetta Electric Supply Company (QESCO) are the largest distribution companies in terms of system losses 38 per cent and 28 per cent losses respectively. Both companies cover the provinces of KPK and Balochistan. Thirdly, with the establishment of micro-grids, the world is shifting towards Renewable Energy based micro-grids which are based on decentralized energy generation and distribution models on a small scale. In this way, electricity can be generated and distributed by locally controlled distributed generation (DG) units. This will not only reduce the inefficiency in terms of losses but also improve the access to electricity rate (SDG7.1). Fourthly, as per State of Industry Report-2022, The financial impact of running defaulters is around Rs. 700 million, which is alarming as these consumers are still connected with the system and no action has been taken by the respective DISCOs to recover their billed amount from these defaulters. To reduce this, there is a need to put a cap on electricity bill instalments for higher income quintiles. Fifth, the residential share in electricity consumption is higher than the commercial and industrial sectors, therefore, effective demand management through Time of Use (ToU) metering, peak demand management, and efficient electric appliances and implementation of Daylight-saving time (DST) will be more effective than the closure of malls and shopping centres earlier than the usual timings. Lastly, employ the circular economy principle of 5R, that is Rethink, Redesign, Reduce, Reuse and Recycle in the energy sector as, Renewable Energy, Redesign Grids, Reduce System Losses, and Redesign and Rethink consumption patterns.

The writer is associated with SDPI as an energy consultant. He can be reached at khalidwaleed@sdpi.org and tweets @Khalidwaleed_.