In October 2021, we wrote a letter to the then Chief of Army Staff (COAS), General Qamar Javed Bajwa, to warn about the imminent threats posed by Circular Debt and Capacity Payments to Pakistan’s national security. Our letter not only highlighted these critical issues but also offered practical solutions that could have averted the current crisis.

Regrettably, our warnings and recommendations went unheeded, leading to the challenges the country now faces. We hope that in the future, such expertise and advice will be taken seriously to prevent similar crises.

Here, we share the original letter to emphasize the urgency and importance of addressing these issues. It serves as a testament to the foresight provided and a reminder of the need for proactive measures in safeguarding our nation’s security and economic stability.

To
General Qamar Javed Bajwa NI(M) HI(M)                                                                                         Oct. 03, 2021
Chief of the Army Staff of Pakistan Army
GHQ Rawalpindi

Subject- COAS Can Save Pakistan From Economic Collapse By Addressing Energy Security

I would like to invite your kind attention towards the state of electricity in Pakistan and Karachi at large since I consider your involvement imperative; for the reasons that the events and orders and situations when the Ministry of Energy and enormous allied entities, including the National Power Regulator, (NEPRA) has to remain questionable in respect of transparent and bold conduct. The system and trust in the political economy of energy and its governance do not disallow us to say that I have lost faith and trust in the system.

Just so you know – the letter is addressed to you, without malice or prejudice to any individual or office. I have tried to highlight the serious issue of Energy security, which has universally become a subset of National Security. This way it is sure that I can reach you most effectively on a subject of national importance.  Our archrival Indian establishment declared almost two decades ago that energy security is a vital organ of national security.

First, let us lay out some significant facts and figures regarding the power sector, which is the foundation of an economy.

• The power sector of Pakistan is a leaking bucket, the holes deliberately crafted and the leaks carefully collected as economic rents by various stakeholders that control the system. It is a self-evident truth that our power sector is bedeviled by corruption, greed, inefficiency, and injustice. While this is so, the bills have continued to increase. It’s time to plug
• The Circular debt has risen from Rs1.1 trillion in 2018, has reached Rs2.28 trillion during the fiscal year 2020-21, and is projected to hit Rs 4 trillion by 2025. The main reason behind Circular debt and hikes in tariffs is the expensive and excess power capacity. PLMN regime added electricity generation, which is 25 % more expensive than comparable regional benchmarks, and also 50% more than national needs.  Yet, at the same time, the PMLN government added generation capacity with a contract of “TAKE OR PAY” basis that has hit the power sector hard. According to the latest available data, the total “obligatory” annual Capacity Charges were Rs185 billion (Rs2.1 per unit) in 2013 increased to Rs860 billion in 2020, and is projected to be a whopping Rs1,455 billion (Rs10.82 per unit) in 2023. The previous government did not invest in the high voltage transmission and the distribution system network, and could not move energy to places where it is required.  (This Capacity Payment of Rs1,455 billion could have been used  to buy simultaneously, state-of-the-art,  5 Nuclear-Powered Ballistic Missile Submarines, multirole fighter aircraft 20 US Made F-35A, French-made 20 Rafale and 600 US-made M1 Abrams Tanks from the international market.)
• These capacity payments amount to 3 percent of Pakistan’s GDP alone. Consequently, circular debt is projected to hit a worrisome 8 percent of GDP. Pakistan has now an insulated capacity of around 39000 Megawatt (MW). The previous government did not invest in the high voltage transmission and the distribution system network, so electricity cannot transmit more than 25000 MW move where it is required.
• The national economy which was growing by 5.8 percent in 2018 has gone into a nosedive, one of the major reasons is circular debt including capacity payments to IPPs.  Resultantly, the escalating cost of surplus power generation has meant a continuous rise in consumer power tariffs. This also has fuelled inflation, eaten away at industrial competitiveness, and necessitated growing resort to government-funded subsidies on power tariffs to shield export-oriented industries from the full brunt of the tariff hikes.
• The major issues causing the high cost of electricity is other than inflated contracts with IPP is deliberately unused or under-utilized the optimal operation of most efficient power plants. Use of highly inefficient power plants, particularly K-Electric in Karachi.
• Non-use or Underutilizing of the efficient power plants not only deprives the motherland of available cheaper electricity units but it also increases the burden on the national economy in the form of capacity payments for unutilized capacity.

The reason for the continuous rise of circular debt is the operation of inefficient power plants. The glaring example of the non-usage of efficient power plants and capacity payments is 1200 MW HUBCO and 1600 MW KAPCO for Karachi. Particularly, 1200 MW HUBCO, falls within the jurisdiction but almost remained idle for the last two years, yet at the same time both IPPs claimed capacity charges at 60%

Respected General Qamar Javed Bajwa Sahib,

• I know very well that you are committed to reviving the economy of Pakistan, especially since your focus is on the industrial hub of Pakistan, Karachi. The city of 20 million people is deprived of cheap and consistent electricity. The large parts of it are regularly plunged into darkness. K-Electric (KE), is responsible for providing electricity to the city but utterly failed to address the electricity needs of the Industrial Hub of Pakistan.   K-Electric, which was privatized in 2005, has repeatedly come under scrutiny for its often illegal profit-maximizing business practices and countless mishaps leading to prolonged blackouts and frequent load shedding. Electricity shortage now in the city reaches critical levels and leaves the citizens sweating and fuming while the impact worsens on manufacturing units.
• While there is surplus electricity in the national grid, K-Electric besides having a demand of 5000 MW only has an installed capacity of 1875 MW with external power producers of 1,818 MW which includes 1,100 megawatts of electricity from the national grid at the basket price. The current management has added only 1,000 MW since 2009. Although K-electric submitted various commitments to add generation capacity to meet the demand of Industry but utterly failed to address the energy security of the industrial hub of Pakistan.   It is unprecedented that in Pakistan, NTDC (now Central Power Purchasing Agency CPPA) and KE maintain two separate generation baskets in their respective areas and the Economic Merit Order (EMO) for the operation of power plants are being determined separately. These two EMOs result in the operation of in-efficient power plants despite the availability of efficient generation capacity in the country. The cost-effectiveness in power generation can be achieved through one EMO in the country.

This is simple math, sir. They took the example of K-electricity for July 2021 to simplify the cost of electricity for Karachi. The table indicates that KE purchases electricity at a rate of Rs 5.74 per unit (KWh) from the national grid, while the 1250 Megawatt Bin Qasim-I power plant generates 203 million units of electricity at a rate of Rs 21 per unit using furnace oil as fuel. The underutilization of 1320 MW Hub Coal Power is another ominous illustration of systematic corruption and well-t

Another dark example of systematic corruption and well-designed inefficiency is the under-utilization of 1320 MW Hub Coal Power. Although the plant is located within KE territory, it only produced 382 million units at a fuel cost of Rs 6.3 per unit in July 2021—despite having the capacity to produce 870 million units—due to a lack of grid connectivity with the KE gearbox system.

• How KE is selling the electricity at a higher rate? The electricity in July will elaborate itself. In this month, the whole fleet of KE generated only 853 million units of electricity at the average rate of Rs 16 per Unit, while KE received 822 million units from the national grid at the rate of only Rs 5.74 per unit (KWh).

In 2008, it was decided that NTDC shall treat KESC (now K-Electric) at par with Ex-WAPDA DISCO for the sale of power and shall charge KE based on a similar mechanism as approved for EX-WAPDA DISCOs.

• Sir, it is a matter of grave concern that K-Electric is running the most inefficient 1,260 Megawatt Bin-Qasim -I power plant. The table below shows the efficiency and quantity of the furnace oil used to generate one unit of electricity in Bin Qasim-I and HUBCO. Due to the ineptness of the Ministry of Energy, the HUBCO power plant has remained idle during the last three years and only fetching huge capacity payments.

KE never considered improving the efficiency of Bin Qasim-I power plants. In India, almost all oil and gas-fired power plants have been modernized and converted into fuel-efficient plants to avail of the multifarious benefits. The initiative ultimately helped to reduce the tariff for all types of consumers including Industrial consumers. KE is deliberately running Bin Qasim-I on Furnace oil for fetching enormous annual illegal and unjustified Tariff Differential Subsidy (TDS) which has been paid to KE in connivance with NEPRA for the last decade. During this fiscal year 2020-21, GOP again allocated 85 billion to KE as the TDS (Federal Budget 2020-21 Brief, page 16, Table 12-Subsidies). KE since Privatization has fetched more than Rs 500 Billion in illegal subsidies by operating inefficient Power Plants with the connivance of NEPRA and officials of the Ministry of Energy. Thus asking for an investigation into why three main actors KE, Ministry, and NEPRA, sabotaging the national economy by allowing the operation of inefficient power plants. One year ago, the Circular Debt Commission was set up to address this thorny issue, but the commission didn’t touch the fuel component of the tariff. Thus menace of circular debt and capacity payment still challenges the national economy with must greater threat.

Now, when Pakistan’s economy is facing a testing moment. It needs the support of GHQ to pull through. I strongly believe that only the Pakistan Army can address energy security, considering it as an integral part of National Security. At the same time,  the current lowest economic growth dictates that there is no room for the ‘business as usual’ attitude at the Ministry of Energy, so CRSS-Islamabad is submitting a humble request to revive the energy sector and national economy at large, GHQ may consider recommending following steps to remove the stumbling blocks     

Sir, I am offering the best practical and doable technical solutions to address the challenges faced by the motherland in the energy sector. Our recommended solutions can be rechecked or reevaluated by World Bank, UN, IEA (International Energy Agency), or any other International Institution

1. To conduct a detailed technical audit of all thermal power of KE at the earliest.
2. I strongly recommend that 1250 MW Bin Qasim-I along with two IPPs GUL AHMED and TAPAL be retired immediately. The fuel (Gas or Oil) for these power plants may be allocated to other efficient power plants connected to the national Power grid having higher efficiency to reduce the cost of electricity.

III. To bolster the future of Karachi’s growth, I will request you to direct the Ministry of Energy to dedicate the electricity generation of 1320 MW Port Qasim Coal Plant, 1320 Hub Coal Power Plant, 1200 MW HUBCO and 11OO MW KANUPP-2 (Karachi Nuclear Power Plant) ought to dedicate to Karachi along with upcoming 660 MW   Lucky coal Electric Power and 1100 MW (KANUPP-3). All these power Plants are installed in Karachi

1. All the EPC cost of 1200 MW HUBCO power plants has been paid by the public through tariff so now GOP ought to take control of this power plant. .
2. There is a need to set an independent technical  commission to hold an inquiry against the officials of NEPRA and the Ministry of Energy involved in this most ‘sophisticated crime of awarding more than 500 Billion Rupees Tariff Differential Subsidy (TDS) to KE since its privatization, which has placed the country almost at the verge of financial collapse
3. I will request you to kindly direct the ministry to supply surplus electricity from the national grid to KE by constructing new 500kV KKI and 220kV interconnections. This action will help to meet the electricity demands of KE as well help to avert huge capacity payments to idle power plants connected to the National Grid.

This request is in the interest of Pakistan. The Pakistan Army must embrace this critical transition in the power sector, to reduce the cost of electricity for the industrial boom in Pakistan by ordering KE as DESCO (power distribution Company) and 500kV KKI and 220kV interconnections with the KE transmission system. Your one-must-need step will help to start a new era of the economic prosperity of Pakistan.

Best Regards
Sincerely
Engineer Arshad H Abbasi
Board of Trustees
Center for Research and Security Studies (CRSS)
ahabasi@ gmail.com
0333-5144405