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Circular debt may jump to Rs700 bn if theft, costs not controlled

The energy strategy to be unveiled by Prime Minister Nawaz Sharif in his televised speech to the nation after his return from China promises to reduce loadshedding from the existing 12-18 hours to 6-8 hours during the month of Ramazan.

A high-level meeting on energy strategy was told that on Friday Rs322 billion were paid to all the IPPs and fuel suppliers, including PSO, OGDCL, PPL, etc. by the finance ministry through Pepco as part of the government’s strategy to overcome the issue of circular debt.

However, it has been warned that in case of failure of the strategy — which contains different measures to increase power production, reduce line losses and power theft, shifting to low cost power production — the government could get back into the vicious circle of circular debt.

The sources said that the meeting on energy strategy, chaired by the prime minister, was told that if things continued as they were in the past, the circular debt would rise to as high as Rs700 billion by next year.

Things will only improve if the government reduces power theft/line losses, ensures recoveries, reduces cost of power production and increases the electricity rates.If things go as per the government strategy, the sources said, from October 2013 onwards, loadshedding will drastically be reduced from 12-18 hours to 6-8 hours. “At least you will have two hours of power and one hour of loadshedding as a short-term solution,” one of the sources said.

The meeting was told that the circular debt was actually the recurring losses of the power sector because of line losses/power theft/non-recoveries and for the reason that the government was actually selling electricity at 9 Cents per unit while it cost the government 15 Cents.

The meeting was also told that the government loses 6 Cents per unit as subsidy but does not have the money to pay to the IPPs and oil suppliers, which results into circular debt.

In the current fiscal year, it is said that the circular debt was around Rs500 billion but was based on 12,000MWs of average generation of electricity. In the next fiscal year, it is said that the power generation is expected to increase because of the huge payments made to the IPPs and oil suppliers. If corrective measures are not taken and power sector reforms not implemented, the circular debt for the next year is feared to reach the figure of Rs650-700 billion.

At the current price and cost difference and in view of the present production, the current monthly loss is Rs45 billion. It was said that the only way to reduce this loss was to change the dynamics of price vs cost of energy. The meeting was told that the government had no choice but to increase the price and reduce the cost.

However, the power rates would be later reduced by shifting from thermal (petrol) production to coal, gas and water. Petrol is the most expensive and water is the cheapest, the meeting was told. But shifting the fuel mix will take time and tough decisions are required to be taken like stopping gas for CNG and fertiliser sectors and giving it to the IPPs and industry. The other way to reduce the cost is to stop theft and inefficiency. It is estimated that the loss of 20 percent can be made up by effectively addressing this area.

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