Pakistan Faces Rs1.5 Trillion Capacity Payment Challenge
Pakistan is on the brink of a severe financial setback, with annual capacity payments for inactive power plants expected to skyrocket to an unsustainable Rs1.5 trillion over the next two years. The surge is attributed to the addition of costly capacity, primarily under the Thar coal and CPEC projects.
During the unveiling of the study "Thar Coal: Locking Pakistan into Unsustainable Capacity Payments," Simon Nicholas from the Institute for Energy Economics and Financial Analysis warned that this projected capacity payment would equal a staggering 75% of the existing circular debt in the energy sector, reaching approximately Rs2 trillion.
The study reveals that despite slowing electricity demand growth and the affordability of renewables, Pakistan continues to invest in dirty and expensive capacity. Nicholas emphasized the need for a shift towards renewable energy projects, particularly in Sindh province, to alleviate the financial burden.
The report highlights that the government has sought easier repayment terms from China for 12GW of CPEC power projects, amounting to a total investment of $30 billion. Meanwhile, high capacity payments to thermal and coal-power generators contribute to the escalating cost of electricity and the worsening circular debt in the power sector.
Wood Mackenzie Power and Renewables analyst Sohaib Malik cautioned that capacity payments have reached unsustainable levels and pose a future challenge, noting that independent power producers are heavily reliant on government subsidies.
In response to the growing capacity payments, the federal government has initiated discussions with power generators to address the chronic financial stress. However, the payments persist as a hurdle to reducing the overall cost of doing business in Pakistan.
Zeeshan Ashfaq from the World Wind Energy Association urged the government to prioritize renewable energy goals, pointing out that wind and solar power tariffs are more economical than hydel power. He emphasized the need to replace retiring thermal electricity capacity with renewables, citing the Sindh government's initiative to add 400 megawatts of solar capacity by 2023.