ISLAMABAD: The government is considering a proposal to convert circular debt in the power sector into public debt as part of efforts to reduce electricity tariffs by Rs3.37 per unit.
As part of the plan, the government also intends to restructure $16.26 billion in debt linked to various energy projects, such as hydel, imported coal, Thar coal, wind, solar, transmission, and nuclear energy. This includes Wapda hydel and the Neelum-Jehlum projects. Currently, $3 billion is allocated annually for debt servicing through end-consumer tariffs, which amounts to Rs8.63 per unit in capacity charges within the electricity tariff.
A detailed nine-page document on proposed reforms in the power sector outlines the government’s strategy to extend the debt repayment tenure, which would alleviate up to Rs5.1 per unit from electricity bills.
The document suggests that refinancing interest-bearing circular debt by converting it into sovereign debt (public debt) would lower tariffs by approximately Rs3.23 per kWh for non-protected consumers, with the figure rising to Rs3.78 per kWh after tax.
“This restructuring would eliminate the arbitrage between sovereign risk and allow for more effective pricing of sovereign obligations. However, it may slightly increase the total sovereign debt,” the paper notes. It adds that the reduction in tariffs would encourage higher electricity consumption and stimulate overall economic growth.
Currently, the total circular debt stands at Rs2.26 trillion, with Rs1.74 trillion bearing interest. This debt is split across Power Holding Limited (Rs683 billion), payables by the CPPA to power producers (Rs1,060 billion), and non-interest payables (Rs683 billion). PHL debt is priced at 3-month KIBOR plus 0.45%.
The document also identifies an opportunity to lower interest rates on this debt by transitioning to long-term, fixed-rate bonds, thereby yielding substantial savings that can be passed on to consumers.
Additionally, the paper highlights that receivables owed by the CPPA to Independent Power Producers (IPPs) carry a high interest rate of 3-month KIBOR plus 3%. This excessive spread is considered inefficient, and the paper advocates for reducing it to secure interest savings.
Furthermore, the government is developing a strategy to sell cheaper surplus electricity to bulk consumers at auctioned prices over the next 2-3 years, aiming to stimulate demand from the industrial sector.