Circular debt: the way forward | Political economics


Due to some inherent inefficiencies, the power sector in Pakistan is doomed to financial collapse. The main result of a crumbling power generation, transmission and distribution system has been circular intercompany debt, threatening its viability.

The perpetual failure to contain circular debt has been a manifestation of the fact that the reasons behind a distorted system have not been effectively addressed. Consequently, the circular debt of the electricity sector reached 2.5 trillion rupees. If the trend continues, it could rise to Rs 2.53 billion in June, posting a growth of 10% compared to the last fiscal year.

Undoubtedly, the rising cost of primary energy has contributed to circular debt accumulation in 2021-22. However, a variable cost of fuel would not have a lasting impact on the size of the circular debt, rather it is the intrinsic inefficiency of the electricity sector that is a constant factor calling into question its sustainability.

In simple terms, “circular” debt can be described as the difference between the cost of generating and transmitting electricity and the subsequent revenue collection at the distribution level. Electricity distribution companies have failed miserably to collect what is owed to consumers.

So-called technical and commercial/financial losses are the very basis of growing circular indebtedness. Technical losses, however, according to one assessment, represent 15 to 20% of the total losses suffered at the distribution level.

Circular debt shouldn’t be a quagmire for policymakers in today’s technologically advanced world. Electricity managers at the federal level can ensure gradual but sustainable circular debt reduction by adopting innovative short- and medium-term approaches to controlling electricity losses, in addition to taking long-term measures. to reduce the cost of production to make energy affordable.

Most of the losses are recorded financially and mainly include electricity theft encouraged by electricity distribution companies, coupled with a lack of recoveries due to corrupt and incompetent management. Let’s focus on this persistent bottleneck in the electricity sector.

According to an expert, if electricity distribution companies had been able to meet their revenue collection targets, there would have been no accumulation of circular debt.

Let’s take an example of how a typical utility company works for revenue collection in this part of the world. If an otherwise conscientious consumer fails to pay their monthly electric bill, the utility quickly cuts off the power supply, forcing the customer to pay the outstanding amount. However, the usual electricity thieves, with the help of the personnel of the distribution companies, are immune to such actions. They continue to steal electricity at will without paying the cost, resulting in loss-making power utilities.

“Circular” debt can be described as a difference in the cost of electricity generation and transmission, and the resulting revenue collection at the distribution level. The electricity distribution companies have failed miserably to collect the fee for the service they provide.

The theft of electricity was made possible by incorrect loss calculations in the power supply of an electricity distribution company. In doing so, for example, an electric utility like the Lahore Electric Supply Company (LESCO) freely transfers stolen units from an electricity thief to an honest consumer living in another area by issuing an inflated bill.

Such cross-subsidization of electricity revenues also takes place between various categories of consumers, meaning that an entire group of domestic consumers in various supply lines end up paying for units consumed by commercial or industrial consumers of connivance with corrupt officials.

How to control this threat is not a million dollar question. There are technologies already in use around the world, and in this region, to control commercial losses in power distribution. Installing smart meters at division, subdivision and feeder level has been seen as one of the most effective ways to control losses by matching wholesale electricity supply to end consumer consumption .

Prepaid electricity meters are another way to ensure timely payment by electricity customers. These are part of innovative and cost-effective measures to transform an electricity company into a dynamic and lucrative distribution company. Initially, these smart electricity meters should be installed for consumers in the public and commercial sectors.

There are several reasons for electricity theft, officially known as Technical and Commercial Aggregate (AT&C) losses, which include metering issues. According to a study, the prepaid metering system minimizes collection inefficiencies, while the sophisticated features of prepaid smart metering enable real-time identification of pockets of loss, while giving consumers the freedom to plan their consumption. electricity according to their needs and resources.

This can help significantly reduce AT&C losses and resolve consumer issues regarding improper billing, easy reconnect after disconnection due to unpaid bills and alleged unauthorized use of electricity in the event of a simple disconnection on paper. For the electricity sector, the prepaid meter is a perfect recipe to ensure revenue collection one hundred percent even before the electricity is consumed.

This intervention does not rely on emerging technology. According to an announcement made by the Indian government in February 2022, some 3.73 million prepaid smart meters have already been installed in various states. Bangladesh is also moving towards introducing advanced smart technologies in the electricity sector.

In India, smart meters are being installed under various federal programs as well as by the utilities themselves. The Indian government is providing funding to the states for the implementation of smart meters to encourage it. Under some agreements, the Center makes the initial capital expenditure and the electricity distribution companies (DISCO) reimburse on the basis of a monthly rent.

The importance of introducing new technologies to limit losses remains underestimated in Pakistan.

The author is a senior journalist based in Lahore

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