What are capacity charges called?
The endless gap between supply and demand is at the root of Pakistan's energy problems, which has led governments to decide that the country needs more electricity. So they set up many new power plants across the country, many of which were Independent Power Producers (IPPs).
These power plants are capital intensive, and those installing them want assurance that they are investing their money in a place where they will get a return.
So they entered into power purchase agreements with the government to determine how they would be compensated.
The agreements stipulated that capacity payments would be based on the cost of land acquisition, design, installation, taxes, insurance, administration, debt servicing and return on equity.
Now the great (or should I say annoying) part of this whole process is that contracts are set against things that fluctuate, including exchange rates and interest rates.
But as has been the case in Pakistan, government decision-makers have over-brained and turned gains into losses.
The idea was that there hould be an oversupply of electricity. But the decision makers forgot that there should be an equal capacity to transmit this excess power.
The result was that Pakistan now has excess power generation capacity, but no way to deliver this power to consumers.
Hence, there are capacity charges for the plants and the government has to pay them.
In simple terms, if an IPP has the capacity to generate 100 MW of electricity and produces only 60 MW due to transmission constraints, it will still be paid for the full 100 MW.
This means that just because an agreement was signed, there are plants that can produce a lot of electricity.
Although consumers need electricity, they will never get it, because there is not enough system to deliver it all.
Now that the plant has the capacity to generate excess power, consumers will have to continue paying for it. Today TV Report
