Pakistan's captive power plants dilemma: risk losing exports or IMF deal

Pakistan is struggling to make what might appear to be an impossibly difficult decision — whether to continue supplying gas to
captive power plants or to cut it off as part of an agreement with the International Monetary Fund (IMF). Either way, the decision has significant implications for the country's power sector and the overall economy.

For the layman, captive power plants are plants that are owned and managed by large entities such as industries and generate electricity exclusively for their own needs.

The government has committed to the IMF to phase out gas-based captive power generation by the end of January 2025. This move aims to integrate captive power plants (CPPs) into the national grid and increase electricity production from RLNG plants which are relatively more efficient than captive power plants.

The rationale and the consequences

The rationale is that integrating captive power plants into the grid would reduce power tariffs for everyone by distributing fixed capacity charges over more units consumed.

However, cutting gas supply to CPPs would have several negatives as well. Exporters, particularly in the textile sector, are concerned about the potential decline in exports, reduced foreign exchange inflows, lower production, decreased tax revenue, and increased unemployment.

Less competitive exports

Yasin Siddik, former chairman of the All Pakistan Textile Mills Association (APTMA), observed that Pakistan's exports are already struggling to compete globally. Cutting gas to CPPs could make them even less competitive, he warned.

If gas supply to captive power plants is curtailed, textile sector exports may suffer up to a 40% decline, Siddik said. Buyers would move to other countries for textile supplies and once they are satisfied with them, they would have no reason to come back to Pakistan, he said.

Industrialists argue that the decision to cut gas supply to CPPs is misguided and they have urged the government to reconsider.

Dr Mirza Ikhtyar Baig, chairman of Baig Group of Companies, said that switching major exporters to grid electricity would adversely impact production costs, leading to lower exports, shutdown of industrial units, and massive unemployment.

Unreliable supply

Although the finance minister assured that electricity prices would be brought to nine cents per kilowatt-hour (kWh) — close to the captive generation rate — industries do not consider grid supply reliable enough.

Javed Bilwani, president of the Karachi Chamber of Commerce and Industry (KCCI), stated that the government has realized that ending captive generation has more disadvantages than advantages.

Significant savings?

The estimated total allocation of gas to captive and industrial consumers is approximately 350 million cubic feet per day (mmcfd) of indigenous gas and 150 mmcfd of RLNG. Industrial connections in the country's south receive more than 150 mmcfd of domestic gas from this allocation.

The total number of CPPs is 1,180, with the majority (797) in the Sui Southern Gas Limited (SSGCL) network. The total self-consumption of electricity by CPPs on indigenous gas and RLNG is estimated at 2000-2500 megawatts (MW). Reconnecting 70% of these to the grid will contribute PKR 200-250 billion to capacity charges, effectively reducing the tariff by more than PKR 2 per unit for everyone.

While this can be seen as a significant saving, the grid needs more consumers due to falling demand caused by the economic slowdown and the sharp increase in self-solar generation.

However, the savings in the power sector would complicate matters for the gas sector, including both companies in the south, which are already facing line-pack pressure issues.

Saad Hanif, head of research at Ismail Iqbal Securities, said that exports would decline due to the closure of some textile units. However, it would reduce circular debt as it would potentially lower gas subsidies, which would in turn help in circular debt management, Hanif said.

He emphasized that the government needs to focus on reducing electricity costs to drive higher consumption rather than disconnecting gas supply, which risks crippling industries and further straining the economy.