The Friday Economist is a collaborative blog series between LUMS MHRC and the CNM Department of Economics at LUMS

The challenge of circular debt has persistently plagued Pakistan's power sector and has worsened over time across subsequent governments. By June 30 2022, the circular debt had accumulated to PKR 2252.75 billion, a significant increase from PKR 450 billion in 2013. The country has been unable to break free from this detrimental cycle of debt accumulation, resulting in frequent power outages, intermittent electricity cuts, rampant theft, and escalating energy costs.

Figure 1 provides a summary of the annual accumulation of debt in the energy sector. Circular debt surpassed PKR 818 billion in 2017 and has consistently exceeded the PKR 2 trillion mark since 2020.

In this blog, we delve into the root causes of circular debt and explore the potential of smart grid and metering technology in addressing this pressing issue.

Unraveling the Origins and Aggravating Factors of the Circular Debt Crisis

Circular debt refers to the accumulation in liabilities that power distribution companies (DISCOs) owe to the Central Power Purchasing Authority-Guarantee (CPPA-G), resulting in delayed payments to power generation companies (GENCOs). Its accumulation can be attributed to three primary factors: first, the tariffs charged to end-consumers are inadequate to cover the increasing costs of power generation and the government, constrained by fiscal limitations, is unable to fully compensate Pakistan Electric Power Company (PEPCO) for the resulting losses.

Second, PEPCO encounters difficulties in recovering dues from its consumers and there is widespread occurrence of end-user theft. In 2021, DISCOs incurred losses amounting to approximately PKR 2.8 billion, due to low bill payment collection from over 430,000 incidences of electricity theft. An alarming PKR 380 billion worth of electricity has been stolen in the ongoing fiscal year (2022-23). It is projected that this loss will further escalate to PKR 520 billion in the following year, exacerbating circular debt further.

Third, high transmission and distribution (T&D) losses are a major contributor to the flow of circular debt (ADB, 2021). to pose a significant concern for the economy. The 2022 State of Industry Report revealed that DISCOs exceeded the permitted T&D losses of 13.41% by 3.72 percentage points – a trend that it has long followed (see Figure 2) – resulting in substantial financial losses of PKR 113 billion in FY 2021-22. According to NEPRA, the largest contributor to the circular debt is T&D losses, along with the challenges in payment collection. 

Can Technology Save the Day?

Pakistan stands among a limited number of developing nations where utility companies (DISCOs) persist in utilizing outdated mechanical electric meters. These power meters consist of numerous gears and mechanical components that progressively lose efficiency and accuracy, resulting in substantial losses. Smart metering and grid systems can enable more accurate measurement of electricity consumption, detection of theft, and timely billing, ensuring a more efficient and transparent energy distribution process.

A smart grid is a modernized power grid that enables a two-way flow of electricity and utilizes advanced technology to detect changes in usage, automatically monitor the energy flow and adjust changes in energy demand and supply accordingly. Smart Grid Technology uses technology and information to improve the reliability and efficiency of the electric system. The integration of digital devices, sensors, and control systems into the grid allows for real-time monitoring and control of the electricity supply chain, reducing the chances of power outages. It can identify high-loss areas, enable swift disconnections and detect unauthorized meter manipulation, making end-user theft less likely. Smart grid and metering structure has the potential to bring financial sustainability and operational efficiency to the energy sector in Pakistan.

An Untapped Opportunity?

Pakistan can draw valuable lessons from the achievements of smart metering implementations in other developing nations, which have effectively mitigated theft occurrences and T&D losses. In Mozambique, the introduction of smart meters in 1995 resulted in a significant reduction of non-technical losses, reducing theft from 43% in 1995 to 21% by 2011. The introduction of prepaid metering in Cape Town, South Africa, in 2016 led to a positive impact on bill payment behavior. Low-income customers and individuals with a track record of late payments showed remarkable progress in paying their bills promptly following the adoption of the prepaid metering system. This successful implementation highlights the effectiveness of prepaid metering in promoting timely payments and improving financial responsibility among customers.

In recent years, several independent development agencies in Pakistan, including UKAID and USAID, as well as private organizations such as Jazz and FINCA, have partnered with DISCOs to enhance energy distribution system efficiency and reduce waste. Lahore Electricity Supply Company (LESCO), in collaboration with USAID, piloted an initiative to combat tampering and theft by replacing outdated electricity meters with smart meters. The pilot, implemented in the Delhi Gate area of the Walled City in Lahore, had promising results. T&D losses in the Delhi Gate area decreased remarkably from 17% to 7%. The profits from the initiative, which are projected to reach Rs 4.88  billion in five years, can prevent electricity theft and control line losses.

In 2018, Jazz, Peshawar Electric Supply Company (PESCO) and their technology partner, Company of Intelligent Systems and Networks Research (CISNR) implemented a mobile-enabled smart metering program on two feeder lines of PESCO. Within a short span of three months, the line losses on each of the 254 transformers halved from 1088KW to 560KW, leading to substantial savings of $78,980 in just one quarter. The estimated amount of savings from connecting all 514,498 transformers in the PEPCO system to the smart metering system is in excess of $600 billion in a year. In another pilot in collaboration with UKAID, USAID and Jazz, PESCO installed smart  metering technology on 10 transformers on the Karkhano feeder in Peshawar. Line losses on the feeder decreased from 38.3% to 27.2%, highlighting the power of smart grid technology in reducing T&D losses for inefficient DISCOs, and its potential for minimizing debt.

The way ahead

Earlier this year, the World Bank committed to funding the installation of smart meters and transformer monitoring systems to tackle the challenge posed by line losses, billing inefficiencies and low recovery. This is in line with the national Circular Debt Management Plan, which also emphasizes the need to address T&D losses and improve collection effort. Embracing smart metering systems is likely to be a crucial step for reducing the burden of circular debt and moving towards a more efficient, secure, and reliable electricity supply for consumers in Pakistan.

Eeman Qureshi is a Teaching Fellow in the Department of Economics, LUMS.

Rimsha Arif is a Consultant at The World Bank and Teaching Fellow in the Department of Economics, LUMS.