A thread on the mess in power sector and circular debt. I am going to use terms like 'core' and 'downstream', so refer to the attached picture of locating the specific part of the energy supply chain. Brace yourself for a really long thread. 
According to a World Bank report in 2018: Losses in transmission and distribution amount to 25% of electricity in the network. For context, the international norm is 10%. These losses are the result of an extremely perverse incentive structure that leads to high inefficiency.
Inefficiencies originating in every link of the electricity supply chain have resulted in fuel shortages, poorly performing state utilities, and wasteful consumption downstream. Institutional distortions and regulatory distortions playing a huge part.
Government planners, not the market, allocate fuel supplies and set prices. Because the market plays a limited role in penalising underperformance and rewarding efficiency, energy suppliers face little pressure to control costs and maximise outputs.
Staying true to my free market leaning I may point out that in the core part keeping all else equal a public plant in Pakistan uses substantially more fuel than a private one to produce the same amount of electricity, infact 20% more fuel. (Dw IPPs are not getting a pass).
Hefty losses of electricity in distribution, along with poor recovery of overdue electricity bills, have given rise to alarming levels of debt in the sector. Yet the governments have placed emphasis on access rather than quality.
As a result, places where electricity prices are too low to recover costs, adding new electricity connections has puts greater strain on the grid because the system is forced to absorb more loss-making customers. All this electrification in a budget constrained environment.
Holding a magnifying glass over the earlier supply chain picture gives us this picture. Let's start with Producers specifically IPPs.
IPPs face no incentive to improve efficiency because of power purchase agreements that offer compensation on a cost-plus basis and a guaranteed return on equity. These plants receive a fixed capacity payment under long-term “take or pay” contracts.
Moving onto the Distributors. Distribution losses are simply huge in Pakistan with wide variation in performance across 10 public distribution companies (DISCOs). These DISCOs have an implicit guarantee of a government bailout and face no repercussion for failure to meet targets.
The governance structure of these DISCOs is inherently weak. As @nadeemhaque points out in his podcast, these are large companies with area monopolies that operate like govt departments. The CEOs are not incharge of their balance sheets and are exposed to political interference
Now NEPRA determines the retail electricity tariff for each distribution company on the basis of its cost of delivering electricity to consumers, including its power purchase cost, its targeted transmission and distribution cost, and a guaranteed return on its capital investments
However, the actual consumer tariff, the government-notified tariff is on average substantially lower. The difference, known as the tariff differential subsidy, is payable by the government.
In determining the end-consumer tariffs, the regulator assumes 100 % collection and transmission and distribution losses at 15.5 percent, a significant deviation from what DISCOs are able to achieve. All these inefficiencies have led to the emergence of arrears in the sector.
Huge chunk of these arrears in the power sector or circular debt comes from inefficiencies in the DISCOs, unbudgeted subsidies and delays in tariff notifications.
The accumulation of this large stock of power sector arrears represents a significant quasi-fiscal risk, including combined annual debt servicing costs exceeding PRs 100 billion. The reform of the sector require revamping the whole incentive structure to nudge or force efficiency
