From Circular Debt to Circular Economy

The term "circular debt" will continue to be used regardless of the governments' movements. The Pakistani Prime Minister presided over the cabinet meeting on the agenda to reduce the power sector's circulating debt, which was held in light of the energy sector's availability and affordability issues. We are stuck in the "circular debt" in a world where contemporary economic debate revolves around the concept of a "circular economy." Although the concept of a circular economy is not new in economics, climate change has brought it into the spotlight. The design of products so that they can be used and consumed is now the primary focus of the economies; simple to repair; they can be easily salvaged and recycled, making them a part of the production process. As a result, efficient production in which input loss is minimal to produce output is achieved through active waste reduction and recycling. The concept of circular debt, however, is relatively new to economics, particularly in the energy industry. In fact, we are to blame for making this term popular in 2010, when Pakistan's energy crisis began to get worse. What exactly is circular debt then? It is in opposition to the circular economy, which places a high value on input recycling and efficient use. The inefficient production-consumption cycle (power generation, transmission, and distribution) is the primary cause of circular debt. It is the increasing debt of stakeholders in the energy sector. It begins with the end-users' inability to pay their electricity bills and the government's unplanned subsidies for tariff differentials, as well as distribution system inefficiencies. Consequently, the Central Power Purchasing Authority (CPPA) is not paid by electricity distribution companies (DISCOs). Power producers (IPPs and GENCOs) suffer as a result of this payment delay. The loop is eventually closed when the fuel suppliers, primarily Pakistan State Oil (PSO), do not receive all of their payments. It begins with the public (the general public and the government) and ends with increasing the public debt, which ultimately burdens end users and the government.

The problem of circular debt can be solved more quickly and effectively through effective sector management.

According to the Asian Development Bank (ADB), delayed tariff adjustments account for 35% of circular debt, which is composed primarily of four major drivers. DISCO inefficiency accounts for 31% of circular debt; Unbudgeted subsidies account for 18%, while interest payments on existing debt make up the remaining amount. As a result, there are at least five important considerations. The most obvious factor is the high cost of producing electricity. Second, the delay in determining tariffs. Third, the DISCOs and K-Electric's inadequate collection of revenue (electricity bills) and high system losses (losses that are attributed to distribution and transmission systems). Fourth, the payments that the government makes in part to the DISCOs are known as tariff differential subsidies (TDS). Last but not least, Power Holding Private Limited (PHPL)'s CPPA's higher borrowing costs and late payment penalties. In Fiscal Year 2013, the total stock of circular debt was Rs 450 billion, and it has since increased to Rs 2437 billion; registering an alarming growth rate of 541% over a ten-year period.

What are the sustainable policy options for resolving this issue? A two-pronged, dynamic approach is required to solve this problem. The supply side of energy or capacity building is the first approach. At the moment, this approach is dependent on imported fossil fuel and is susceptible to price and supply shocks around the world. In this regard, the next step is to make the electricity generation mix less dependent on imports. Pakistan currently imports 33% of its primary energy requirements, accounting for 26% of its total import bill. This reduction necessitates an integrated, gradual process. Although the Indicative Capacity Expansion Plan – 2022-2031 (IGCEP) is a positive step in the right direction, it is still a plan that must be implemented with diligence and commitments. In addition, the National Electric Power Regulatory Authority must ensure automatic quarterly tariff adjustment protocols and implement targeted and fully budgeted electricity-related subsidies to stop the flow of circular debt. As a result, renewable and local resources can be used to reduce generation costs and improve financial management.

Demand-side management is the second strategy. The problem of circular debt can be solved more quickly and effectively through effective sector management. The energy sector's problems, according to many experts, are more of a management problem than a capacity problem. The following policies can be implemented in this setting: First, private investors can invest in transmission and distribution systems like the 660 KV HVDC Matiari-Lahore Transmission line Project through organizations like the Private Power Investment Board (PPIB). As a result, more purchased electricity will be sold and distribution losses will be reduced. Additionally, better reporting incentives, effective use of detection bills, and advocacy and awareness campaigns to control electricity theft are the next steps in reducing unbilled electricity. Second, additional DISCOs can be established for improved DISCO management. In terms of system losses, Peshawar Electric Supply Company (PESCO) and Quetta Electric Supply Company (QESCO) are currently the largest distribution companies, with 38% and 28% losses, respectively. The provinces of KPK and Balochistan are served by both businesses. Thirdly, the world is moving toward renewable energy-based microgrids based on small-scale decentralized energy generation and distribution models with the establishment of microgrids. Locally controlled distributed generation (DG) units can thus generate and distribute electricity. In addition to decreasing inefficiency in terms of losses, this will enhance access to electricity rates (SDG 7.1). Fourthly, according to the State of Industry Report-2022, defaulting on payments costs approximately Rs. 700 million, which is worrying because these customers are still connected to the system and the DISCOs have not done anything to get their money back from the defaulters.

The higher income quintiles must have their monthly electricity bills capped in order to reduce this. Fifthly, the residential sector consumes more electricity than the commercial and industrial sectors do. As a result, efficient electric appliances, Time of Use (ToU) metering, peak demand management, and Daylight Saving Time (DST) will all be more effective than closing malls and shopping centers earlier than usual. Last but not least, apply the 5Rs of the circular economy to the energy sector, such as redesigning grids, reducing system losses, rethinking consumption patterns, and rethinking renewable energy.

Although the concept of a circular economy is not new in economics, climate change has brought it into the spotlight. The design of products so that they can be used and consumed is now the primary focus of the economies; simple to repair; they can be easily salvaged and recycled, making them a part of the production process. As a result, efficient production in which input loss is minimal to produce output is achieved through active waste reduction and recycling. The concept of circular debt, however, is relatively new to economics, particularly in the energy industry. In fact, we are to blame for making this term popular in 2010, when Pakistan's energy crisis began to get worse. What exactly is circular debt then? It is in opposition to the circular economy, which places a high value on input recycling and efficient use. The inefficient production-consumption cycle (power generation, transmission, and distribution) is the primary cause of circular debt. It is the increasing debt of stakeholders in the energy sector. It begins with the end-users' inability to pay their electricity bills and the government's unplanned subsidies for tariff differentials, as well as distribution system inefficiencies. Consequently, the Central Power Purchasing Authority (CPPA) is not paid by electricity distribution companies (DISCOs). Power producers (IPPs and GENCOs) suffer as a result of this payment delay. The loop is eventually closed when the fuel suppliers, primarily Pakistan State Oil (PSO), do not receive all of their payments. It begins with the public (the general public and the government) and ends with increasing the public debt, which ultimately burdens end users and the government.

The problem of circular debt can be solved more quickly and effectively through effective sector management.

According to the Asian Development Bank (ADB), delayed tariff adjustments account for 35% of circular debt, which is composed primarily of four major drivers. DISCO inefficiency accounts for 31% of circular debt; Unbudgeted subsidies account for 18%, while interest payments on existing debt make up the remaining amount. As a result, there are at least five important considerations. The most obvious factor is the high cost of producing electricity. Second, the delay in determining tariffs. Third, the DISCOs and K-Electric's inadequate collection of revenue (electricity bills) and high system losses (losses that are attributed to distribution and transmission systems). Fourth, the payments that the government makes in part to the DISCOs are known as tariff differential subsidies (TDS). Last but not least, Power Holding Private Limited (PHPL)'s CPPA's higher borrowing costs and late payment penalties. In Fiscal Year 2013, the total stock of circular debt was Rs 450 billion, and it has since increased to Rs 2437 billion; registering an alarming growth rate of 541% over a ten-year period.

What are the sustainable policy options for resolving this issue? A two-pronged, dynamic approach is required to solve this problem. The supply side of energy or capacity building is the first approach. At the moment, this approach is dependent on imported fossil fuel and is susceptible to price and supply shocks around the world. In this regard, the next step is to make the electricity generation mix less dependent on imports. Pakistan currently imports 33% of its primary energy requirements, accounting for 26% of its total import bill. This reduction necessitates an integrated, gradual process. Although the Indicative Capacity Expansion Plan – 2022-2031 (IGCEP) is a positive step in the right direction, it is still a plan that must be implemented with diligence and commitments. In addition, the National Electric Power Regulatory Authority must ensure automatic quarterly tariff adjustment protocols and implement targeted and fully budgeted electricity-related subsidies to stop the flow of circular debt. As a result, renewable and local resources can be used to reduce generation costs and improve financial management.

Demand-side management is the second strategy. The problem of circular debt can be solved more quickly and effectively through effective sector management. The energy sector's problems, according to many experts, are more of a management problem than a capacity problem. The following policies can be implemented in this setting: First, private investors can invest in transmission and distribution systems like the 660 KV HVDC Matiari-Lahore Transmission line Project through organizations like the Private Power Investment Board (PPIB). As a result, more purchased electricity will be sold and distribution losses will be reduced. Additionally, better reporting incentives, effective use of detection bills, and advocacy and awareness campaigns to control electricity theft are the next steps in reducing unbilled electricity. Second, additional DISCOs can be established for improved DISCO management. In terms of system losses, Peshawar Electric Supply Company (PESCO) and Quetta Electric Supply Company (QESCO) are currently the largest distribution companies, with 38% and 28% losses, respectively. The provinces of KPK and Balochistan are served by both businesses. Thirdly, the world is moving toward renewable energy-based microgrids based on small-scale decentralized energy generation and distribution models with the establishment of microgrids. Locally controlled distributed generation (DG) units can thus generate and distribute electricity. In addition to decreasing inefficiency in terms of losses, this will enhance access to electricity rates (SDG 7.1). Fourthly, according to the State of Industry Report-2022, defaulting on payments costs approximately Rs. 700 million, which is worrying because these customers are still connected to the system and the DISCOs have not done anything to get their money back from the defaulters.

The higher income quintiles must have their monthly electricity bills capped in order to reduce this. Fifthly, the residential sector consumes more electricity than the commercial and industrial sectors do. As a result, efficient electric appliances, Time of Use (ToU) metering, peak demand management, and Daylight Saving Time (DST) will all be more effective than closing malls and shopping centers earlier than usual. Last but not least, apply the 5Rs of the circular economy to the energy sector, such as redesigning grids, reducing system losses, rethinking consumption patterns, and rethinking renewable energy.