The Economic Merit Order (EMO): Unveiling Hidden Costs and the Need for Transparency

The Economic Merit Order (EMO), prepared by the National Power Control Center (NPCC) in Pakistan, plays a crucial role in determining the priority order of power plants in the national grid. This merit order is intended to optimize power generation, dispatching the most cost-effective plants first and curbing the overall cost to consumers. However, beneath its surface, significant cost components are being overlooked or understated, leading to an inaccurate representation of the true economic impact.

The data shared by Central Power Purchasing Agency (CPPA-G) and endorsed by NEPRA (National Electric Power Regulatory Authority) has come under scrutiny, with growing concerns about the transparency of cost components included in the EMO. The current methodology tends to obscure several key costs, leading to a misleading narrative of the power sector's efficiency.

Hidden Costs in the Economic Merit Order

The EMO is largely based on variable costs, focusing on Energy Payments (cost of fuel) to decide the order in which power plants are dispatched. However, the Capacity Payments — guaranteed payments made to Independent Power Producers (IPPs) regardless of whether their plants are dispatched or not — are often neglected in this calculation.

While Energy Payments directly reflect the fuel cost per unit generated, Capacity Payments include additional factors such as fixed operational costs, debt servicing, and profits that must be paid even if the plant is underutilized. This omission distorts the real economic burden on the system.

Here are the key areas where hidden costs are lurking:

1. Capacity Payments Ignored: Many power plants, especially newer IPPs, are burdened with high capacity payments that are not reflected in the EMO. These payments, while contractual obligations, represent a significant cost passed on to consumers but are often overlooked when presenting the economic picture.
2. Fuel Price Adjustments: The EMO typically uses the cheapest available fuel prices to dispatch plants. However, fluctuations in global fuel prices and local pricing policies (like gas and furnace oil) are often not accurately reflected. These delayed price adjustments, or failure to account for all associated costs (e.g., transportation and storage), contribute to the disparity.

Transparency in Economic Merit Order: A Call for Reform

To ensure the Economic Merit Order truly reflects the real economic situation, a more comprehensive and transparent approach is required. Here's what needs to be done:

1. Inclusion of All Cost Components: Both Energy Payments and Capacity Payments must be considered in a reformed EMO to reveal the actual cost of power generation. This would give a more accurate picture of how much each plant is costing the system, not just in terms of fuel but also in long-term contractual obligations.
2. Adjustment for Realistic Fuel Prices: The merit order must incorporate real-time fuel price fluctuations and all relevant associated costs. Regular adjustments for fuel prices would help in creating a more dynamic and realistic economic picture.
3. Impact of Capacity Payment Obligations: Highlighting the full scope of capacity payments and how they inflate consumer electricity bills is essential. Many new IPPs were awarded contracts with lucrative terms, and these costs need to be transparently communicated to the public and regulators.

Conclusion: A Realistic Economic Merit Order Is Essential

A reformed Economic Merit Order that incorporates all cost components — Energy Payments, Capacity Payments, environmental costs, and realistic fuel prices — is critical to revealing the true cost of power generation in Pakistan. NEPRA, CPPA-G, and NPCC must work together to develop a more transparent and comprehensive methodology. Only by doing so can we ensure that the energy sector operates efficiently, that consumer tariffs reflect actual costs, and that long-term energy security is achieved without unnecessary burdens on the economy.

Transparency, accountability, and a holistic view of all cost components are the need of the hour. Without these, the EMO will continue to mask the real economic challenges facing Pakistan’s power sector.