Impact of actor behaviour on the circular debt crisis in Pakistan's electricity sector - An Agent-Based Modelling approach

Abstract

A reliable, accessible, and affordable electricity provision is crucial for economic development in emerging markets. For some emerging countries, ill-advised policies, unfortunate market development, and a bad starting position together with the already complex nature of the electricity sector caused circular debt to accumulate. Circular debt is a self-reinforcing shortfall of revenue throughout the value chain that tends to look like a “vicious circle” without a proper solution. This study focuses on one of the root causes of circular debt: expensive and inefficient electricity generation. This thesis aims to research the effect of investors’ investment behaviour and the price-setting strategy of market regulators on circular debt in the context of the energy transition. Therefore, this study follows two main steps: (i) an agent-based investment model is used to link actor behaviour to the contracted market prices and the variable renewable energy share, (ii) a qualitative analysis links the model results to the development of circular debt. The results of the agent-based investment model show a decreasing electricity price in all scenarios. Furthermore, the market regulator’s price-setting strategy has a more significant influence on the contracted market price than investors’ investment attitude. In addition, this study’s qualitative research confirms the positive causal relationship between contracted market prices and circular debt of previous studies. However, no conclusions can be drawn about the degree of causality between lower contracted market prices and an improved circular debt position. Finally, the analysis also shows a mismatch between the short-term problem of circular debt and the long-term solution of integrating renewable energy. Integration of variable renewable energy is not a solution for the current circular debt crisis but a vital long-term driver to prevent the repetition of circular debt crises.