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Road to urgent resolution of the power tariff crisis

Rising electricity bills are breaking the back of the domestic consumers and making manufacturing businesses unviable. There are protests and agitation across the country about the rising electricity bills which have approximately doubled in less than 18 months. That is resulting in a decline in consumption and an increase in thefts (line losses and non-recovery). In response, both the government and the IMF are prescribing further increase in tariffs. There is no end to this circular solution of the circular debt. They must deal with it in a different way.

The good news is that over the last few years, the mix of the power generation has been improved with the induction of efficient plants and increased reliance on the indigenous (such as Thar Coal) and low marginal cost (such as nuclear and hydel) fuel options. The engineering solutions are fine, as fuel costs are falling, and energy usage is becoming efficient.

However, the financial aspect is bankrupting the sector, as almost all the plants’ debt is frontloaded (to be paid in the first 10-12 years of projects with a useful lives of 25-30 years or more) in dollars and indexed to interest rates. With steep currency depreciation, the impact of lowering fuel cost is being eroded. In the latest tariff determination, the component of capacity charge is 70 percent of the power purchase price which used to be 20-30 percent till 2015. This is simply unsustainable.

The ideal scenario is to increase consumption (numerator) to lower the impact of fixed capacity charge (denominator). However, that is clearly not happening, as with the rise in effective tariffs amid worsening macroeconomic conditions, grid consumption is falling. And it is going to fall further with every round of price increase, and recovery of the bills is going to fall, as well.

Thus, the only way to sustain is to lower tariffs to increase consumption and reduce the capacity charge per unit. However, there is no fiscal space to provide subsidy to the power sector, while the circular debt has to be checked to ensure financial sustainability.

There are multiple steps and decisions the government should take in the short to medium term. And the IMF would be convinced, if the circular debt were to not grow any further.

Immediate attention is required to be paid to the consumer categories of below 300 units. Out of 3.5 million KE consumers, 2 million are below 300 units. At the same rate, about 60 percent of domestic consumers in the country are in this category.

The rounds of price increase last year are higher in percentage terms for these consumers, as all the unprotected consumers (above 300 units) must pay the same surcharge (at Rs3.23) on PHPL debt irrespective of what tariff category they fall in. Similarly, fuel surcharges and quarterly adjustment are equally applied to all consumers, irrespective of slabs. And protected consumers can slip to unprotected for six months if they cross the 200 units limit any month.

In this fashion, the increase in bills for low middle class consumers is much higher than affluent segment. In July 2023, a consumer bill was Rs 15,000 on 279 units while it is Rs 6,500 for consuming 177 units. These units are enough to run a fan or two and a few lights. There are cases where households are paying more on electricity bills than house rents. It’s natural to see protests across the country.

The question is how to lower the bills of vulnerable segments, as already the government is providing Rs900 billion subsidy to the power sector and then upper slabs of domestic (having TOU – time of unit meters), commercial and industrial consumers are cross subsidizing lower segments. However, growing bills are making businesses unviable and straining middle class budgets. These surely cannot take any further burden.

The need is to look at the energy sector holistically. There are huge variations in the energy cost between similar industries but with different types of connections. For example, between the two cola bottlers – Pepsi and Coke, in Karachi, one runs on captive power using indigenous gas, while the other is on the power grid, and the poor one on the grid pays 2.5-3 times in energy bill more than the other. If the one on grid is competitive, the other is simply extracting rent.

In another case, one big mall in Karachi is on the grid while another runs on a captive gas connection belonging to the legacy industrial unit on the site – again the difference in shop’s energy bill is 2.5-3 times. The distortion makes one group lucky, the other not so much.

Another very interesting case is of a well-known Karachi-based group of companies in confectionery and snack food manufacturing business, which also relies on a captive power unit using indigenous gas for manufacturing. In the last 12 months, the group consumed 1.2 million MMBTU and paid Rs1.4 billion in gas bills. Had it even been on LNG connection, the bill would be Rs4.4 billion, and around Rs3.5-4 billion on grid power. It would imply that the group extracted economic rent of Rs2.5-3 billion last year. ‘Re-imagine’ that!

These anomalies must be eliminated if lifeline consumers are to be cut any slack at all. It is estimated that a bunch of business houses in Sindh has extracted rents of around Rs 200 billion last year thanks to cheap gas connections.

Gas prices should be normalized, and indigenous gas should be available foremost for the power sector where efficient plants are relying on expensive imported gas while inefficient captive plants of business houses are bleeding the Exchequer dry thanks to access to dirt cheap local gas. By doing so, the benefits from bunch of business houses in south shall be transferred to grid consumers, and can help lower the power tariff.

Then the immediate step should be to end the PHPL surcharge from all kinds of bills. It is charged at Rs3.23 for the interest payment on Rs800 billion circular debt. That debt is bad and is being written off. However, consumers are paying interest. The federal government should add it to public debt instead.

However, that won’t be enough to significantly lower the bills to let consumption grow for fully utilizing installed capacity. The problem of capacity payment needs to be dealt with. There are 17 Chinese funded projects of about 11,000MW having foreign debt of $15 billion. The annual debt servicing is around $2.4 billion (at current LIBOR rate) for ten years. The government should try to convert these into a G2G loan with 30-year repayment term at a concessionary loan of 2 percent. This can result in savings of $1.8 billion for the initial ten years, and that can reduce the power tariff by Rs7/unit at current consumption.

Then the government must exhibit a serious resolve to reduce losses of power distribution companies (discos). However, in the last year (FY23), recoveries were reduced by 1.8 percentage points to 92.7 percent. And FY24 has started on a sour note – there are countrywide protests going on and recovery is likely to fall further.

Thus, the government must work on bringing indigenous gas to the power sector, work on removing grid constraints, remove PHPL surcharge, ensure conversion of imported coal to local, and talk to China for restructuring the power sector loans and should create the fiscal space by taxing retailers and traders and provide direct subsidy to vulnerable sector. And concurrently, work on privatizing and provincialization of Discos. Nothing of above-mentioned steps is easy to implement – but the window is closing, otherwise, growing defaults on the grid power shall cripple the system sooner rather than later.

Ali Khizar, "Road to urgent resolution of the power tariff crisis," Business recorder. 2023-08-28.
Keywords: Economics , Monterey fund , State Bank , Gas prices , Economy , Pepsi , Coke , Pakistan , China , LIBOR , PHPL) , MMBTU

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