Energy bills are sinking the finances of many Pakistani households
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The last four years have seen considerable increases in electricity bills and large increments have also been proposed for gas consumers. Despite this, the energy sector’s viability remains precarious due to the slow implementation of long overdue reforms that have been exacerbated by rising global fuel prices. The cash constraints affecting production and accumulating power payment arrears to producers have resulted in frequent load shedding as well as put an unsustainably large burden on the national exchequer. It had earlier strained Pakistan’s commitments to the International Monetary Fund (IMF) under the Extended Fund Facility (EFF), and going forward, is likely to test them again as the government tries to contain public outrage at the ever-increasing and unaffordable energy bills.
In FY2022 alone, PKR 536 billion (0.8 percent of GDP) power payment arrears were added to the power circular debt pool to close at PKR 2,253 billion (3.4 percent of GDP). This was only slightly lower than the all-time high stock in FY2021 since the government made payments from the budget of PKR 564 billion. The continued addition to the pool of circular debt despite several tariff hikes since 2019 has largely been due to new power generation capacity coming onstream, higher international energy prices, exchange rate depreciation, higher interest rates, and subsidies to various industries. Delays in tariff adjustments further worsened the situation. Similarly, the gas sector has also accumulated circular debt stock of about PKR 720 billion (1.1 percent of GDP) by March 2022 driven by a shortfall in revenue that has been driven by high unaccounted-for gas losses (UFG), delayed sales price adjustments (since September 2020), uncovered subsidies (especially for export and zero-rated industries), and collection shortfalls. The combined gas and electricity circular debt amounts to approximately PKR 3 trillion or 4.5% of GDP.
To make the sector viable, the government has primarily relied on aligning tariffs with the cost of production and distribution (in which recovery and transmission losses are embedded). The base tariff has recently been raised by PKR 7 per unit, which led to a hike in electricity rates in addition to the tariff increases on account of fuel adjustments. Over the last three months, the national average base electricity tariff has already gone up from PKR 16.91 per unit to PKR 24.82 per unit. The National Electric Power Regulatory Authority (NEPRA) has indicated allowing power distribution companies to further raise the power tariff by PKR 3.39 per unit on account of quarterly adjustments.
While the cost increases have partly been driven by the rise in international fuel commodity prices, it is the inexorable increase in capacity payments that have driven the bulk of the power sector tariff increment hikes.
Javed Hassan
The government has also approved the increase of gas prices to contain the gas sector’s circular debt flow, address some of the debt stock, and improve the liquidity of the gas companies. As per the OGRA determination, the prescribed average end-user gas price is expected to go up by 45 percent to PKR 928 per MMBTU, which will generate about PKR 666 billion for gas companies in the fiscal year 2023. The tariff increments for electricity and gas have hit the public hard when they are already struggling to cope with historically high inflation levels.
While the cost increases have partly been driven by the rise in international fuel commodity prices, it is the inexorable increase in capacity payments that have driven the bulk of the power sector tariff increment hikes. The capacity charges have increased from PKR 2.49/unit in 2015 to PKR 9.8/unit presently as a result of one-sided agreements with Independent Power Producers (IPPs) post-2013. Power costs can be curtailed by reducing transmission and distribution losses, but this component constitutes less than 20 percent of the tariff or less than PKR 4.9/unit and has remained around this level in percentage terms for the last 5 years. Reduction in tariffs through improvements in transmission efficiency and better collection efforts will undoubtedly help lower costs, but it is unlikely to materially offset the impact big surge in capacity charges that are likely to further go up with PKR depreciation since they are dollar indexed.
The capacity payment charges to the consumer can be reduced by boosting overall consumption, thereby increasing the level of utilization of fixed capacity, or in other words, spreading the cost more widely. However, there is little likelihood of that since the economic growth outlook remains tepid for the near term. The government has indicated to the IMF that it will be looking to actively seek Power Purchase Agreements (PPAs) renegotiations to reduce the capacity charges that have added most to the recent tariff increases. There is also a commitment to rationalize preferential power subsidies for tube-well owners and export-oriented industrial sectors. It is hoped cost reductions that can be achieved through PPA renegotiations, reduction in the transmission and distribution losses, and cutting down of subsidies are expedited, and the savings redirected towards alleviating the burden of electricity bills, which is sinking the finances of many households across the country.
- Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
