FeaturedNationalVOLUME 19 ISSUE # 2

Energy sector conundrum

The energy sector finds itself ensnared in a complex web of challenges, marked by relentless tariff hikes, diminishing consumer reliance on the national grid, and a pressing call for structural reforms. Despite previous tariff adjustments, the government faces the formidable task of addressing the growing circular debt, prompting a closer look at the implications on households, industries, and the broader economy.

Despite repeated tariff increases on a monthly, quarterly, and annual basis, the circular debt in the power sector continues to escalate. The government has strategically shifted towards billing consumer tariffs, including capacity charges payable to power producers. The National Electric Power Regulatory Authority (Nepra) recently announced a flat Rs3.2814 per unit additional quarterly tariff adjustment, affecting all consumer categories and companies, except lifeline consumers, for the next six months, from October to March 2024. The overall revenue impact surpasses Rs200 billion, including Rs136 billion for additional cash flows to 10 ex-Wapda distribution companies (Discos), along with an 18% GST.

Simultaneously, the Power Division discreetly published the National Electric Plan (NEP) 2023-27 on its website. Approved by the last PDM-led coalition government on Aug 8, the plan outlines the partial recovery of capacity charges payable to Independent Power Producers (IPPs) through fixed charges for all consumers, except those in the very poor category. A circular debt report, available on the Power Division’s website for the period ending June 30, reveals total payables to IPPs at Rs1.434 trillion and total circular debt at Rs2.31 trillion. The report, released after a three-month gap, indicates an increase in payables to IPPs by Rs83 billion and total circular debt by Rs57 billion in FY23 compared to the previous fiscal year. Payables to public sector generation companies also rose by Rs10 billion to Rs111 billion.

The plan emphasizes the progressive incorporation of fixed charges in the tariffs for all consumer segments, excluding those in the protected category. It aims for fixed charges to represent at least 20% of the fixed cost of respective categories by FY27, evaluated through a cost-of-service study.

Despite successive increases in base tariffs, fuel costs, quarterly adjustments, and efforts against theft, the power circular debt continues to grow. The IMF is urging another tariff hike to address this issue, mirroring a similar challenge in the gas sector. The power sector circular debt flow has surged by Rs292 billion during the Jul-Sep quarter, exceeding the permissible ceiling of Rs155 billion, reaching Rs2,537 billion as of September 30, 2023.

Hence, the previous increment of Rs5.75/unit in the base tariff proves inadequate, necessitating further rate hikes by the government. The next tariff review, barring unforeseen deviations, is scheduled for July 2024. The International Monetary Fund (IMF) scrutinizes the costs and insists that the government recoup expenses through tariff adjustments or fiscal subsidies. Given the absence of fiscal leeway, a tariff hike emerges as the seemingly sole recourse. However, this is an unsustainable solution, especially considering that tariffs for specific segments have nearly doubled in the past few years.

The repercussions on households are substantial. In the middle-class bracket, the monthly electricity bill during the summer constitutes approximately 30% of disposable income. The situation is even direr for the lower middle-income class. The industrial sector and other businesses face declining competitiveness due to recurrent energy tariff hikes. Exporters grapple with formidable challenges competing against regional counterparts.

Many households, with the means to do so, are transitioning to solar solutions, diminishing reliance on the grid. Manufacturing companies, in particular, are diversifying their energy sources, aiming to decrease dependence on the national power grid. With an additional tariff increase, those equipped with generation sets may increasingly rely on their own power generation, while daytime consumption continues to shift towards solar. For those still solely dependent on the grid, the incentive to invest in alternative solutions is intensifying.

Consequently, reliance on the national grid is on a downward trajectory, evident in recent statistics. Power generation witnessed a 10.6% decline in October 2023 (YoY), with a staggering 28% drop compared to the previous month. The overall increase in the first four months of FY24 is 3.7% from a low starting point. As capacity costs escalate, reduced consumption will likely lead to further increases in subsequent biannual reviews. Complicating matters, the capacity to pay is diminishing, while the temptation to engage in theft is on the rise. Despite extensive campaigns by the power ministry to curb theft and boost recoveries, anecdotal evidence points to an increase in theft in various regions.

This situation creates a vicious cycle: tariffs continue to rise, dependable consumers decrease reliance on the national grid, and theft incidents continue to grow. Political constraints impede recoveries in areas like Azad Jammu and Kashmir (AJK) and erstwhile Federally Administered Tribal Areas (FATA). Likewise, volatile conditions posing law and order challenges hinder departments from collecting due payments in numerous areas of Balochistan.

Industry advocates for wheeling, while the government demands steep wheeling charges. A potential solution involves dividing the Distribution Companies (Discos) into smaller entities and privatizing them. Encouraging the formation of an energy market is essential. Once reforms are in place, the government should consider extending the debt repayment period for Independent Power Producers (IPPs). Without such measures, the energy sector’s issues risk spreading further, affecting the broader economy.

In the face of mounting tariff increases, the energy sector stands at a critical crossroads. The diminishing reliance on the national grid, coupled with the escalating issue of theft, underscores the urgency for comprehensive reforms. As households turn to alternative energy sources and industries grapple with reduced competitiveness, the government must prioritize sustainable solutions. Structural reforms, potential privatization of distribution companies (Discos), and incentivizing an energy market formation are crucial steps to break free from the vicious cycle and prevent the energy sector’s challenges from metastasizing into a broader economic crisis.