Per unit cost of electricity is constantly on the rise in Pakistan and has now gone beyond the paying capacity of average households. Last week, Pakistan’s National Electric Power Regulatory Authority (NEPRA) authorized the distribution companies to levy a Rs2.83 per unit additional charge on consumers’ bills for the month of May.

As we know, Pakistan has been caught up in a mesh of hyper-inflation since April 2022, with the highest-ever inflation rate recorded at 38 percent in May 2023. Gas and electricity rates were hiked by 318.7 percent and 73 percent respectively in a year, according to official data.

In Pakistan, electricity is much more costly as compared to neighbouring countries. With 63 percent of power generation based on imported fuel, the country is producing the most expensive electricity in the region. A major reason for the high cost of energy is that for a large segment of privileged consumers electricity is totally free. They include government officials who get free or subsidized units of electricity. Another reason is transmission and distribution losses running into millions of units. Average T&D losses of Discos as per Nepra’s SOI 2023 Report are 16.45 percent as compared to previously determined benchmark of 12 percent and global benchmark of 6-7 percent. The T&D losses also include the element of power theft. According to an estimate, in the financial year 2022–23, around 15 to 30 percent of electricity pilferage was valued at Rs 380 billion. It is estimated that in FY 2023 -24, this figure may go up to Rs 520 billion.

Another factor behind high electricity charges is that the bill recovery rate is 92 percent as compared to the Nepra-determined benchmark of 100 percent.  It means that if 100 units are generated, due to transmission losses, DISCOs receive payment of only 73-74 units as compared to the global average of 92 units. The difference of 20 units is paid by ordinary consumers, mostly captive middle class and commercial and industrial users. It may be added here that there is a category of protected consumers. Including agriculturists, who consume less than 200 units and are charged a maximum of Rs. 10 /Kwh instead of the national average tariff of approximately Rs.30/Kwh. The delta of Rs20 is passed on to the helpless domestic consumers.

The biggest culprit in the whole story is capacity charges to Independent Power Producers which amount to around 60 percent of power tariff. The power purchase agreements made by the governments with the IPPs reek of corruption and are unsustainable. They added over-capacity in power generation to a rickety and inadequate distribution system and at an unaffordable price for the consumer. Capacity payments to IPPs are too open-ended and lack transparency.  Of the total circular debt of Rs 5.4 trillion, a good Rs 3.2 trillion is on account of electricity generation, of which Rs 2 trillion is capacity payments to IPP (independent power producers).

While the total installed power generation capacity is 46,000 MW, power transmission and distribution system can handle only 22,000 MW. It means that successive governments pursued a careless policy of aimless increase in the installed base of thermal power generation without taking into account the supply and demand as well as capacity situation in the energy sector. The result is that more than half of the installed power generation capacity is lying idle but the consumers are made to pay for units not used by them.

A serious mistake made by the authorities concerned is to ignore hydropower generation which is comparatively cheaper. Renewable energy is a meagre 6.5 percent of the total installed capacity. By contrast, in India it is 21 percent and this percentage is rapidly increasing.

It is time the government thoroughly reviewed its energy policy and removed anomalies and inefficiencies which have raised tariffs to unsustainable levels. The average per unit electricity cost even after including periodic adjustments is close to Rs 37/Kwh but the elements of free electricity to a privileged class, anomalous cross-subsidy, irrational taxes, surcharges and additional cost resulting from T&D losses and recovery shortfall almost double the net resultant tariff. A particular area of concern is the circular debt of Rs 5.4 trillion accumulated over the years due to incompetence, mis-governance, lack of transparency and corruption.

The energy sector in its present configuration is a drag on the national economy and a big burden for the bulk of the population. Without changing the existing energy mix, putting a brake on the ever rising capacity payments to IPPs and eliminating power pilferage, per unit cost of power cannot be brought down. To this end without further delay, the government should renegotiate or terminate the agreements with the IPPs and privatise public sector power distribution companies (Discos).