FeaturedNationalVOLUME 19 ISSUE # 15

The looming crisis

The escalating trend of passing tariff increases onto consumers to alleviate circular debt poses a threat to the stability of Pakistan’s power sector. With every rise in tariffs, evidence suggests a subsequent decline in power consumption, potentially leading individuals to seek alternative self-generation methods and compelling others to curtail their usage. This mounting strain on the system necessitates urgent attention from the incoming government to prevent the power sector from collapsing under its own weight.

The surge in electricity bills appears unstoppable, and the power sector managers seem indifferent to its impact on consumers. Reportedly, the Central Power Purchasing Agency—Guaranteed (CPPA-G) is seeking a significant Rs7.13 per unit increase in Discos’ power tariff as fuel cost adjustment (FCA) for January 2024, to be billed in March 2024. This is nearly double the pre-fixed fuel cost of Rs7.5 per unit.

This starkly exposes the government’s forecast deviation from reality, reflecting poorly on its competence. There’s a lack of effort to address the inefficiencies in Discos and the energy value chain, raising concerns about a crisis akin to the one in the summer of 2022.

Notably, the National Transmission and Distribution Company (NTDC) system lost 352 GWh to transmission losses in January 2024 alone, equivalent to the combined production from HSD, wind, import from Iran, and Bagasse. Urgent attention is needed to reduce transmission and distribution (T&D) losses, as some plants may be operating only for their produced units to go to waste.

Higher FCA is attributed to the rising cost of insurance due to Houthis’ attacks in the Red Sea, alongside increased local HSD and gas prices. Regardless of the reasons, these should have been anticipated and factored into the forecast. The significant increase in power prices, coupled with a 26 percent annual tariff hike and an 18 percent increase in quarterly tariff adjustment (QTA), is becoming unbearable for consumers. The government is contemplating staggering the increase over a few months to mitigate the impact, posing a challenge for the incoming ‘weak’ Pakistan Democratic Movement (PDM) coalition, reminiscent of the challenges faced by PDM 1.0 in 2022.

In another report, the government is reconsidering reducing the tariff for solar net metering, citing the shift of affluent consumers to solar, which burdens remaining grid consumers with capacity payments. This lack of foresight in the initial net metering policy affects households and industries heavily invested in solar panels.

This highlights a classic case of policy inconsistency hindering investment, emphasizing the need to respect the sanctity of policies, regardless of the governing party. Successive governments have failed to implement necessary structural reforms to increase power bill recovery, curb theft, and reduce transmission and distribution losses. Moreover, new power projects are being installed in Independent Power Producer (IPP) mode without considering the country’s macroeconomic reality.

The escalating cost of power, driven by substantial capacity payments, necessitates negotiating debt payments to align with project lifetimes. To address these challenges, there is a pressing need for the government to deregulate and privatize the power sector, yet there seems to be a lack of political will to take such steps.

The prevailing approach seems to be shifting the burden of circular debt reduction onto consumers through various forms of tariff increases. However, with each successive hike, there is clear evidence that power consumption is likely to decrease. Individuals may opt for self-generation, and others might be compelled to limit their usage, exacerbating the challenges associated with capacity payments.

The system is in a state of crisis. The incoming government must take decisive action to address the issues plaguing the power sector. Failure to do so may result in the power sector collapsing under its own weight, imposing a significant economic toll on the nation. It is imperative for the new government to devise effective solutions to safeguard the stability and sustainability of the power sector.

The power sector in Pakistan is at a critical juncture, with the burden of circular debt increasingly shifted to consumers through tariff hikes. The foreseeable reduction in power consumption and the potential migration to self-generation methods underscore the urgency for the new government to take decisive action. Failure to address these issues may result in the power sector’s collapse, imposing severe economic consequences on the nation. Swift and effective solutions are imperative to ensure the stability and sustainability of Pakistan’s power sector in the face of these looming challenges.