Capacity payments nearing trillion rupees

Power tariffs are all set to further increase as the second half FY19 tariff adjustment is nearing. And soon after, the base tariff will go further up by September 2019. The cumulative impact is anyone’s guess right now, but it could well be in the range of Rs3-3.5 per unit, from existing rate. All this while, Pakistan’s generation fuel mix has actually improved considerably

from yesteryears, though still heavily reliant on imported fuels.

The State Bank of Pakistan in its recently released State of the Economy report has a special section on power tariffs, titled: “Why are power tariffs in Pakistan consistently high”? Amongst other things, it has rightly singled out rising capacity payments as they key reason for high tariffs and how it is highly unlikely for Pakistan to get out of it anytime soon.

How alarming has the capacity payment rise been? What was Rs280 billion in terms of capacity payments in FY16, has already become Rs816 billion – with further adjustment in lieu of FY19 to come. The recently made tariff adjustments on account of 1HFY19 arrived at a shortfall of Rs189 billion to be collected from the end users. Of that, Rs172 billion are on account of capacity payments. With rupee having lost significant value in 2HFY19, the upcoming 2HFY19 adjustment in August 2019, would most likely be higher than the one made for 1HFY19. The capacity payments for FY19 after adjustments could well cross Rs1000 billion – from Rs644 billion in FY18. Worse still, the demand has not increased anywhere close to the required rate, whereas additions have been made to capacity. More plants are in the pipeline for next three years, and it is highly unlikely that the capacity payments would go down from here.

On the other hand, the benefit of reduced fuel cost component in the power purchase price will fail to reach the consumers. The upcoming base tariff revision for FY20 would also be made in September 2019, and needless to say, capacity payments would constitute bulk of the cost.

While the previous government must be credited for making energy available, it cannot be absolved of the criminal negligence on the affordability front. For the current fiscal year subsidies have been provided to cater for the tariff increase, but that will not be enough by the end of the year. And in the years to come, subsidizing electricity will only become tougher, with ever rising capacity payments. From where things are, Pakistan has to unfortunately settle for pricier power for the foreseeable future. One hopes there is a lesson for the policymakers when the next big round of power plant addition comes; the agreements are made with more economic sense, instead of falling head over heels just to have more power in the system.