Pakistan generated its highest ever electricity in July 2019 at 14.2 billion units. It seems the demand is gradually mak
Pakistan generated its highest ever electricity in July 2019 at 14.2 billion units. It seems the demand is gradually making a comeback, having gone down sequentially for five straight months leading to the end of FY19. A year-on-year growth of 3.5 percent would not make news under normal circumstances, but in times of economic slowdown where lack of power demand was fast becoming a worry, these are heartening numbers.
And no marks for guessing that the generation mix is now well diversified and much improved from ever before, and keeps getting better. That said, the furnace oil based generation keeps making a comeback every now and then, inflating the average fuel cost component of the overall tariffs. Advent of coal based power plants has somewhat eased the burden off other fuels, and being high on merit order, a share of 14 percent and increasing an encouraging sign. Coal based power generation in July 2019 at over 2 billion units was the highest ever.
Good rainfall and extension in key hydro power plants also resulted in an all time high power generation from hydel sources at 4.6 billion units. The hydel generation is expected to remain strong for August 2019 as well, which is also much needed, August usually being the peak month for electricity demand. RLNG plants have kept the momentum going, with a 27 percent share, much in line with six-month average share.
Generation end of things was never in doubt, after the efforts made by the previous government, especially under CPEC. What is concerning is the affordability part of it, as despite 33 percent share from hydel and 14 percent from coal, the average fuel cost has inched up a bit from Rs5.3 per unit in July 2018 to Rs5.47 per unit in July 2019. Steep currency depreciation has a lot to do with inflated fuel cost, despite reduction in average fuel prices over the same period last year.
The reference fuel price built in the final tariff for July 2019 was kept as low as Rs3.54 per unit, considering high hydel contribution. The contribution did come, but the currency depreciation spoiled the party, which means the fuel price adjustment for July 2019 would be close to Rs2 per unit, the highest monthly increase in three years.
The real challenge will be faced October onwards, as the demand starts to tape off, in line with temperatures. That is when the lopsided power contracts will inflict the real damage. That is where one may see the merit order being completely ignored, in order to oblige the take-or-pay contracts with most new power plants, especially those based on RLNG, the share of which may rise to as close to 50 percent. That could mean giving up cheaper fuel options for more power generated on imported fuel.
And then there is the elephant in the room – the capacity payments, which are expected to be close to Rs1 trillion for the ongoing year. That would take the cost of generation to close to Rs15 per unit. Try passing that on, with the current allocated subsidy. All eyes will be on the next revision in power tariffs, which is part of the structural benchmarks of the IMF programme. Whichever way you look at it, power availability is here to stay, and power affordability is not getting any easier.