Power tariffs: who will foot the bill?

The power tariffs have finally been notified. Nearly three-fourth of power units will either be sold at similar or substantially reduced rates. So much for the tariff rationalization exercise! It now makes sense why the IMF has been reportedly pressing to further rationalize the power tariffs – as the latest tariff notification indicates more subsidies is required to fund the power supply, than budgeted.

The whole industrial electricity supply will now be charged around 24 percent lesser than previous tariffs, at an average rate of Rs9.55 per unit. All industries will be sold power at Rs3 lesser than the notified tariff. On top of that, the zero rated sectors will be priced 7.5 cents for a unit of power. Textile is roughly 10 percent of Pakistan’s industrial production – which takes the weighted average reduction in industrial tariff to more than just Rs3/unit across various usage slabs.

Recall that the allocated amount for power tariff differential subsidy in the FY19 budget is Rs134 billion. After the government tariff notification, the subsidy requirements have soared to Rs256.7 billion – two-third of which (Rs176 bn) are to be doled out to the domestic sector. The tariff differential between notified and base tariff still stands at Rs2.48 per unit. Almost 80 percent of domestic power units will be priced at virtually the same rates as the previous tariff. This also goes on to show why Rs134 billion as subsidy for power sector was always on the lower side.

The reduction in power tariffs for industrial consumption (outside the notified tariff) is alone going to cost Rs1.06 per unit, which amounts to Rs110 billion. The subsidy on power for tube-well consumption also amounts to Rs74 billion. With half the year gone – room will still have to be made to set aside at least Rs125 billion to fund the tariff differential.

With fiscal challenges aplenty – expect delays if not defaults on payments to discos by the federal government. The circular debt has not gone anywhere – and with massive unbudgeted subsidy to grace the payment chain – fears of a deeper mess are not entirely out of place. The tariff rationalization process has once again been found wanting. Consider that the power purchase price at Rs10.01 per unit is too close to comfort with the average final tariff of Rs10.41/unit. Add all those units lost in the distribution chain, distribution margins, and fixed cost component – and you know why the mess is going nowhere. More on the cost component and losses aspect of the tariffs, later.