Breaking down SME electricity bills

There is enough noise surrounding capacity payments, energy payments, circular debt, and so on. Amidst all this noise, policymakers, politicians, and commentators alike lose sight of the forest for the trees, with barely anyone trying to understand how much does a consumer actually pay for electricity per kilowatt-hour (per unit), and what constitutes that amount. Electricity tariffs are fragmented across the country, with each distribution company having its own tariffs, and slabs, as well as different taxes depending on jurisdiction. For the sake of simplicity, this piece will be focusing on electricity bill of a mid-sized company, classified as SME in Karachi.

Average generation cost (per kWh) is estimated to be US 7.8 cents, of which 4.4 cents can be attributed to capacity payments, and 3.3 cents can be attributed to energy payments. The same was covered in extensive detail here. Most conversation of restructuring power contracts, extending debt timelines, reducing guaranteed returns; largely refers to capacity payments which cover debt and equity costs, as well as any other fixed costs of a power plant. Meanwhile, energy payments are variable which cover the cost of the energy source being used, such as natural gas, RLNG, or furnace oil.

In the case of a Karachi-based SME, electricity (per kWh) for the month of September 2020 was billed at Rs30.36 per kWh, or 18.975 cents which is 2.43 times higher than the generation cost. In essence, final price being paid by the consumer is much higher than the generation cost, as that final price includes adjustments for the distribution company, various inefficiencies, and a plethora of taxes and duties. Adjusting for generation cost, taxes amount to 6.43 cents or 33.9 percent of the total retail cost, while the remainder of the money can be attributed to the distribution company, and inefficiencies borne out of a dilapidated transmission and distribution network.

In effect, more than one third of the electricity bill paid by our hypothetical SME constitutes various taxes and duties, followed by payments associated with transmission and distribution, as well as capacity payments. The composition makes it clear that the government generates one and a half times more revenue than the amount that needs to paid in capacity charges. There has been incessant focus on reducing capacity payments, and rightfully so. But in this context, the policy makers are losing sight of the big picture. High transmission and distribution costs are adding an undue burden on consumers. Most, if not all distribution companies suffer heavy financial losses, and have significant line losses as well.

The problem is higher tariffs for the end user which pushes up overall cost of business. A multi-pronged approach which targets reduction in transmission and distribution losses, as well as rationalization of taxes can yield better results, rather than a never-ending politicized focus on reducing capacity payments which can only be squeezed to a certain extent. The case covered here is for a mid-sized SME based out of Karachi. Different jurisdictions and types of consumers may have different tariff compositions which we will cover in future. But the composition would largely remain in a similar range. The full electricity generation and distribution value chain needs to be reviewed for extracting efficiencies, rather than just focusing on one of its components.