Electricity generation stays depressed

Pakistan’s national grid electricity generation in FY23 at 126 billion units stayed nearly 10 percent lower year-on-year. This is the steepest decline in yearly power generation in well over a decade. The only time when net power generation dipped year-on-year before this was FY20 – as Covid quarter generation was reduced to half. Even then, the dip was contained to half a percent year-on-year.

The 12-month moving average power generation at 10.5 billion units a month is the lowest in 24 months. June 2023 drop was only 1 percent year-on-year – the best month of FY23, largely because of the base effect as June 2022 was the starting point of trend reversal in power generation. June 2023 generation is even lower than June 2021.

The power generation mix has improved significantly from years ago – but Pakistan has not necessarily ben able to take full advantage. With the latest increase in consumer end power tariffs – very soon after the rebasing exercise carried in FY23 alongside subsidy reform program that led to removal of previous slab benefits for residential consumers, and an end to all subsidies for industries and agriculture users – chances of a strong revival in power demand appear very slim.

Unlike the previous few months, where cooler temperatures were being cited as the core reason for demand shortfall – June 2023 temperature readings confirm the worst fears. The national mean and average temperature stayed higher than June of last year. Yet the system was not able to generate enough to meet peak load demand – as the financial crunch continued calling the shots. While overall demand has undoubtedly taken a hit, the system continues to be unable to generate enough to meet peak demand hours – as evident from countrywide load shedding that has crossed 6 hours a day.

At the one hand, reduced generation causes unit cost to be higher as capacity component continues to rise in the wake of unfavorable currency and interest rate adjustments, due to heavy indexation of IPP contracts. On the other hand, the government finds it difficult to arrange enough dollars to ensure timely fuel supply to the most efficient power plants. It appears that saving dollars takes precedence. Monthly and quarterly adjustments in tariffs take care of the revenue requirement resulting from less-than-optimal fuel mix and reduced overall generation.

Only that the tipping point may already have come and the IMF’s prescription of another base tariff hike may eventually be counterproductive. It is hard to imagine any other outcome in the absence of any meaningful reform in distribution companies’ reckless T&D losses that stay way above the allowed limit and substantially reduced billing collection, which is assumed at 100 percent of the billed amount.

With all industrial, zero-rated and agriculture subsidies taken away – and with domestic tariffs rising sharply in such a short span – and with surcharges, duties and taxes now amounting to almost Rs1000 billion – expecting power demand trend to reverse for the better – seems wishful thinking.