The power sector woes are not resolving despite successive and massive increases in the consumer tariffs – especially for industrial, commercial, and high consuming domestic users.
The overall consumption is falling due to tariff increases, and that is not letting the circular debt growth to stop, as the fixed capacity and other charges are not being fully recovered, and to plug the hole, high QTA (quarterly tariff adjustment) is expected soon to true up the tariff. And that will further exacerbate the problem, as consumption falls further, and result in another round of tariff increase. It is a vicious cycle.
One thing is crystal clear now that the power price increase is not the solution to power circular debt. It is proving counterproductive. This space has asserted that numerous times, and now the chicken are coming home to roast.
The issue is the denominator (electricity consumption) is low while the numerator (costs – mainly fixed cost) is high, and the denominator is falling further. The IMF’s and other IFIs’ solution of dumping every cost on good paying consumers is simply not working. An out-of-the-box solution is warranted.
The price increases formula works fine in the gas sector, as the domestic cost was previously very low; but not in the power sector where the fixed capacity and other costs are too high. The solution is to bring down the costs.
That includes debt reprofiling of Chinese IPPs (nuclear, coal and others), government buying old plants (by one-time payment) and terminating them. The way PKR has depreciated, and the global interest rates have increased, the capacity payments have increased to an unsustainable level.
Moreover, the government has to do away with cross subsidies. The good paying consumer cannot take the onus of vulnerable consumers – Rs 600 billion cross subsidy is too much of an ask for industrial and other consumers to bear. Then there is a limit for high consuming domestic (and other) consumers to absorb Discos’ inefficiencies, as Discos keep overbilling consumers to hide their recovery losses. The madness must end.
In November 2023, the power generation clocked in at 33 months low; it’s down to 7,547 GWh – down by 10 percent YoY. As per industry sources, in the first 20 days of December, industrial power consumption fell by 20 percent (YoY) and domestic is down by 8 percent. In October, APTMA (All Pakistan Textile Mills Association) members’ consumption was down by 49 percent and 36 percent, respectively, on LESCO and MEPCO networks.
The industries catering to domestic markets can still survive, as they have protection against imports and can pass on the increase in cost to prices (which is to fuel inflation); but for exporters, they cannot compete at such a high cost. The overall textile exports are falling. An informal survey of big textile players suggests that they expect exports to fall by 10-15 percent in 2024, due to cost escalation and exchange rate appreciation. Not a good sign.
The players are moving away from the grid to alternate sources such as captive generation from gas even after the recent increase in the gas prices, as still it is relatively cheaper to produce on captive, and electricity tariffs for grid consumers are too high. This is evident from the fact that industrial sector consumption on Sui Northern network increased by 50 percent in Nov 23 from the numbers in July 23. And even in Sui Southern, some prefer captive on gas as the gas price increase is even higher. This is evident by the fact the on KE network, industrial consumption is down by 7 percent in 5MFY24, and it’s on top of 9 percent decline in the same period previous year (5MFY23). Thus, it’s over 15 percent decline from 5MFY22 levels.
Another evidence of lower textile production is of lower off-take of cotton. Fiber production has improved significantly this year; but the country is still importing yarn, as it is cheaper for players to import yarn, and not feasible for some local yarn players to produce due to high cost of energy. Thus, the country is losing its basic comparative advantage in textiles.
New factories built on TERF loans have not been brought online while many old plants are shutting down as well. The situation is going to worsen in the next quarter, as expected QTA of Rs6 per unit shall further increase the energy cost.
The solution the energy minister is talking about is to have higher fixed charges in tariffs to compensate for higher fixed charges in costs. According to him, the total cost of electricity comprises of 72 percent fixed charges while the fixed charge in tariff stands at only 2 percent. As per him, balancing this could work.
However, industry sources think that this may further exacerbate the problem. The players keep both captive and grid connections and use a mix to optimize the costs. Some players go to the grid in non-peak hours and move to captive in peak hours. If fixed charges are raised, that incentive shall diminish, and costs will grow further. The point is that if the grid fixed charges grow, some may completely move to captive, as currently, the fixed charges for industrial players are at 5-10 percent and there is hue and cry on even this ratio.
The solution is to lower the power generation fixed costs where 57 percent is capacity payment and here debt reprofiling is becoming inventible. Moreover, 15 percent of cost in Discos is administrative, and transmission and market operator’s cost. Here, privatizing Discos to lower these costs, and private players’ innovative selling techniques can enhance the denominator.
Thus, talking to Chinese lenders of IPPs and privatisation of Discos is perhaps the only way to bring the power sector out of the quicksand.
Copyright Business Recorder, 2023
Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar
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