The energy sector mess

EDITORIAL: That the energy sector is in a mess and is dragging the already low productivity of the manufacturing sector further down is a grim reality.

There is no respite from sharp increases in costs, and, in turn, ballooning circular debt despite repeated increase in power and gas tariffs along with sporadic efforts to curb theft.

Prices have already doubled for the power sector and the increase is even higher for the gas sector in the last two years, and still the gaping hole remains unplugged.

The government talks about the introduction of the CTBCM (Competitive Trading Bilateral Contracts Market), on one hand, while the Use of System Charges (UoSC) is proposed to be too high, making it unviable for bulk consumers, on the other. Moreover, there are issues in the petroleum sector where the problems are not being considered in their proper context and greater collaboration with the power sector as the two divisions of the energy ministry not only continue to work independently but are also oblivious of the fact that they represent the two wheels of the energy cart.

Another complication that is coming to a head is that the government has an obligation to build the Iran-Pakistan gas pipeline to avoid penalties, but the US is not supporting it. Needless to say, building the pipeline can attract US sanctions, something that no government can afford. In sum, there is utter confusion that pervades all over with the government struggling to come to grips with the situation that continues to become dire by the day. The ministerial divisions continue to indulge in superficial tinkering here and there without an agreed holistic plan that has the support and ownership of both the wheels of the energy cart and that is further dragging the sector towards an abyss.

Pakistan’s manufacturing sector is losing its competitiveness in the process. Frequent increases in the power tariffs are making a few sectors entirely uncompetitive. And those who were relying on gas as primary energy source are facing similar problems. The one good thing happening is the end of the prioritised supply of gas to captive power plants, which is forcing them to move towards more efficient solutions. However, nothing is efficient as such at current prices, which are expected to increase further. Frequent price increases are bringing combined cycle efficient plants close to becoming uncompetitive. And, those relying on electricity grid are no different.

In a competitive market, the government is thinking of recovering Rs26/unit as UoSC. This alone is more than 9 cents, which is the demand of the export-oriented sector to remain competitive. These costs are to be determined very carefully as UoSC is too low, it will prevent the distribution company from recovering true costs and maintaining infrastructure for reliable power supply. If these are too expensive, it will defeat the spirit of competition by becoming prohibitive for eligible customers to switch out, as is the case now.

Discos have to be practical in terms of passing the stranded costs, as they cannot simply collect all their inefficiencies and cross subsidies from good paying consumers under the name of UoSC. However, at current operational efficiency levels, they are out of options. The energy ministry is demanding Rs1.2 trillion in subsidies for the next fiscal year. Tariff differential subsidy (sought at Rs450 billion) is to cover only one-third of the actual cross subsidy and the rest is picked by residential commercial and industrial consumers. The good paying consumers cannot take any more of other burden.

However, the price increase in protected and other subsidized sectors is already more than their paying capacity in the power sector whereas there is still some room to rationalize the tariffs in the gas protected sector. The government ought to have a better balance and should support the electricity protected consumers through budgetary subsidy. If the federal government cannot provide it, the provinces should do it, and the segment needs to be redefined from consumption to income levels through BISP (Benazir Income Support Programme) data and the cross-subsidy should end.

There are so many ifs and buts in the sets of equations, and there are political and economic constraints where correcting one node would make other unsustainable. The government must reduce the cost of production by elongating the capacity payments to the 2015 IPPs (Independent Power Producers) and lower the inefficiencies in transmission and distribution system by deregulating and privatizing Discos, and the first step should be to end the uniform tariffs and blanket protected categories.

Copyright Business Recorder, 2024