EDITORIAL: In yet another indicator of the mess that is the country’s energy sector, power regulator Nepra has projected a massive increase in electricity tariffs in the coming months under Quarterly Tariff Adjustments, at a public hearing held on September 26. These troubling projections have been revealed even as overall consumption of electricity has crashed by a significant 20 percent.
The high tariffs combined with the consequent fall in electricity demand is substantial enough to more than offset any benefit that could have been accrued from a nominal decline in costs of fuel that are expected next month.
A reduction in demand for electricity has very obvious economic implications of a dire nature, indicating diminished industrial activity, lower production levels, as well as falling consumer spending, reflecting wider economic slowdown. Therefore, as complex a problem as this is, reviving electricity consumption and stimulating economic activity is essential, and for that a way has to be found to bring down electricity tariffs.
However, we are faced with a highly troubling situation where under the IMF programme, the government is required to implement a tariff policy that guarantees full-cost recovery, meaning the total cost of electricity production is charged to consumers, and the billed amounts are fully collected, with there being limited scope for subsidies.
It is clear then that policymakers have their work cut out as they need to devise a far-reaching, integrated strategy focused on bringing down the cost of generating electricity, as well as plugging the holes further down the energy value chain, including through addressing system losses and power theft, and investing in the upgrading of the country’s transmission and distribution (T&D) network, which could help enhance its capacity and reliability, and reduce the billions of rupees worth of annual T&D losses.
When it comes to addressing the cost of power generation, as has been pointed out repeatedly, capacity payments to IPPs account for a very substantial proportion of the total energy costs that consumers are currently paying. The task force constituted by the PM to look into their operations has reportedly proposed a transition to a take-and-pay model, and also recommended tariff reductions for the IPPs.
It must be noted, however, that while most IPPs run on thermal power, which has for long been the dominant source of electricity supply in the country, recent years have seen an increased reliance on hydel, nuclear and renewable sources, indicating that the government cannot afford to focus solely on reforming the operations of IPPs running on thermal power if it wants to bring down electricity costs.
Additionally, there is the conundrum posed by a switch to alternative sources, like rooftop solar panels. As consumption for on-grid electricity drops due to this switch, the fixed costs of power generation, transmission and distribution have to be spread across a smaller consumer base, leading to further tariff hikes for on-grid consumers.
And just to point towards the larger disarray of the energy sector, we now also have the SNGPL intimating to the Petroleum Division that it is facing challenges in managing payment obligations towards RLNG and the indigenous gas supply chain.
It has revealed that in September, full payment to RLNG suppliers for the current level of supplies may not be possible, leading to a gap of Rs22 billion for the month, owing to, among other factors, the reduced demand of the power sector resulting in surplus RLNG supplies.
It is clear, then, that we are faced with a multifaceted challenge, and incremental measures just won’t cut it anymore.
An all-encompassing approach taking into account the interconnected nature of policies, regulations, contracts, operations of power generation companies and utilities, as well as overall macroeconomic goals has become imperative. And while such a comprehensive reform exercise will be a painstaking endeavour, there is, however, no other way to revive a malfunctioning energy sector.
Copyright Business Recorder, 2024
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