Reportedly, the differences between government and the IMF have narrowed down to exchange rate and electricity prices; it’s better to link exchange rate with REER, and foreign exchange flows - for details read “Dollar diary: Don’t go the Dar’s way”. The complex problem is in the energy chain; and because of host of issues, Nepra determination is of Rs3.82/unit increase in tariff while government has approved an increase of only Rs1.27/unit.According to the circular debt report presented by Shibli Faraz, total electricity generation last year was around 120,400Gwh while the revenues were collected from 90,540GWh - total AT&C losses came at 24.8 percent (18.3% T&D losses & 92% bill recovery) while NEPRA allows 16.3 percent of T&D and there is no room for recovery loss.

The NEPRA permissible losses are much higher than other developing economies (10-11%), but the revenue collection was short by 9.2 percent. The electricity price without losses stood at Rs9.78/unit (generation price at Rs8.53/unit plus Rs1.25/unit T&D cost) - with 16.3 percent allowance the electricity price increases to Rs11.37/unit, consumers taking a hit of Rs175 billion. However, this is not enough as 9.2 percent losses are being borne by government - Rs116 billion which is adding to the infamous circular debt every year.

With every Re1/unit increase in generation price - due to increase in RLNG/coal/gas prices (linked to international crude prices) or devaluation of rupee, the financial loss (circular debt) increases by Rs10.2 billion. Thus, with recent currency adjustment, circular debt creation increased proportionately. Above mentioned is one side of the problem and is not the core reason for NEPRA tariff determination. The problem is that the government is trying to reduce the AT&C losses, which may take years of commitment to become compatible to similar economies (10-11%). In the meanwhile, authorities have ignored the elephant in the room - the growing capacity payments associated with every new power plant coming online.

In the last regime, the government kept on adding new power plants without any planning of demand supply gap and today, the grid electricity production capacity is higher than demand; but for every new plant, capacity charge has to be paid irrespective of actual production.

Yes, there are benefits of efficiencies of newer technologies and cheaper fuel choices (RLNG & coal versus FO) - average fuel cost of NTDC system reduced from Rs7.9/unit in 2013 to Rs5.5/unit in 2017; but the additional capacity burden is higher than fuel savings. The government kept on passing the benefit of fuel savings to consumers but is yet to pass the capacity burden to the consumers and that is the prime reason why NEPRA determined Rs3.82/unit tariff increase.

According to NEPRA, capacity payment of generating facilities in NTDC system was Rs280billion in FY16 which increased to Rs329 billion and Rs418 billion respectively in FY17 and FY18. It is expected to reach Rs650 billion by FY19. With every new plant, the capacity charge increases, For example, the annual capacity payment of 1,320MW coal plant is $380 million (Rs52 billion).

The impact of capacity charge has to be diluted by increase in the electricity demand; but consumption is not growing in proportion to the new supply and that is building payment pressure. This has to be either borne by existing consumers (by increasing tariff) or be absorbed by government (economy at large). - the capacity cost per unit was Rs3.4 in FY16 which increased to Rs4.1 and Rs5.0 in FY17 and FY18 respectively. The problem is that NTDC electricity consumption is not growing in proportion to capacity increase.
With 12 percent increase in power generation in FY18, load shedding is almost over. The gap was over estimated earlier, as in years of high load shedding, many industries had moved to captive power generation and they still prefer own generation due to uninterrupted supply. In case of domestic consumers, bulk was relying on UPS during load shedding hours and UPS takes energy from grid to regenerate at much low efficiency - on average one unit of UPS production consumes 2 units of grid electricity.

In a nutshell, the supply demand gap of grid electricity was much less than earlier projected. And the problem does not end here as the capacity charge has to increase further as numerous new plants are in process of construction - power generation capacity of NTDC system may increase from 33,961 MW in FY18 to 62,184 MW in 2025.

Now the problem is in hands of incumbents and there is no fiscal space to take the brunt by government and that is why IMF is rigid on increasing power tariffs. The power tariff hike should not be contingent upon the IMF programme. Even if the government decides not to enter the Fund programme, power pricing riddle needs to be solved. It is a tough decision, which will be easier taken in an IMF programme. The fuel component to tariff was also added on the IMF’s behest.

The need is to have an integrated energy solution to maximize the new and upcoming power generation capacities. To start with, the government may need to novate two NTDC’s coal IPPs (2*1.320MW) in south to K-Electric system and stop giving 650MW from NTDC to KE; concurrently KE should retire its old inefficient power generation (1,200MW) and stop buying from old IPPs (250MW). For details read “power(ful) scenarios!” published on December 11, 2018.

By such tweaking, NTDC system can transfer Rs104 billion capacity payment to KE. This reduces the need of tariff revision of Rs1.04/unit for around 100,000 GWh units billed in NTDC system. The other low hanging fruit is to incentivize the captive power generation in Punjab, Sindh and KPK to either NTDC or KE systems.

For example, in SSGC system, 198 MMCFD gas is allocated for FY19 to industry for their own captive power generation which at assumed level of 40 percent efficiency generates 8,372 GWh. A similar number can be assumed for Punjab - in total around 15,000 GWh can be added to grid systems - this can reduce the power tariff increase by another Rs0.3/unit.

This reduces the need of Rs3.82/unit tariff increase to around Rs2.50/unit, against the announced increase of Rs1.27/unit. But the problem of capacity payments will keep on increasing as numerous power plants are in the process of construction. It seems highly unlikely for power consumption demand to increase proportionately. The long term solution is to bring transportation in electricity consumption equation. To start with, all the new and existing public transport systems should move towards electric busses. This may sound bit elitist right now, but the world is moving onwards, efficient usage, and efficient appliances. It may be a shot in the dark – but seems one of the many ways to find a long term solution.

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