Every Joe on the street is talking about inflation, especially the one that the upcoming IMF programme is expected to bring home. Some of it will definitely materialize, in the form of taxes. But most criticism and fear is being drawn from the anticipated rise in electricity prices that will lead to unprecedented inflation. Only that it will not. Unless of course, the PBS does the magic again, in case the highest slab undergoes a massive increase and simple averages are at play (read: ‘High inflation, low common sense’, published Nov 6, 2019).
The government may well have bargained well on power tariffs – saving 78 percent domestic consumption from a hike. The subsidies too are slated to go up, to finance the unfunded part to the tune of Rs50 billion, that primarily stemmed from the industrial package extended in January 2019 (read: ‘Government wins on power tariffs’, published May 14, 2019). But all of it may prove too little in the end, especially the dream of bringing circular debt to zero by 2020.
Not that the government is not looking to recover the difference between price and cost, but there is little debate on the elephant in the room, that is the capacity payment component. And that is all set to go out of bounds, even before the next fiscal year starts. The amount of upwards adjustment that may be required for FY19 determinations for respective discos, could be too hot to handle. The IMF is not the worry as far as the power prices are concerned, capacity payments are.
Some perspective would not go amiss. Total system capacity payments in FY16 were Rs280 billion or Rs3.4 per unit sold. That is where the megawatts started coming in. Remember CPEC? The capacity payments went up to Rs350 billion in FY17 or Rs4 per unit. Still manageable. Worth the price to pay for having power in a system that had faced years of shortage.
Come FY18, and the capacity payments almost double from last year to Rs644 billion or Rs6.2 per unit. That is almost 60 percent of the power purchase price. The dependable capacity stood at 24500 MW by the end of FY18. That is quite scary already, but it has been factored in the tariffs. The current prices along with subsidies will take care of that.
It is FY19, almost coming to an end. The dependable generation capacity is close to 30600 MW, nearly 20 percent higher than last year. It does not stop here. The power demand growth has gone down in double digits, and is expected to be at least 10 percent lower for FY19. Do the math. Higher available capacity and lower units generated – and you are looking at a capacity payment bill of close to Rs900 billion. That is Rs9 per unit. And that will not be easy passing on, especially if quarterly revisions are planned.
The fruits of a much improved energy generation mix have not been yielded by Pakistan, as the demand never went up considerably, in comparison with capacity additions.
Tough 12-18 months are ahead in terms of capacity payments’ impact on final tariffs. Those who rightly take the credit for eradicating load shedding, should step forward and take the blame for lopsided contracts, left, right and centre, without proper demand forecasting and planning. The current government would do well to at least think five to ten years ahead and not repeat the mistake; however, futile it may feel thinking that far ahead.
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