Research Analyst, PAGE
Sep 6 - 12, 2010
Pakistan is facing the worst energy crisis and price hike of its history. On one hand the increase in the oil prices is severely affecting the common masses, on the other hand the increased electricity prices and shortage of electricity is creating havoc in the country.
The government has already announced a sizable reduction in power subsidies; the tariff increase is being introduced in a gradual manner. The government and the international lenders estimated that the power tariff would need to be increased by a cumulative 50 per cent during the next fiscal year.
It depends on what are you comparing with. If compared with the purchasing power of people, energy prices are too high. Unfortunately, energy is generally priced at international level, which is generally high but with some exceptions. In most of the oil producing Middle East, petrol is literally free: only perhaps distribution cost is charged.
Even domestically produced petroleum has to be priced at international prices: firstly its share is too low and secondly most inputs are imported. Lower labor costs are usually compensated by lower efficiencies not of the labor only but of the larger energy market's inputs and supplies also. There is taxation on oil retail in Pakistan, almost 45 per cent.
In the US also petroleum prices are lower than in Pakistan due to lower taxation and more efficient oil industry. In India, petrol prices are almost the same as in Pakistan. In Europe, as a general rule petrol/diesel prices are twice as high as in Pakistan: major reason is heavy taxation, which has deep ideological routes in Europe.
Gas prices have remained generally quite low: lower than India, Europe and USA. Middle east and Iran obviously have much lower prices. Gas prices are expected to rise as a result of rationalisation of royalties and Gas Development Surcharges.
Electricity prices used to be low in Pakistan due to cheap hydro electricity. These days one-third of electricity is being produced with imported oil which has become more expensive locally due to heavy devaluation of Rupee. Government has been subsidising electricity for the last several years, thereby incurring Rs100 billion cost per year. Government's capacity to pay such heavy subsidy is wilting which has resulted in accumulated circular debt. Electricity tariffs are to be raised as a result of IMF's conditions also. Even after the increase, electricity tariff would remain comparable with other countries.
In Pakistan, electricity losses are phenomenal around 25 per cent as opposed to an average of four per cent in advanced countries. More than half of these losses compose of theft and pilferage and about half or slightly less are technical losses which could be brought down.
Very poor or very powerful are involved in electricity theft. Utility employees are usually partners in such a process. Electricity theft is rampant and has been brought down somewhat recently. Electricity theft is very high in Karachi, interior Sindh, KP, and Balochistan, but it is much too lesser in most Punjab.
Thar coal and hydroelectricity offer a good opportunity for cheaper and domestic and affordable energy.
Circular debt problem plaguing the power sector stems from a disparity between cost and tariffs of energy. The inability to increase consumer's energy tariff prior to fiscal year (2007?08) gave rise to substantial cost-tariff differential. As the subsidy element grew, large amounts of circular debt were created whereby power producing companies were unable to receive payments from distribution companies in turn the power producers could not make payments to the fuel suppliers. In addition, the net position of overall circular debt was declined from Rs190,953 million in July 2010 to Rs103,939 million in April 2010.
CIRCULAR DEBT RESOLUTION
On 01-06-2009 Rs214 billion On 30-06-2009 Rs216 billion On 18-05-2010 Rs120 billion
Transmission and distribution (T&D) losses as per cent of net system energy have remained more or less stagnant from 21 per cent to 25 per cent during 2000?01 to 2008?09. Furthermore, during July-March 2009?10, T&D losses have witnessed an increase of one per cent over the same period last year. Keeping in view of these losses, the NTDC and Disco's have invoked various technical and administrative measures to improve operational and managerial efficiency to reduce power losses. Other measures such as renovation, rehabilitation, capacitor installation and strengthening the distribution system network are a continuous process for controlling wastage of power.
The government has already increased electricity tariff by about 60 per cent over the past 15 months from March 2009. The series of tariff increase would need to be passed on to consumers to contain ever-rising circular debt that choked the operations of most of the energy sector organisations both in public and private sectors.
The government must implement not just the power-saving proposals but also look towards building power plants and tapping into alternative energy resources.