ELECTRICITY TARIFFS

S.KAMAL HAYDER KAZMI,
(feedback@pgeconomist.com)
Research Analyst
, PAGE
Dec 27, 2010 - Jan 2, 2011

Electricity is generated, transmitted, distributed and retail supplied by two vertically integrated public sector utilities: Wapda for all of Pakistan (except Karachi), and the KESC for the city of Karachi and its surrounding areas. There are around 16 independent power producers contributing significantly in electricity generation in Pakistan. For years, the matter of balancing Pakistan's supply against the demand for electricity has remained a largely unresolved matter. Pakistan faces a significant challenge in revamping its network responsible for the supply of electricity. While the government claims credit for overseeing a turnaround in the economy through a comprehensive recovery, it has just failed to oversee a similar improvement in the quality of the network for electricity supply. Some officials even go as far as claiming that the frequent power cuts across Pakistan today are indicative of an emerging prosperity, as there is fast rising demand for electricity. And yet, the failure to meet the demand is indeed indicative of a challenge to that very prosperity. Electricity producers are now seeking parity in returns for both domestic and foreign investors which indicate it to be one of the key unresolved issues in overseeing a surge in electricity generation when the country faces growing shortages.

Rising circular debt issue also affects a negative feedback in the entire electricity sector. The lower availability of hydel resources for generation, and a higher than normal shortage of gas skewed the fuel mix of the electricity generation sector towards fuel oil. Since this occurred at a time of a doubling of the international oil price, the effect on the cost structure of the utilities was amplified greatly.

PAKISTAN: SUPPLY AND DEMAND (MW)

YEARS 2010 2011 2012 2013 2014

2015

Existing Generation 15,903 15,903 15,903 15,903 15,903

15,903

Proposal / Committed Generation 7,226 10,115 10,556 13,307 13,520

14,607

Total Existing/Committed Generation 23,129 26,018 26,459 29,210 29,423

30,510

Expected Available Generation 18,503 20,814 21,167 23,368 23,538

24,408

Demand (Summer Peak) 19,352 20,874 22,460 24,126 25,919

28,029

Surplus/Deficit Generation -849 -60 -1,293 -758 -2,381

-3,621

With no change allowed in the electricity tariff between 2003 and 2007, the compounded effect on the viability of the energy sector has been devastating. Furthermore, during July-March 2009?10, Nepra had issued 27 tariff determinations and 169 tariff adjustments in respect of generation and distribution companies. During the same period, Nepra had also processed the tariff petition in respect of 80 MW cogeneration power project based on bagasse and imported coal.

Recently, economic policymakers and an IMF mission completed the review of the macroeconomic policies for 2009-10 and outlook for the ongoing fiscal year. It is estimated that the government will increase power tariff by 17.6 per cent through increments of 2.2 per cent at the start of each month.

The recovering electricity charges was essential to bridging the growing gap of Rs250 billion between power supplied and charges recovered through utility bills in the country. The IMF authorities have also made it clear that the road map for curtailing power sector subsidies and increase in power tariff should be implemented in a manner which helps reduce loss of income in the power sector.

For the FY 2010-11, the subsidy was reduced to Rs30 billion from the required Rs226 billion in the country. Therefore, the IMF made it compulsory fort the government to increase the electricity tariff in the country.

The government has so far increased power tariff for domestic consumers by 94.9 per cent, for commercial consumers by 67.6 per cent and for industrial sector by 77 per cent. Moreover, the increase in prices of fuel like furnace oil and gas, more dependence on thermal generation, non-availability of committed gas and increase in administrative expenses were major causes for this phenomenal hike in electricity charges.

Approximately 2,125MW of electricity was expected to be added to the national grid by the end of this year. Despite hefty increases in end-user electricity tariffs over the past two years, a significant gap still exists between generation cost and recovery, due in large part to the adverse developments. This imbalance between cost of generation and distribution, and the final tariff, is the root cause of the circular debt issue, with each downstream player in the energy chain being forced to delay payments to upstream entities.

CONCLUSION

Pakistan is facing the worst energy crisis and price hike of its history. If on one hand, the increase in the oil prices is severely affecting the common masses, the increased electricity prices and shortage of electricity is creating havoc in the country on the other hand. The government has already announced a sizable reduction in power subsidies and the tariff increase has introduced in a gradual manner. Load shedding and power blackouts have become severe in Pakistan. With power shortages in Pakistan, Iran has been offering to export electricity to Pakistan at subsidized rates but the government of Pakistan has not yet responded to the offers for unknown reasons.