ENERGY PRICES: WHAT TO DO?
Jan 24 - 30, 2011
Are the current and projected increases in energy prices especially electricity justified? The proposed increase of two per cent per month in electricity tariff implying a raise of 24 per cent in one year over and above the increases already made may become a political bombshell.
There may be genuine economic dislocation of people and may result in non-payments and increased theft and pilferage, nullifying the purpose for which these increases are being made or proposed to be made.
There are difficult questions involved. If compared with the purchasing power and generally low incomes of the people, energy prices are generally high.
In South Asia including Pakistan, there is a unique and welcome aspect of energy tariff that small and poor consumer is charged much less than others, in some cases the rates are just a pittance, if compared with international rates. However, now business community is protesting loudly, as while they may be rich personally but there businesses are poor and operate in low margin regime, whether exports or domestic market, except for the monopolists and cartel members who may be able to extract or pass on rather undue profits and prices.
Pakistan, South Asia and other poor developing countries domestic customers are charged less than industry and commerce, making the tariff of latter even higher than they would have paid in a neutral regime. In most developed countries, the reverse is true. Large customers are charged lower rates on account of lower overhead and processing costs. In some cases, industrial tariff is kept artificially low to boost competitiveness.
Chinese prices are a case in point but that may have more to do with the exchange rate issue. A more indicative policy pricing would be France, where one of the lowest or perhaps the cheapest energy tariff is maintained partially artificially, although cheaper nuclear and hydro energy has more to do with it. The most expensive energy rates are found in most of Europe and Japan, except those countries like France, Sweden and Norway where there are cheaper nuclear and hydro resources. Elsewhere in Europe, energy is severely taxed on one account or the other? Gasoline and Diesel are taxed at 100 per cent and even more, while electricity is being indirectly taxed due to rather excessive feed-in tariff for renewable.
The cheapest energy is found in most of the Middle Eastern countries where oil and petroleum products are usually priced below crude oil prices. The other country is USA, where energy is minimally taxed. There is hardly 15 per cent tax in the US on diesel and gasoline, resulting in the cheapest motor fuel among the advanced countries. In Pakistan, both retail and wholesale prices of energy have been traditionally low. Hydro and gas based electricity are the examples. Also gas itself, which has been priced less than half of energy cheap and abundant America.
Over the last many years, government of Pakistan has been subsidizing electricity: the last year's subsidy was of more than one Rupee per unit resulting in budgetary deficits and circular debt.
We used to have relatively cheaper electricity due to cheap gas and hydropower. Over the years, the incidence of gas and hydro has been decreasing in the total package, and the share of expensive and imported oil has been continuously increasing, generating pressures for tariff increase. Unfortunately, due to non-implementation of any hydro scheme and lack of any major discovery of natural gas due to lack of adequate level of exploration activities, the traditionally cheaper energy resources are getting eclipsed.
Imported gas, whether LNG from Qatar or pipeline gas from Iran is no cheaper. It is increasingly linked with oil and that at very high rate of 75-80 per cent.
If reliance is increasingly on imported fuel, there is no economic case for cheaper energy than elsewhere because almost every input including power equipment is imported (except manpower), costing more due to extra transportation and logistics. There is a strong moral and welfare case, however, to try to minimize the energy prices as much as we can and search for solution that may bring the prices down by whatever margin that may be possible and feasible.
Bulk of our population is poor and a small percentage of the well to do or those who are insulated from inflation. Energy is a necessity, used in transportation, cooking and living. Let us examine what are the options and potential available to us in this respect.
There are no quick fixes other than finding the money from somewhere and meet the shortfall. Money comes from taxes which most of us evade. Consequently, we are one of the least taxed countries of the world. It can come from royalties of oil, which we do not have and can only dream or pray about. It can also come from savings, which we cannot due to a variety of political reasons. Quite a few among us want a tall foreign policy agenda, continuous rift with neighbours, big armies, welfare state and no aid or trade, all in one. And, we have anchors as well? It is not easy to govern Pakistan.
In the mean time, government should take the business leaders in confidence and explain its difficulties and constraints and invite their proposals. They may come out with ideas on reducing tax evasion by their community, enhancing government revenues and its ability to continue to provide subsidies to the energy sector. However, they are more likely to come with a demand to levy income tax on wealthy landlords. Secondly, the real incomes of the average person in Pakistan are going down. There is an urgent need to promote income generating employment opportunities. At present level of general unemployment and under-unemployment, almost nothing is affordable. Genuine land reforms and income tax on agriculture may be the need of the hour.
Finally, there may be some scope of negotiating with the IMF for doubling the adjustment time to two years, reducing the increase to 12 per cent per annum than the present 24 per cent in one go in one year. Another immediate option available to the government is to negotiate with IMF a zero tax-subsidy regime for the whole energy sector, whereby taxes on petrol and diesel and other energy inputs, balance out subsidies on electricity. Alternatively, government may examine the possibility of substantial tax cut on petrol and diesel which would go a long way towards controlling the runaway inflation and would make the increases in electrical tariff more acceptable to people. In the medium term, there is a lot that can be done towards bringing down energy prices in the country. In short these are:
1. Improving thermal efficiency by retiring and replacing the old plants with new more energy efficient ones; 2) Fast track implementation of hydro and Thar coal projects; 3) Exploration of gas resources including non-conventional tight and shale gas resources; 4) Reduction of T&D losses; 5) More rigorous regulatory processes to bring capital costs down; 6) Promoting conservation and efficiency at consumer end including large commercial buildings and industrial sector; and 7) Energy labelling programs for energy consuming domestic appliances .
Coming back to the energy sector, following suggestions are made by this scribe:
1. There are a number of stranded or low btu gas deposits which can be utilized in bringing cheaper electricity on line in two or three tears time. A special case in point is of Uch gas which remains unutilized due to the unreasonable demands of the project sponsors with respect to capital costs.
2. NEPRA and other regulatory agencies be encouraged to diligently and carefully process the tariff cases and bring the tariffs down to the extent it is feasible. It is widely known that there is significant padding in capital costs proposed by the project sponsors resulting in higher tariff.
3. Hydropower projects and Thar coal should be implemented on fast track basis to avail of cheaper aspect of these resources.
4. Thermally inefficient plants be either retired or used sparingly for peak load. Investment be made in thermally efficient plants. Fortunately, some action has been taken in this respect by KESC and another public sector plant.
5. Conversion from oil to coal and to gas (in case of availability of LNG or Iran Pipeline) may result in reduction of cost of generation. Reportedly, Planning Commission has already initiated studies in this direction.
6. Reduction of T&D losses including theft and pilferage. The current incidence of 25-30 per cent of T&D losses is very high. It can be brought down to 10-15 per cent. Already, Discos in Punjab are having T&D losses in the proposed range. The culprits are Sindh, Balochistan and KP including KESC. While there may be socio-political issues involved in T&D losses, at least technical losses could be reduced through technical improvements.
7. There is a potential of discovering more natural gas in Balochistan. Present government has taken many initiatives to resolve political problems and difficulties in that province. More should be done in this respect, once there is respite from other challenges.
8. Conservation and energy efficiency at consumer end should be facilitated. This has a lot of potential in reducing the monthly energy bills of the consumers, if not the energy prices and tariff. Most electric fans and electric motors in Pakistan are energy deficient wasting a lot of energy. Similar is the case with air-conditioners. Energy efficient motors are very expensive. There are no checks on producers or any technical assistance programme for SMEs, which manufacture most of the electrical equipment. Standardization or labelling program could create market incentives to improve electrical efficiency of their products. It has been done successfully elsewhere including the neighbouring India. There is no reason, it cannot be effective here. Energy savers have already made a sizeable impact on people's energy bill, even of factories. More initiatives are required in this respect.
9. Similarly, there is hardly any building with insulation in residential or commercial sector. No window glass has ever been found insulated, resulting in heavy heating/cooling losses. Relevant government agency should launch awareness campaign and prepare legislations to bring about controls in this area. This has been one of the most neglected areas.
10. Our industrial sector except some notable exceptions has not been traditionally much interested in conservation and efficiency issue , although that may be changing due to rising energy bills and lesser opportunities for energy theft. The textile sector, one which is the most vocal against raises in energy prices, has been found to be particularly wasteful and least interested in improvements. Some magic should be found to reform them.