Plans afoot to rationalise power tariff

ISLAMABAD: Admitting that the power sector possessed a major risk for fiscal sustainability, the government is making plans for rationalising power tariffs through different proposals including slashing allocation of development budget at federal and provincial levels.

The government is also working on closing down domestic Independent Power Producers (IPPs) belonging to government and private sectors. However, the IMF has not yet granted its endorsement for the power rationalisation plan. There is also some resistance within the ranks of the government as some important quarters consider that this plan might not be workable and may fail to provide a permanent solution to structural problems being faced by the cash-bleeding power sector.

“The non-CPEC IPPs will be targeted to pay off capacity charges through different instruments. The government wants to secure a substantial fiscal space by cutting down the Public Sector Development Programme (PSDP) at the federal level and Annual Development Plans (ADPs) of the provincial governments to create the desired fiscal space. Then the funds from authorities and state-owned enterprises (SOEs) will also be utilised for creating a fiscal space in the range of Rs1.5 to Rs2 trillion,” top official sources told The News on Monday. The IMF is opposing all such proposals arguing that without fixing the generation, transmission and distribution, and collection of bills, the power sector could not be fixed through gimmicks and window dressing.

The finance ministry, in its report on fiscal risks, highlighted that several economic factors have contributed to increase in capacity payments. Over the years, Pakistan’s nominal GDP has grown significantly, rising from PKR39,189.81 billion in FY2018 to PKR 106,045 billion in FY2024.

“However, the growth in capacity charges has outpaced the growth in nominal GDP, leading to potential fiscal strain,” it added. The depreciation of the Pakistani Rupee against the US Dollar, from an average of 109.84 (PKR/USD) in FY2018 to 283 in FY2024, worsened the situation by raising the cost of imported fuels and equipment. Moreover, high and fluctuating interest rates, exemplified by the Karachi Interbank Offered Rate (KIBOR) peaking at 23.27pc in FY2023, have increased borrowing costs, adding to the financial burden. During the last few years, low economic growth also resulted in lower electricity demand growth, leading to increased capacity charges.

Fuel prices add another layer of complexity to the tariff structure and Pakistan’s fiscal sustainability. Global coal prices have been historically volatile, impacting capacity charges. For instance, the average annual sale price of coal increased to around USD296.5/MT in FY2023 from USD64.44/MT in FY2020. The monthly average price of coal peaked at USD430.81/MT in September 2022 from USD50.14/MT in August 2020. Such large fluctuations in the imported coal prices have consequences for the cost of electricity generation and increased capacity charges if the coal power plants do not operate at capacity. Similarly, RLNG (re-gasified liquefied natural gas) costs are also subject to global market conditions and geopolitical tensions, making them volatile and unpredictable. Pakistan’s reliance on imported fuels portrays fiscal risk arising from these volatilities due to uncertain capacity payments.

The widening gap between supply and demand in power sector poses risks. The finance ministry stated that the installed capacity of Pakistan’s power sector has grown by 5pc per year from 33,233MW in FY2018 to 42,362MW in FY2023.

On the other hand, electricity generation has increased by only 1.2pc per year while electricity consumption has grown by 1.8pc per year, resulting in higher capacity charges. Despite the increased capacity and generation, the gap between generation and consumption suggests inefficiencies and potential losses in the system. However, owing to increased demand on account of above-average economic growth, electricity generation peaked at 14,3316.6GWh in FY2022 while electricity consumption reached 11,6902.21 GWh.

This growth in energy demand reduced capacity payments, masking the effect of currency depreciation, increased circular debt due to underpricing energy in the domestic market, and fiscal pressure emanating from subsidies.