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February 25, 2020

Reducing energy tariffs

Opinion

February 25, 2020

Prime Minister Imran Khan has stressed the need to bring energy prices down and has asked for out-of-the-box solutions.

There is no magic wand. The die has been caste by prior commitments. However, some smaller adjustments and improvements on a number of fronts may add up to a worthwhile reduction. Bureaucratic processes often deride creativity and innovation. At the risk of appearing naive, let me posit some proposals. However, before we do that, let us examine the comparative tariff situation elsewhere and how big the problem is.

Pakistan’s electricity prices are 50-100 percent higher in the region and in some cases even more. India benefits from cheap local coal. Pakistani Thar coal unfortunately is as expensive as imported coal and twice as expensive if compared to similar lignite elsewhere including in India. However, the Indian power sector is beset with almost the same problems as in Pakistan – high T&D losses including theft at 20 percent; accumulated debts and liabilities and poor liquidity; old inefficient GENCOs and stranded assets. Poverty is the common denominator.

Unlike Pakistan, power tariffs vary widely across India, where every state/province has an independent power system, from regulator to financial ownership and liability. The comparison with Gujarat is relevant from many angles: it is geographically contiguous; it has a textile focus; and it is a progressive and successful province.

Most of the tariff slabs in India vary between IRs4 IRs5 per kWh which translates to Rs8-9 per kWh. The Lesco tariff correspondingly varies between Rs16 and Rs18 per kWh. We can roughly conclude that, overall, Lesco (Pakistan) electricity tariff is around 1.5 to 2 times or in some cases even more than twice that of Indian (Gujarat – GUVL) tariff.

Malaysia seems to have the lowest tariff at 6 USc for household and 10 USc 1 per kWh for industries. Malaysia’s energy resource endowment and export-oriented economy seem to be the drivers in this respect. Similarly, Turkey has a low tariff – 9.19 USc for households and 7.66 USc per kWh as the industrial tariff. China seems to have a comparable tariff with the South East Asian region.

Having reviewed the electricity tariff of relevant countries, we conclude that Pakistan’s electricity tariff is twice as much as elsewhere and merits urgent considerations. Revolutionary changes and results should not be expected. However, there could be some scope of optimism.

The energy sector is a major taxpayer. According to some estimates, the tax revenue from the energy sector amounted to Rs900 billion in 2016-17, which was 25 percent of the total tax revenue; GST from the energy sector being 60 percent of the total GST. Due to lack of propensity to pay fair taxes by our elites and commercial people, the government relies mainly on indirect taxes.

And now under IMF tranches, any income reduction is unacceptable. In fact, they have encouraged indirect taxation, having seen lack of success in increase in direct tax collection. Some adjustments are, however, possible. There is a case for reducing GST in reciprocation with India’s action. In India, VAT on electricity is 6 percent or even less in some states. Reduction in GST for residential consumers would be recommended since 17 percent GST is too much of an add-on on an already high tariff. Residential consumers do not get an input adjustment; 6 percent GST may be appropriate and may cause some palpable reduction in consumer bills. However, would it be affordable by the government?

The government has shown more than due activism on reducing circular debt. However, along with devaluation and high interest rates shock, clearing the balance sheet and bringing all kinds of suspended payables and receivables into consumer tariff has increased electricity bills disproportionately. There should be a mid-of-the-road tempo. It is a cash-flow issue, not one of cost.

High tariff award to power projects in the reign of the previous government is a factor, but currency depreciation and increase in interest rates has given a major jolt to electrical tariff. The energy sector is highly dollarized, based on FDI and foreign debt. Interest on working capital has also increased due to rise in interest rates. Most renowned economists are crying hoarse that interest rates should be brought down. Early action in this respect will relieve power tariff stress to some extent as well.

There is a huge difference between winter and summer demand. Fixed charges are increasing due to increasing capacity and slower growth in demand. The government has introduced some demand-increasing incentives like decreasing winter tariff. It has to do more. There is perpetual under-utilization of capacity during night time, whether summer or winter. There is reduced night-time tariff for night-only industries in India. There is a night-time tariff of IRs2.60 for night-only industries vs IRs4.25 general industrial tariff. Some steps can be taken in this direction along with slowing down the induction of new capacity.

High risk and accordingly higher financial costs have caused the power tariff in Pakistan to be twice as much as elsewhere. There is something fishy about it. Ethiopia, of all places, has been awarded higher credit worthiness than Pakistan. Undue or indecent haste by our politicians has also prevented adequate negotiations to bring down both CAPEX and financial terms. In fact, Nepra’s upfront tariff preempted the scope of bilateral negotiations among companies. It is sometimes possible to renegotiate the lending terms after project implementation due to risk reduction. It may be possible to increase the repayment periods if not reduce the interest rates.

Nepra may be encouraged to launch some corrective steps, at least in cases of excessive violations and deviations, although retrospective actions and opening old cases is not easy. Some reforms and corrective steps have been discussed in this space earlier. Unreasonably high O&M charges claimed by some IPPs can be corrected immediately.

The energy sector cannot be treated in isolation from the larger macro-economic framework and the changes thereof. Growth in demand will automatically improve capacity utilization and reduce unit prices. It will improve the government’s capacity to reduce the tax burden from the sector and thus reduce energy prices – which in turn would spur demand and growth in economy.

Sufficient time has to be given for macroeconomic adjustment to take place before launching other additional cost-push financial steps. The intention of the government to take steps towards reducing energy tariffs would be welcomed by a large sector of our society.

The writer is a former member of the Energy PlanningCommission and author of ‘Pakistan’s Energy Issues:Success and Challenges’.

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