Economic slump, swelling capacity charges forced govt to hike power tariff

By Mehtab Haider

ISLAMABAD: The economic slowdown of the last two years, eruption of Covid-19 pandemic and inability of government to undertake tariff reforms forced the government to hike electricity tariff by Rs 1.95 per unit, top official sources confirmed to The News here on Friday.

The increased power supply and the inability to reform the tariff left the government with no option but to hike the tariff. However, the blame for not undertaking reforms lies squarely with the PTI government. Attacking the PML-N regime, SAPM Dr Shahbaz Gill said the previous government needlessly contracted 22,000MW which was way beyond the country’s requirement in order to mint money but left the consumers in great misery. Gill said if Pakistan’s GDP was increasing annually by 7 per cent even then only 10,000 MW was needed.

Now the total capacity charges stand at Rs 860 billion which the government has to pay to the power companies in the backdrop of the fact that surplus power is available without any demand on the consumption side. The last PML (N) led government increased supply side of electricity by adding 10,000 to 13,000 MW into the national grid assuming that the country’s GDP growth would rise on an average of 5 percent per annum while the demand of electricity would increase by 5 to 8 percent annually. But on the contrary the country’s GDP growth plunged into negative 0.38 percent and since the country had surplus electricity the government was forced to pay Rs 860 billion as capacity charges as under the tough terms of the agreement the government has to purchase electricity from the power plants built under China Pakistan Economic Corridor (CPEC). SAPM Dr Shahbaz Gill said the country utilizes 13,000 MW in winters and needlessly pays for the capacity charges of extra 26,000MW of unused power. Whereas in summers 25,000MW power is used but the government is forced to pay for capacity charges of 11,000MW unused power. The government, he said was left with only two option to pay the deficit by increasing the tariff or by taking external loans.

However, the top official said that the government hiked the power tariff by Rs 1.95 per unit for implementing base tariff for 2019-20 which had increased from Rs 13.35 to 15.30 per unit so with quarterly adjustments the overall average tariff was Rs 16.50 per unit in the country.

Now the capacity charges of the power sector will rise to Rs 1400 billion by 2023 leaving the government with only two options of either to sell the extra supply and recover the capacity payment or further hike tariff to burden the voiceless consumers. The government increased the supply side but it could not reform the tariff regime. Many experts believe that the government should have granted 2000 to 4000 megawatt connections for increased consumption to recover the capacity charges through increased consumption. Secondly the government could replace furnace oil based plants with RLNG plants as it would bring desired efficiency by reducing the cost of electricity.

When contacted former Finance Minister Miftah Ismail on Friday, said that the government once hiked the tariff after coming into power in 2018 and blamed the PML (N) government, but there was no justification to blame the previous regime again after passage of two and half year period. He said that the country’s GDP growth nosedived dropping the power demand significantly so they could not blame the PML (N) for their failure. He said that the government was running RFO and diesel plants but blaming us for installing highly efficient plants at Haveli and Baloki. He said that the power consumption requirement increases from 25,000 to 27000 MW in peak summers but drops to 4000 MW in winter. It was strange that the rulers were blaming us because of their inability to fix the power sector, he added.

When contacted, Dr. Khaqan Najeeb, who had served as Advisor to the Ministry of Finance said, the power tariff regime needs serious reforms. Pakistan is still continuing with a demand constraining tariff regime. As consumption increases so does the tariff for every sector to curtail higher demand. He suggested that with addition of 13,000 MW surplus availability in the past few years we should have moved toward a marginal tariff regime. Dr Khaqan felt this would have incentivized a higher demand bringing the per unit fixed cost down. The total capacity payment for 2020 stands at Rs 860 billion. In addition, following merit order in running the plants ensures the cheapest source energy is used in making electricity. Taking out RFO plants and using the 62 % hi efficiency based RLNG plants to full capacity can help keep the tariffs reasonable.

He emphasized it is most important to improve recovery and cut line losses which are causing a loss of Rs 185 billion yearly. In addition the subsidized tariff for AJK and Balochistan tube-wells have an impact of Rs 100 billion. This highlights the need for moving to targeted subsidies, adequate budgeting of subsidies and their timely payment.

Dr Khaqan felt in the medium term indigenization of supply is the real solution for managing a reasonable tariff. The excess supply currently gives the country room to work on building hydel capacity, he concluded.