Cost of thermal power generation exceeds base tariff

KARACHI: The cost of electricity generated by imported thermal fuels including coal, RFO (residual furnace oil), and RLNG (regasified liquefied natural gas) is still higher than the adjusted base rate of Rs18/KwH.

On an average, thermal generation through imported fuels costs around Rs4-20/KwH more than the base rate.

However, due to cheap non-thermal electricity generation, mainly from wind, solar, hydel, and nuclear, which usually makes up for most of the generation during July-November (winter), reduces the overall cost of generation.

Pakistan’s electricity demand sharply falls during winters. Interestingly, this seasonal factor in demand comes at a time when thermal generation remains high before peaking out in the summer. Farhman Mahmood, Head of Research at Sherman Securities, said but this time, base tariff would be enough to absorb cost pressures in the wake of expected rise in costly thermal generation during the next few months.

“This is happening at a time when the economy is slowing down and electricity rates are touching record highs,” he noted.

According to Mahmood, the power sector remains the major beneficiary as it will lower the demand by 7-8 percent (higher decline cannot be ruled out) keeping the overall cost of electricity generation in check.

“Unfortunately for consumers the federal government raised the power tariff when the prices of coal, RLNG, and RFO, are skyrocketing in international markets.”

He said with base tariff expected to further increase to its peak level of Rs24.4/KwH by October 22 (adjusted for T&D losses to Rs18), historical power sector woes were expected to subside going forward, especially if international prices crashed amid fears of increasing global recession fears, record inflation, and peaking commodity prices, especially energy.

“If the commodity prices remain at current levels and demand falls by 7-8 percent, the cost would surpass electricity base tariff during January-April 2023 mainly due to lower hydel generation and higher thermal generation.”

However, it was a time when electricity demand was minimal and thus circular debt accumulation would be the lowest. In case, commodity prices crashed by 10-15 percent, Farhan said adding “we may see base tariff meeting the cost of generation in the second half of this fiscal”.

Electricity base tariff increased to Rs20/KwH in July 2022 (Rs15/KwH after adjusting for loss units). “Independent Power Producers (IPPs) would recover their EPP and CPP payments from August 2022,” Mahmood said.

Moreover, base tariff would further increase to Rs24.4/KwH from October 2022 as per the IMF plan. Last year the average base rate during this period was around Rs16.5/KwH.