Energy assets and energy security

A government must take regulatory and policy decisions needed to safeguard critical national resources

The coronavirus pandemic has triggered a macro-economic shockwave that is unprecedented in peacetime. The socio-economic devastation is likely to persist, especially for the ‘vulnerably employed’ sector.

A brutal economic contraction has rendered hundreds of millions of workers unemployed globally, with International Labour Organisation (ILO) warning that it could destroy the livelihoods of nearly half the global workforce.

In this context, governments around the world are scrambling to develop and announce relief measures to ease the burden on the most vulnerable while also stimulating the economy. Recurring and essential costs, such as utilities, mortgage or rental payments and food support are being prioritised for public relief support.

Energy industries across the globe are facing turbulent times, with a deep decline in energy demand due to lockdowns, lower recovery leading to liquidity crunch, and low morale of field staff. The propensity to pay is also decreasing due to reduced consumer disposable income, industry shutdowns and corporate investment with knock-on effects on the power mix.

Some South East Asian countries have responded proactively to provide relief to the consumers on electricity bills. These countries have taken unique approaches, for example, Malaysian residential consumers have been provided a progressive discount on electricity bills till September 2020. Discounts are also available to six worst-affected business sectors, including hotel operators, travel and tourism agencies, shopping complexes, theme parks and airline offices.

In Indonesia, 24 million customers received free electricity for 3 months (April, May and June 2020) and 7 million customers received a 50 percent discount on electricity tariff, both financed by a $24.9 billion stimulus package. In Thailand, discounts were provided to 10 million households for March to June with free electricity up to 150 units for households with power meters lower than 5 ampere, varying discounts were also provided for February’s billing up to over 3,000 units.

In South America, the National Electric Agency of Brazil authorised the transfer of $400 million to guarantee liquidity amongst the companies in the electricity sector while concurrently prohibiting the suspension of power supply due to payment default for up to 90 days.

Historically, looking at data the economic downturns compels a breadwinner to resort to crime to meet basic needs of the family, leading to theft as well as unrest in society, which is bound to contribute to electricity theft and consumers not paying their dues.

In Pakistan, relief policies circle around refund-based relief for domestic consumers, because the inability to pay is the ground reality. Pakistan is willing only to defer payment rather than exempt its domestic consumers. This relief, which does not consider the long-term effects of joblessness and depleted income levels only affects the liquidity of utility companies without providing real relief to the worst affected.

A dependable supply of power underpins the quality of life, especially during Covid-19 crisis, energy suppliers have a special responsibility on their shoulders. In South Asian economies, like Pakistan and India, where the power sector is also plagued by high levels of theft, there is a secondary conundrum faced by power utilities.

Vulnerable residential customers, in the absence of real relief measures like refunds, resort to power theft due to their inability to pay their bills, thus creating a liquidity crunch. A large portion of this amount is permanently unrecoverable. Apart from recovery issues, in Pakistan, as in other countries, power utilities are struggling with an overall decline in power demand from the most profitable segment, i.e. industries and commercial consumers due to suspended production/economic activities.

During these exacting times, no amount of resilience or robustness can ensure security of supply, if the financial constraints are not addressed properly, not only will it push back investments it will also disrupt reliable power supply.

Now is the time to join hands and provide relief to the power sector, including through direct government interventions which ensure working capital and other adjustments to address financial and operational challenges for power utilities.

Demand stimulation should also be a focus area with subsidies for the worst affected sectors. According to Pakistan Institute of Development Economics (PIDE) Covid-19 e-Book, on the consumer front the vulnerably employed population in Pakistan accounts for 56 percent and since it is projected that poverty will increase to 70 million people (high impact scenario) from a base of 54 million people, thus mega drives for public awareness, and other subsidies to be provided for commercial and residential consumers, should be granted to provide true relief even if they have to be targeted toward the lower end of the consumer spectrum.

Economic challenges and operational hurdles will have long-term impact on utilities post-Covid-19. A government must take the necessary regulatory and policy decisions to safeguard critical national resources, prime amongst them energy assets and energy security. It is likely to take some time before the demand reaches pre-Covid levels. The resilience of utilities and other associated entities will be tested meanwhile and if no immediate interventions are made, it will cripple energy assets, including power utilities, affect economic activity and compromise long-term ability of the country to achieve its priorities.

The writer tweets @Jawwadrizvi

Energy assets and energy security: A government must take regulatory and policy decisions needed to safeguard critical national resources