Electricity to industrial consumers: Finance Ministry confused about subsidy arrangement

ISLAMABAD: Finance Ministry is reportedly confused about the subsidy arrangement of around Rs 350 billion on supply of subsidized electricity to industrial consumers for three years, well informed sources in Finance Division told Business Recorder.

The industrial consumption for 12 months has been calculated at 21 billion of which 45 percent is related to SME's consumption (9.5 billion units) and large scale consumption is projected at 55 percent (11.6 billion units). It is estimated that consumption will increase by 24 percent (5 billion units) in best case scenario, of which 2.3 billion units would be in SME sector whereas 2.7 billion units of additional consumption is expected in large scale manufacturing.

On Monday, Prime Minister Imran Khan presided over a follow up meeting of ISP after the ECC constituted a committee to recommend the subsidy mechanism. The concerned ministers including Minister for Industries and Production Hammad Azhar, attended the meeting. The decisions taken in the meeting will be tabled before the federal cabinet today.

According to sources, ECC was informed that the average energy demand decreased by approx. 1.05 percent at generation level in FY 19-20 from FY 18-19. There is a significant amount of idle generation capacity in the system for which the system has to pay capacity charges under contractual and regulatory requirements.

Efficient committed generation fleet of local coal, hydel, RLNG and nuclear shall be added in the system by FY 2023. In order to evaluate the modalities for reviving industrial growth and utilize efficient generation capacity on sustainable grounds, the prime minister chaired a meeting on Oct 21 on the agenda titled Industrial Support Package for power sector.

During the meeting, the proposal for sale of electricity to all industrial connections at Rs 8/unit on additional consumption for next three years was approved. The proposed price of Rs 8/kWh was based on a subsidy of Rs 4.96 per unit to be budgeted and provided to keep the impact on the circular debt neutral. The presentation suggested that accelerated incremental growth in the industrial sector can be achieved through predictable certain and subsidized pricing mechanisms. Benefits to the economy as a result of increased electricity consumption in LSM and SME sectors were also presented.

Power Division had previously carried out an analysis on the marginal cost of electricity generation and a proposal for the provision of incremental off-peak power at marginal cost. This proposal was based on the principle of no subsidy and was also circular debt neutral.

It was also directed that the current system of peak and off peak tariffs should also be discontinued considering surplus power available. Elimination of peak and off peak rates will increase the average rates of base consumption of industrial consumers from Rs 15.90 kWh (off-peak) to Rs 16.87 kWh. Further the generation constraints in the summer 2021 do not allow elimination of this price signal. In addition the price elasticity of incremental demand is also not known ex-ante and may increase the overall incremental marginal cost and affect power balance of the system.

In view of the decision the support package for industrial and captive consumers (excluding K-Electric consumers) the Power Division proposed a period of three years i.e. from November 2020 till October 2023. Following options were submitted for consideration of the ECC: (i) incremental rate of Rs 12.99 Mwh may be charged to all industrial consumer categories, excluding zero-rated industrial consumers, on the incremental consumption over their respective historical consumption or established benchmark for a period of three years from Nov 2020 till Oct 2023, (the proposal is subsidy neutral); OR incremental rate of Rs 8/MWh may be charged to all industrial consumer categories, excluding zero-rated industrial consumers, on the incremental consumption over their respective historical consumption or established benchmark for a period of three years i.e. from Nov 2020 till Oct 2023.

The estimated subsidy requirement for this option is approximately Rs 243 billion for three years i.e. Rs 229 billion for Discos and Rs 122 for KE. The corresponding subsidy shall be budgeted by the Ministry of Finance and released on actual sales under the package on monthly basis to Power Division.

Power Division proposed that the ECC approve one of the two options and issue guidelines to Nepra for approval of proposed package and incorporation in the regulatory framework.

Following recommendations of Nepra, notification of such tariff in the proposed package to be made by the Federal Government in the official gazette within fifteen days of intimation in terms of section 31 of the Act. In case of approval of the proposal supplementary grant in the amount of Rs 29.26 billion may be allocated against demand No 46 and head 18-5064 Industrial Support Package payment to other expenditures of Power Division during CFY.

For FY 22 & FY 23 budget allocation to be included in budget estimates of Power Division. Peak, off-peak rates may be retained till summer 2021 and may be re-evaluated for winter 2021.

Copyright Business Recorder, 2020