Oh “dear” power!

There are two ways to look at the power sector subsidy allocation for FY23. One is to say the power sector subsidies have been cut to half from Rs1075 billion in FY22 to Rs570 billion budgeted for FY23. The other way is to see how power subsidies at Rs570 billion are identical to the record high budgeted for previous year – which is 3 times higher than the 10-year average.

Subsidy overruns are an oft-occurring phenomenon. Election year or otherwise. The overruns have been massive and often. Who is to say it won’t be the case yet again? Of course, there is a sizeable upfront increase in base tariff promised by the government to its people and the IMF. The likely increase will hover around Rs8/unit spread over three consecutive months.

In simpler terms. That is close to Rs1 trillion that will not need to be subsidized. One has to wait for Nepra’s determination on the base tariff increase petition, to make a more informed comment on how much of the base tariff increase pertains to the increased requirements on Power Purchase Price, and how much of it (if any) relates to circular debt settlement. Seemingly, Rs8 per unit is on the higher side, to just adjust the capacity component, even accounting for currency depreciation and other indexation components.

The reference fuel price will be another key. If set on or around current high fuel costs, this could well mean some respite down the line in terms of fuel charges adjustments, whenever the commodity super cycle decides to call it a day. So why then there is a need to still earmark Rs570 billion in power subsidies for FY23, one asks?

The biggest component remains inter-disco tariff differential at Rs225 billion – higher by Rs41 billion from last year’s revised figures. That is roughly Rs1.8-2 per unit for maintaining uniform tariff across the country. Another Rs80 billion go to K-Electric, most of which is to pick the tariff differential. Nothing out of the ordinary there.

As things stand, export and general industries should brace for substantially higher electricity tariffs, as zero-rated and industrial support package goes down from Rs41 billion to Rs27 billion. With the proposed Rs8/unit increase from August 2023 onwards, Rs27 billion will be as good as nothing – and it won’t hurt to drop it altogether.

It must be remembered, 60 percent of the entire power subsidy was doled out in the last quarter alone. The PM relief package accounted for Rs80 billion. No less than Rs434 billion were paid to the IPPs, most likely on account of payments overdue, and Rs118 billion to PHPL, as per the Circular debt Management Plan. Another Rs100 billion have been spent on advance subsidy for coal and other plants – which needs more clarity as regards the use of funds. Mind you, this isn’t necessarily a subsidy that could be characterized under public relief. This is more of the government’s inefficiencies over the years, piling up, only to lead to settlement of dues.

Recall that hefty payments in the name of circular debt clearance have been made since FY13. It continues to be the same. All it offers is a breather for more inefficiencies and complacency to breed – only for the circular debt to balloon up to levels where hundreds of billions get settled from the national kitty. Now that the base tariff is all set to go up, expect the difference between power generation cost and average selling price to come down drastically. And then in two years from now, boom! Because pricing is only part of, and not the entire reform, even if the international donors would want you believe otherwise.

Welcome back to a fresh cycle of clean slate without having the necessary reforms, only for it to go haywire in 24 months from now. Energy affordability will remain a pipedream in Pakistan.