The complexities of the energy sector are not easy to resolve. The IMF set a structural benchmark to end gas supply to Captive Power Plants (CPPs) with the objective of forcing them to transition to the national grid. This was necessary as grid consumption was declining while supply was increasing.
However, there was a problem: not all CPP users have access to the grid, and even those who do may face reliability issues. Additionally, some CPP operators claim their efficiency is higher than the most advanced plants on the grid, yet they have been reluctant to allow government audits to verify these claims.
Due to strong opposition from CPP operators, the government renegotiated with the IMF to increase gas prices for CPPs rather than cutting off supply entirely. The aim was to incentivize them to transition to the grid. This policy shift is a step in the right direction and has long been advocated in this space. With higher gas prices, truly efficient operators can continue, while those lacking grid access may start investing in the necessary infrastructure while still having access to gas.
The gas price for CPPs has been raised from Rs3,000/mmbtu to Rs3,500/mmbtu, with an additional 20 percent levy to be implemented in stages through biannual 5 percent increments. A power utility expert in the South estimates that only 5-10 percent of the 1,000-1,200 CPP consumers will shift to the grid at Rs3,500/mmbtu. However, once the penalty (the additional 20 percent levy) is fully in place and grid prices decrease, as the government claims they will, the majority are expected to transition.
Those with full grid access and a cost advantage will naturally move to the grid, though their numbers are currently low. However, with the implementation of the levy and a potential reduction in tariffs, more marginal consumers will continue shifting. Those needing capital investment to build the infrastructure for grid connectivity—costing between Rs2-9 billion in some cases and requiring 6-18 months of construction—may also begin making arrangements.
Meanwhile, another factor is causing concern for Sui gas companies: third-party access to the gas system and imported RLNG. Under the previous power policy, up to 10 percent of the domestic gas supply could be allocated to third-party suppliers using the Sui network. That share has now increased to 35 percent. These third-party suppliers, unburdened by inefficiencies and cross-subsidies, will invariably offer cheaper gas, making them a preferred option for many consumers.
This shift leaves Sui gas companies in a precarious position. Over time, their most reliable, high-paying consumers have been moving away, while tariffs for the subsidized consumers they used to support have not increased proportionally. As a result, Sui gas companies are facing financial difficulties. Compounding this problem is their obligation to purchase imported RLNG under long-term agreements with Qatar. Due to limited pipeline capacity, domestic gas supply is being reduced to accommodate RLNG.
Currently, Sui companies’ largest consumers are CPPs. Their transition to the grid further worsens the financial strain. The situation is aggravated by increased third-party access, which enables independent suppliers to serve large consumers like CPPs. Now, proposals are circulating to allow third-party access for RLNG imports as well. If these suppliers can offer lower prices, Sui gas companies may face bankruptcy, as senior Sui officials warn.
In summary, the issue of excess power supply in the energy sector is being partially addressed by shifting CPP consumers to the grid. However, this move is exacerbating problems in the petroleum sector, where Sui gas companies’ financial stability is deteriorating.
For heaven’s sake, the government must develop an integrated energy policy that takes all these dynamics into account before making critical decisions.
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