In the past few years, the energy mix of the power sector has improved substantially. New plants are more efficient. This has resulted in lowering the marginal cost of production. But in the process the fixed cost – due to debt payment of new plants, and higher plant cost primarily coal and nuclear—has been growing.
The solution is simple. Enhance the electricity consumption on the grid. Without it, advantages of better fuel mix and efficiency will be diluted. In fact, overall cost could potentially increase.
In FY13, the NTDC system power generation was 88.3 billion Kwh. This had increased by 37 percent to 120.7 billion kwh by FY18. The total cost increased by 37 percent as well – from Rs848 billion to Rs1,164 billion during FY13-18. There are two cost components - energy purchase price (EPP) and capacity purchase price (CPP). EPP is linked to the international oil prices and the overall fuel mix; while the CPP has nothing to do either – its increase is mainly due to newer plants and currency depreciation.
In FY13, EPP was Rs7.5/kwh (US¢7.8/kwh). This was reduced to Rs5.7/kwh (US¢5.2/kwh). But the CPP was growing – moved up from Rs185 billion in FY13 to Rs471 billion in FY18. In terms of per unit cost, this has increased from Rs2.1 (Us¢2.2) to Rs3.9 (Us¢3.5). The situation was not that bad as overall cost per Kwh in PKR was same (at Rs9.6) in FY13 and FY18.
The problem really started thereafter. Part of the problem was bound to happen. New capacities are being added (and will keep on coming) to enhance CPP in USD. At the same time, PKR was bound to depreciate and that is increasing CPP in PKR. But the real problem is that energy consumption is being stagnated since FY18. These two factors combined are increasing per unit cost of generation. With tariffs not moving up, circular debt is growing at a faster pace. If the tariffs increase, consumption will fall further. It’s a catch 22!
The overall cost of generation increased by 28 percent from FY18 to FY20, but the generation is up by a mere 1 percent. In fact, the EPP cost is down by 8 percent to Rs639 billion. The elephant in the room is CPP – up by whopping 82 percent from Rs471 billion to Rs856 billion. The elephant is growing fast while the room stays the same in size. This CPP is expected to grow to Rs1,600 billion in today’s PKR/USD parity by FY23. Thus, the EPP fall gains are already washed out and it will become a real pain.
The solution is to make the room bigger for the elephant to fit in. Not to mention that the elephant needs a diet plan – for that, negotiation with power producers is a must. The overall cost per unit is Rs12.3 (Us¢ 7.8) in FY20 – up from Rs9.6 (US¢9.9) in FY13. This implies that had the currency not depreciated, the cost per unit would have been less. Another way to put it is had the contracts been in PKR, the cost per unit would have been lower.
But the reality is what it is. EPP was US¢7.8/kwh in FY13 and is now Us¢3.3/kwh. The better fuel mix is yielding results. The CPP doubled from US¢2.2/kwh to Us¢4.4/kwh. The CPP will grow further at even higher rates if the energy consumption is not increased. That is why incremental consumption for industrial connections at lower price is a better option – this has to be extended for residential consumers too.
This way, the CPP elephant could be kept in control. But with higher consumption, grid capacity would be tested. At current leakages rate, the discos’ revenue and cost would grow more to lead to more circular debt. The room size has to fit in the elephant –reforming discos though developing CTBCM (Competitive Trading Bilateral Contract Market). More on this later.
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