Regionally competitive energy for industry

Competitive energy availability is imperative for expansion of industrialization. There are no two ways about it. However, many believe that demand by industrialists for energy provisioning at competitive rates is unjustified. The impression is that business community lobbies for excessive rebates and relaxations, allowing them to seek undue advantages. Yes, some lobby and extract as much rent as they can. But it is unfair to insist that it is always the case.

Many industries have moved to captive power generation in the last decade or so. The decisions were commercial and in line with regional trends. Electricity was either not available or too expensive. Later, new capacities were added to the national grid which were fuel efficient than majority of captive producers. However, industrial consumers would only move if energy cost from grid is lower than captive.

Pakistan is not the only country where industrial consumers rely on their own generation. The story across the region is similar. India has captive power capacity (CPP), which is 75GW – one-sixth of India’s total installed capacity. The number for Pakistan is around 10 percent. Bangladesh too is also moving up the industrialization ladder by relying on captive as a major source of energy. Around one-sixth of total electricity produced is captive as 60-70 percent of the industry is relying on captive generation.

Captive was installed in days when there were energy shortages. Affordable energy is preferred for domestic consumers and farmers. Industrial consumers on grid cross-subsidise others. To make industry competitive, countries provided cheap energy source for captive generation. Indian captive generation is mainly relying on coal while Pakistan’s and Bangladesh’s industrial sectors depend on natural gas. The fuel rates were kept low to remain competitive and that brought down energy production cost relative to grid.

In the last decade (all three countries) have expanded production on the grid. Now these have surplus capacities. Newer plants on grid are more energy efficient and of low marginal cost. The natural resources (gas and coal) are depleting. The challenge of policymakers is how to move industrial players from captive to grid.

Here the policy prescription is to not regulate the use of captive. A better solution is incentivizing industry, i.e., by providing energy on grid at rates similar to what costs them on captive. No other way could work. If industries’ gas is cut and forced to move to the grid, slowly the industry will die down or give kickbacks to get gas/coal. The best way to deal is to reduce cross-subsidies on the grid. Many industries will move to grid. Captive is an energy inefficient solution. Sooner it is done, the better it would be.

The case in Pakistan is worse. The grid energy cost is relatively higher than India and Bangladesh as cost of production from IPPs is higher due to higher equity return and front-loaded tariffs. Then the transmission and distribution losses are higher, and recovery is around 90 percent. Industrial unit effective price in Pakistan ranges between 12.28¢/kwh -16.14¢/kwh. The range in India varies between 5.46¢/kwh and 12.82¢/kwh. Clearly, India is much cheaper; but still industry prefers captive. Same is the story of Bangladesh.

Recently, a report by PIDE highlighted that industrial tariffs in Pakistan are higher than those in other countries in the region and even beyond. Export industry in Pakistan is getting electricity at 9¢/kwh rate which is higher than what is in Vietnam (7.3¢/kwh), India (7.1¢/kwh and 7.8¢/kwh in Maharashtra and Punjab, respectively) and at 6.1¢/kwh in Xinjiang China. The rate of gas in Bangladesh for captive generators is at $4.05/mmbtu versus $6.5/mmbtu for general and $5.9/mmbtu for Sindh.

Providing energy at regional competitive rates is imperative for industrial exports to grow. The heat is on. Growth momentum is building up in Pakistan. Textile and other exporting sectors are in an expansion mode. Exports this year would be at all-time high. Sick units are reviving, and new expansions are in the pipeline. New orders are coming, and margins are squeezing due to soaring input costs (such as cotton). It is imperative to lower the energy conversion cost.

The problem is higher for upstream textile industry (spinning and weaving). These are energy intensive. Downstream industry (garments) has become labour intensive. Having both

upstream and downstream industries in a country is important as buyers are giving 45-60 days lead time for orders. That is why Bangladesh is fast developing upstream textile industry.

Expansion in Pakistan is taking place as production is becoming competitive in the current regime. Interest cost is low and exchange rate is market-based. Credit goes to State Bank of Pakistan (SBP) for providing low rates for expansion. Working capital is at competitive rates too. The other factor is wages which are well in range of India and Bangladesh.

These are good for boosting downstream industry. Competitive energy is a bottleneck for upstream expansion. The PTI government in the first year pledged to resolve it by providing energy at regional competitive rates (gas at $6/mmbtu and electricity at 7.5¢/kwh). Based on this, low interest rates and market-based exchange rate, expansion is taking place. Textile exports moved from $12 billion in 2018 to expected $16 billion in 2021. Another $3-4 billion capacity expansion is in the pipeline. Textile exports can well reach $20 billion in 2022.

The message for policymakers is to not reverse the trend that is working fine. There are talks of providing direct rebate to exporters – this may not work. In the last regime, the then finance minister Ishaq Dar provided rebate to exporters (4%-8%), but there was no growth, as other factors were not competitive. The energy cost subsidy provided by PTI government in first year was around Rs45 billion – 2% of textile exports (at $16 billion). This implies that targeted subsidy is better than blanket.

The problem with rebate is that its benefit is for downstream but upstream becomes uncompetitive. That is why yarn becomes short. The government should continue to provide energy at regional competitive rates. And to become energy efficient, incentivize industry to move to grid by right pricing signal, not by showing sticks.

Copyright Business Recorder, 2021