Pakistan’s power sector is currently reeling from a fuel supply chain crisis capable of leading to an implosion. Notwithstanding the non-availability of sufficient fuel quantities, macroeconomic and geopolitical factors have caused a surge in prices — furnace oil is twice as expensive for every metric tonne, and RLNG costs have also tripled since June 2021.
Simultaneously, the demand for electricity is also beating projections on the back of premature and unexpected heatwaves, widening the chasm between demand and supply.
Generating electricity with such expensive fuel comes with extreme complications. The cost of electricity for end consumers is fixed under the Uniform Tariff Regime. However, variations in fuel costs are passed on to consumers through Fuel Charge Adjustments.
Every month, KE and XWDISCOs submit information on the costs incurred to generate electricity for power regulator Nepra’s scrutiny. Following a public hearing, the regulator determines a) the cost to be charged to consumers and b) the month in which this cost will be charged.
The petitions filed by Ex-WAPDA Distribution Companies (XWDISCOs) for Fuel Charges Adjustment show how generation costs have risen due to expensive fuel costs. For instance, in the month of April, Wapda generated 1.28 billion units of electricity through natural gas, at a cost of PKR 10.7 billion. In the same month, 2.56 billion units of electricity were generated through imported RLNG at a cost of PKR 41.4 billion.
While the number of units through RLNG were 61% higher than Natural Gas, the cost incurred was almost 286% greater. These costs could have been reduced by providing an adequate allocation of sufficient natural gas to the national power sector, which would also be passed on in benefit to the consumers.
Increased fuel costs coupled with a limited supply of natural gas have a ripple effect beyond the National Grid and on KE as well. For the month of April 2022, KE petitioned for a PKR 4.86/unit rise on account of Fuel Charges Adjustment. If the utility had been provided with its allocated natural gas quota, consumers in Karachi would be charged PKR 3.8/unit less. Instead, the available natural gas appears to be routed away from the power sector, creating an artificial dependency on imported fuels.
According to informed sources, the monthly fuel adjustment cost that is collected from consumers on top of the bill is expected to increase exponentially from the current levels of PKR 1 to 4 per unit per month to as high as PKR 10 per unit per month, which will send electricity bills through the roof.
Impact
Utilities and the Government are also in a financial crunch as fuel prices reach unprecedented highs. The Government has to increase its subsidies to maintain uniform tariffs for consumers but lacks the funds to actually make the payments to utilities. Currently, KE is owed PKR 25 billion in Tariff Differential Subsidies which is pending at various levels at GOP, including Ministry of Finance, Ministry of Energy and NEPRA.
The utility urgently needs this cash to pay SSGC and PSO for fuel supplies. This owed amount is projected to reach PKR 48 billion by June 2022. The lack of funds will make fuel procurement a Herculean task, which in turn will impact the electricity available for Karachi and could cause an extension in the power cuts to the city. To bridge the gap, KE has been borrowing from financial institutions, but even these credit lines are quickly becoming exhausted.
The national situation is no better either. In a high level meeting with PM Shehbaz Sharif, Chinese power firms operating in Pakistan said they await payment of PKR 340 billion in outstanding dues which are creating liquidity issues and pushing them to the brink of shutdown. PSO’s subsidy receivables are also projected to hit PKR 60 billion in the last quarter of the fiscal year. An urgent release of these legitimate payments is critical to the sustainability of the power value chain, and all eyes look towards the Government machinery to come through.
This is an ugly manifestation of the circular debt crisis that has been lingering since time immemorial. The difference is that it is now threatening the fundamental integrity of the power sector. It is impossible that an overnight solution will be developed to solve the mountains of payables and receivables between entities. But as we enter the last month of the current fiscal year, the government needs to ensure that enough subsidies are released to KE, PSO, and other stakeholders to sustain the sector.
Additionally, a bitter pill that the nation must swallow is that if electricity is becoming so expensive, it must be treated as a luxury. Faced with similar messy situations, Sri Lanka resorted to nationwide power cuts of up to 7.5 hours to save costs, a practice that is continuing to some extent today as well. In a recent video interview, former PM Shahid Khaqan Abbasi also shared that one hour of load-shed can actually save the country USD 125 million (or approximately PKR 25.19 billion). As recently as 2021, countries like China were sensitizing citizens on reducing personal consumption.
These solutions must be explored in earnest but should not be relied upon to offset the actual issue of clearing subsidy payments on time. It is imperative that we begin searching for a way out while the lights are still on; shooting in the dark has seldom resulted in success.
Copyright Business Recorder, 2022
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