The federal government okayed the power price hike, with the ministers attempting to downplay the impact. While the protected category is rightly insulated from the price increase, the inflationary impact on the unprotected category promises to be substantial for the next 12 months. The regulator’s decision comes with a detailed look on the Power Purchase Price (PPP) for FY23, which offers interesting observations.
The PPP calculations assume an allowance of 11.7 percent on account of Transmission& Distribution T&D) losses. What would not you give to have a T&D loss of 11.7 percent this fiscal year? Only that this is purely stuff of dreams. Like always. This time, the dream has got bigger. For better context, T&D losses in FY21 stood at 18 percent – staying virtually unchanged since FY16.
The difference between allowed and actual T&D losses has historically hovered around 3-4 percentage points. It promises to be higher this time – close to 600 basis points. Even in the best-case scenario of the authorities putting all the efforts, it would be nothing short of a miracle to pull the T&D losses down to 16 percent. Even that would lead to a deficit of Rs150 billion before anything else. Evidence suggests T&D losses tend to go up with higher tariffs. Good luck starting with a deficit of Rs150-200 billion, and then dreaming of curtailing circular debt.
The energy team in a presser gave the impression that the rebasing exercise has taken adequate considerations in terms of reference fuel prices. Recall that monthly Fuel Charges Adjustment have been considerably higher in the last 10-12 months – with the yearly average adjustment going up to Rs5/unit – in sharp contrast to 4-year average FCA of only 50 paisas per unit.
It is fair to assume that the commodity super-cycle won’t stay around forever. The energy charges in FY21 stood at a staggering Rs1474 billion – almost double the reference fuel cost of Rs780 billion. Commodity prices, fuel shortages leading to inefficient generation mix, and currency depreciation all played their part. For FY23, the reference fuel cost has been raised to a more realistic Rs1152 billion or Rs10.2 per unit. FY22 was an anomaly – and FCA requirements should revert back to the historic mean, unless the commodity price spiral decides otherwise.
The capacity payments have been worked at Rs1251 billion (Rs11.1/unit) for FY23 – up from Rs792 billion in FY21. A closer look is required at the set of assumptions as the indexation factors could turn for the worse – especially the local and US inflation indices, which feed into capacity charges. While there may be some respite on account of FCAs, the starting deficit of Rs150-200 billion due to optimistic T&D assumptions will ensure the final tariff remains on the higher side.
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