Power: Consumption and price conundrum

The power sector paradox is becoming increasingly visible. The capacity payments against newer power plants are growing disproportionately due to large number of new plants coming online along with currency depreciation, as almost all the payments are pegged to dollar. To recover that growing cost, power tariffs had to increase. Then in the second round, consumption dipped and bills recovery fell due to a sharp increase in tariffs. This made the case for another round of tariff increase. And the process is on repeat…

This is not some arbitrary theory. It’s a reality of the Pakistan’s power sector, even though the marginal cost of the power generation has significantly come down due to newer plants. The power base tariffs on average increased by Rs8/unit last year due to passing on both growth and legacy cost to the consumers while rest of the difference was budgeted. However, sources reveal that despite all these measures, there is perhaps another increase of Rs400-450 billion in the circular debt. And that along with growing capacity payments, calls for another round of tariff increase.

This is a circular problem- especially, when the consumption is falling on the grid, as those who can afford, in residential and commercial segments, are moving to alternate sources such as solar; while those who cannot afford, are either reducing the consumption or not paying the bills on time. This is evident from the macro numbers where the power dispatch is down by 10 percent in 11MFY23.

Then there is a study conducted by IPS in May 2023 to understand the relationship between the increase in electricity tariff and reported consumption of electricity. There were 1,180 respondents comprising of 1,000 households from top ten cities, as well as over 140 business owners across the spectrum. More than 50 percent of respondents say that there is a moderate increase (5-20%) in the electricity bills, while around 30 percent say that there is significant increase (higher than 25%), and around 15 percent didn’t have any change in bills. Households are spending more of the monthly budget on electricity bills – households are spending almost 25 percent of their income on electricity bills while shopkeepers are spending 22 percent of their income on power.

These numbers demonstrate a substantial financial burden imposed by electricity bills on individuals and businesses. High electricity prices can strain household budgets, limit disposable income for other essential needs, and impact the profitability of small businesses. These findings underscore the importance of ensuring affordable electricity tariffs and implementing measures to improve energy efficiency and conservation to alleviate the financial pressure on households and businesses.

Apart from these financial pressures on households, there is a strain on the system as well. Consumer behavior is changing as well. The survey reveals that 35 percent of respondents have claimed to have extensively reduced their consumption while 33 percent reported a slight reduction in consumption. The results imply that the higher the reported increase, greater the likelihood of respondents implementing more significant measures to reduce their electricity consumption.

This suggests that the financial burden imposed by higher electricity bills has motivated consumers to adopt energy-saving practices and make conscious efforts to reduce their electricity usage. 17 percent of respondents had installed solar energy systems, and almost half of the respondents showed interest in installing solar energy systems to make use of renewable energy; but are having capital constraint in installing solar solutions.

Interestingly, Females demonstrated higher levels of concern and were more likely to have extensively reduced their electricity usage compared to males. And the larger the family, higher levels of reduction in electricity usage.

And the thorny issue is that the reduction in electricity consumption did not result in a decrease in their monthly electricity bills. Around one fourth of respondents preferred paying their bills in installments over the past year. At least one disco, K-electric, is having recovery camps to address people’s diminishing ability to pay.

The problem is not going anywhere for the power generators and suppliers. The issues are not being highlighted by many discos whereas K-electric is one exception where being public listed company; it is providing some clarity on recovery challenges on quarterly basis. However, overall country’s recovery position is to be cleared once NEPRA publishes its state of the industry report in September.

The real time position is missing. However, both macro numbers and the IPS survey suggest that the situation is grim, and it is likely to continue like this in the coming year.