EDITORIAL: That the devil of power circular debt has not stopped growing despite successive increase in base tariffs, painful fuel and quarterly adjustments, and supposedly massive drive against theft is a grim reality.
And the IMF (International Monetary Fund) is asking for another tariff hike to curb the flow. The gas sector, too, is facing an identical challenge.
The power sector circular debt flow has increased by Rs292 billion as against the permissible ceiling of Rs155 billion during Jul-Sep quarter as the stock stood at Rs2,537 billion as of 30th September 2023.
Thus, the earlier increase of Rs5.75/unit in the base tariff is not sufficient, and the government must increase the rates further. And next tariff review, if everything remains under target, would be in July 2024.
The Fund looks at the cost and is demanding the government recover the cost through tariff adjustments or by providing fiscal subsidy.
Since there is no fiscal space available, a tariff hike appears to be the only option. However, that is not sustainable. Tariffs for certain segments have almost doubled in the last couple of years.
The impact on the household is huge. In the middle-class segment, the summer monthly electricity bill was hovering at 30 percent of their disposable income. The ratio was even worse for the lower middle-income class.
The industrial sector and other businesses are losing competitiveness due to frequent hikes in energy tariffs. Exporters are finding it extremely difficult to compete with the regional players.
Many households who can afford are moving towards a solar solution and reducing the reliance on the grid. Most companies in the manufacturing sector are investing in multiple energy solutions as the idea is to rely less and less on the national power grid.
With a further increase in tariffs, many who have generation sets may rely more on their own generation, while daytime consumption keeps on shifting to solar. And those who are still solely on the grid, incentive to invest in alternate solution is increasing for them.
In this manner, the reliance on the national grid is set to decline, and this is evident by the recent numbers. Power generation is down by 10.6 percent in October 2023 (YoY), and the fall is 28 percent as compared to the previous month. The overall increase in 4MFY24 is 3.7 percent from a low base.
With growing capacity cost, lower consumption will result in further increase in the coming biannual reviews. There is another problem: the capacity to pay is decreasing and the incentive to steal is increasing. There are anecdotes of increase in theft in various regions despite a massive campaign aimed at reducing theft and increasing recoveries by the power ministry.
This is a vicious cycle. The tariffs keep on increasing while the reliance on national grid by good paying consumers keeps on reducing while the incidence of theft keeps on growing.
There are political compulsions, which are hindering recoveries from places like AJK and erstwhile FATA. Similarly, disturbed conditions that pose law and order challenges are hurting the relevant departments’ ability to recover due payments from a large number of areas in Balochistan.
The industry is demanding wheeling while the government is asking too much for wheeling charges. The government must split the Discos into smaller sizes and privatise.
The energy market formation must be incentivized, and once the reforms are in place, the government should elongate the debt repayment of IPPs (Independent Power Producers). Otherwise, the energy sector cancer will spread further to anywhere in the economy.
Copyright Business Recorder, 2023
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