Regionally competitive level sought: APTMA demands power tariff at 9-10 cents per kWh

ISLAMABAD: The All Pakistan Textile Mills Association (APTMA) has expressed deep concern over the absolutely dismal state of the power sector and emphasised the dire need for power tariff rationalisation to prevent further economic deterioration.

The APTMA demanded of the government to bring power tariffs down to a regionally competitive level of 9-10 cents/kWh where Pakistan’s exports are competitive in international markets.

The association urged caretaker Federal Minister for Energy Muhammad Ali to expedite the reform process considering the gravity of the situation.

Higher tariffs cause power consumption decline: APTMA

The association further stated that power consumption for the first 20 days of December 2023 has declined by 26 percent year-on-year for industrial consumers and by eight percent for domestic consumers on the LESCO network, driven by decline in high-end domestic consumption.

This dramatic decline in power consumption is the direct result of irrational decision-making in the Power Division that has pushed power tariffs to levels where neither industrial nor residential consumers are able to sustain their levels of consumption and demand for power is becoming increasingly elastic to prices.

In export-oriented sectors, production is not feasible at current power tariffs that are almost twice the average faced by competing firms in regional economies like India, Bangladesh, and Vietnam. Economic inefficiencies like cross-subsidies and stranded costs embedded in power tariffs cannot be passed on to international consumers who have several lower price alternatives available to them in international markets, thus rendering Pakistan’s exports uncompetitive, the APTMA added.

For domestic industries, the power sector’s rationale—as indicated in various documents including the DISCOs’ petitions on the determination of the UoSC/Wheeling Charges—is that these industries can pass on the high electricity costs to their respective customers. However, the economy has witnessed and continues to witness unprecedented inflation of as much as 40 per cent that—in-part driven by increasing energy prices—has severely eroded purchasing power.

On one side, power tariffs are being increased for domestic sectors and on the other side they are also being forced to bear the impact of higher energy prices for industrial consumers in everything they purchase, resulting in a severe reduction in demand for domestically produced goods that has forced large production cuts and reduced industrial power consumption, causing loss of employment and further reductions in purchasing power.

The fall in the domestic sector’s power consumption is all the more worrying because it is driven by a fall in the power consumption of high-end domestic consumers.

Given that industrial and high-end domestic consumers are major contributors of power sector revenue, especially the inter- and intra-DISCO cross-subsidization, this decline in consumption is expected to cause huge losses to an already financially unsustainable and debt-ridden power sector.

These losses will necessitate a high Quarterly Tariff Adjustment (QTA) for Q2FY23, thereby, further increasing already-high power tariffs that are responsible for the decline in consumption in the first place.

The APTMA stated that based on prevailing consumption trends, our estimates suggest that the QTA for Q2FY23 will be approximately Rs6/kWh, taking the total power tariff for industrial consumers to approximately Rs54.5/kWh (19.5 cents/kWh), not including the various duties and taxes: There should be no doubt that such a high power tariff will further accelerate the pace of economic deterioration, leading to a drastic reduction in industrial activity and loss of millions of jobs.

Irrational power tariff policies have created a vicious cycle of high power tariffs causing consumption to decline, necessitating further hikes in the power tariff that further reduce consumption and so on. If we continue on this trajectory, electricity tariffs will soon reach Rs100/kWh, consumption will continue to fall and even then, power tariffs will need to be increased.

If power tariffs had been maintained at around Rs35/kWh, APTMA estimates suggest that industrial power consumption would have reached over 30,000 GWh annually and contributed over Rs1 trillion to power sector revenue, compared to only around Rs894 billion at current consumption and tariff levels where most of the reduction in revenue can be attributed to a lower industrial contribution to fixed costs of the system.

This misadventure has had very serious and dangerous implications for the entire economy.

If the status quo is maintained, manufacturing in Pakistan will become financially unviable, industry will come to a grinding halt with implications for millions of direct and indirect jobs in upstream and downstream sectors, including agriculture and retail, and loss of millions of livelihoods.

As unemployment and poverty increase further, an increasing number of households will be pushed into the lifeline and protected power tariff categories, causing a significant shift in the power sector and the overall government’s revenue dynamics that the system is not equipped to handle.

The government must carefully review power tariff policies to reverse the incoming catastrophe. Power tariffs must be reassessed and revised to an economically optimal level that increases power consumption and power sector revenue.

A rational tariff for industrial consumers will stimulate industrial activities across the economy, increase power consumption and allow for a sustainable and financially viable power sector.

It will also create incentives for industry to move away from RLNG/gas-based captive generation, freeing up indigenous resources and bringing down the energy import bill.

The APTMA continued while saying that the energy minister is cognizant of the dangerous dynamics at play in the power sector and the serious implications this poses for the overall economy.

Copyright Business Recorder, 2023