One of the key objectives of the IMF’s next Extended Fund Facility (EFF) to Pakistan will be “restoring the energy sector’s viability by accelerating cost-reducing reforms”. By the time Pakistan enters the desired bigger and longer EFF, it will likely have undertaken the biggest of all base tariff adjustments in the electricity market. It is another thing how the IMF even thinks that the authorities are at any stage of a cost reduction reform program for the power sector, that it talks about ‘acceleration’. The only acceleration that has been witnessed is with the price adjustments – that are far too many to even keep count now.
Of course, this is not the IMF’s fault that the country’s power sector is becoming the epitome of unaffordability. It is worth mentioning that the IMF has for a long time had a singular focus on pricing and pricing alone under the energy reform umbrella. In that context, it is a welcome change that the objective now clearly states reforms that will reduce cost. When the plan is presented, it will be commented upon, but that is likely for the much longer term. In the now and near, more pain waits for electricity consumers.
The power regulator sought petitions from the ten distribution companies to make adjustments in consumer end tariffs for the upcoming revision for FY25. Six of the ten discos came up with complete revenue requirements, whereas the other four (Multan, Hyderabad, Peshawar, and Sukkur) presented only the distribution margin (DM) and prior year adjustment (PYA) requirements. The DM and PYA sought for FY25 amounts to Rs660 billion or Rs5.1/unit. The same last year was Rs415 billion or Rs3.77/unit. That is a 59 percent increase over last year, assuming Nepra admits all petitions as they are.
Now on to the most critical component of the tariff i.e. the Power Purchase Price (PPP). From Rs2.8 trillion for FY24 base tariff, it is slated to go up to Rs3.4 trillion for FY25. In terms of unit price, that is an increase of Rs/unit to Rs 31/unit on account of PPP alone. The total revenue requirement for FY25 could cross Rs4 trillion at Rs37/unit – up from Rs29.8/unit for FY24 (based on PPP provided by 06 discos out of 10, the other 04 discos’ PPP has been estimated using historical contribution). The PPP will be computed by the Central Power Purchasing Agency (CPPA), but is not likely to alter a great deal from the one sought – as the capacity component is by and large settled.
Mind you, all of this is based on a very noble assumption of T&D losses at under 12 percent with 100 percent recovery. The periodic adjustments that follow will take that into account later. It is a shame that the total units sold for FY25 are estimated at a mere 4 percent higher than the actual (and provisional) units sold in FY24. For context, 110 billion units envisaged to be sold for FY25 are only 7 percent clear of that in FY20, which included the disastrous Covid quarter. The revenue requirement back then was Rs16.9/unit versus Rs37/unit for FY25.
With the ever-shrinking space in the kitty for subsidies, expect all consumer categories to be exposed to a big price shock this summer. And we haven’t even talked about the taxes, surcharges, duties, quarterly and monthly adjustments, and more surcharges. The state’s perennial inability to broaden the tax base means the government cannot think of giving up on taxes on electricity consumption, which could possibly lead to higher usage, better recovery, and lower losses, eventually reducing the per unit cost. That is almost out of the equation as the IMF, if anything, encourages more surcharges on the electricity sector, knowing fully well electricity bills are the best bet to ensure incremental revenue.
For now, brace for impact. For the glass-half-full types, place your belief in the IMF’s “cost-reducing reforms”.
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