In the previous piece of this essay, we observed that although there are fuel cost savings of 6.29% when we utilise the solar rooftop generation during the daytime, it is also evident that this saving is causing a counter upsurge in the unit price of consumers by 12.45%. We explained the reasons why non-solar consumers are punished, which is due to more and more solar rooftop installations.
It is essential to know that the utility company does not pass this fuel cost savings to the consumers while calculating the national average power purchase price. If we analyse the power purchase price determination of Nepra for 2024-25, this fuel cost saving is ignored.
With the discussions of more than 12GW of solar equipment imported into the country, this capacity, when installed, shall become a significant generation source that will replace the grid supply. So, while solar generation may save on fuel, the non-solar consumers end up paying the price—literally and figuratively.
Net metering: Balancing the scales—I
As the previous example was simplified to make a layman’s reader understand the real problem, it is pertinent to mention that an increase of 12.45% in unit price is based on the national average power purchase price.
This surge indirectly increases the bill amount for non-solar consumers when different taxes, surcharges, and duties are added per standard billing procedures.
Most of these charges and duties are based on the base bill amount; therefore, the overall bill amount is increased immensely after adjustments.
While concluding the final bill amount, the utility company first calculates the base bill amount, which is calculated by multiplying the units consumed by a consumer during the month with the Nepra-determined distribution tariff. Two types of charges are then added to this base bill amount.
The first category of charges is applied by the utility company itself, and the second category is the charges that the utility company applies on behalf of the government. Let us discuss these charges individually and their impact on consumer categories, i.e., solar and non-solar consumers.
The charges applicable by utility companies include fuel adjustment charges (FAC), quarterly adjustment charges (QAC) for variations in interest rates, exchange rates, and inflation, finance costs surcharges (FC surcharge) and distribution margin.
The FAC and QAC are calculated periodically because they keep fluctuating, and the change is passed through to the consumer through an increase or decrease in overall per unit rate. The FC surcharge is PKR 0.45/kWh and is calculated based on actual units consumed by the consumer.
On top of all this is the distribution margin, which covers the costs of maintaining the distribution network, again calculated based on the number of units consumed.
The second category of charges is applied by utility companies on behalf of the government. The most important of all these charges is GST, which is currently charged at 18% of the final bill calculated after including utility charges. In addition, another 1.5% of the utility bill (excluding surcharges) is charged under the head of electricity duty.
The income tax is applied based on how much the overall bill amount is and the consumer’s billing category. There are also other charges with small amounts, like TV licence fees and something called “further tax” which is applicable to certain consumer classes.
Except for the TV license fee, all charges are somehow based on the total units imported by a consumer during a billing cycle. Solar consumers, by generating their electricity during the day and feeding the excess back into the grid, significantly reduce the number of net units they draw from the grid.
At the end of the month, when the utility companies tally up the total electricity they have consumed versus what they’ve generated, the balance is either zero or close to it. It means that solar consumers often pay less or zero in GST, finance cost surcharge, electricity duty, income tax, and adjustment charges because these charges are calculated based on the number of units consumed from the grid.
But that is not the whole picture. Let us assume that the government cannot cover the financial charges from the current applicable rate, and it has decided that an additional PKR 2 billion is required to meet the actual expense; it must increase the rate of the FC surcharge. Do you understand what does it mean for consumers?
Consumers with net metering have nothing to worry about because they will be subsidised by the poor who do not have enough funds to join the solar club. They are the ones who end up bearing the brunt of the costs. They cover the costs of maintaining the power plants, the distribution network, and all those additional taxes and surcharges, while solar consumers, who consume much more electricity than non-solar consumers, avoid most of these charges. The situation leaves us with an important question: Is this fair?
Now, let us consider an additional aspect of this scenario. The average rooftop solar generation cost is lower than PKR 10 per kWh. The generation costs from conventional power plants, which replace solar after sunset, are above PKR 60 per kWh.
The unit-to-unit adjustment thus means that the utility borrows a unit during daytime, which costs PKR 10 and returns the same unit by incurring a cost of PKR 60 at night. It is one enough reason to reconsider this flawed mechanism of net metering.
While solar generation has certain advantages, it has also had unforeseen repercussions for non-solar consumers, who now pay higher electricity bills without seeing any fuel savings flow through to them. This discrepancy must be addressed to guarantee that the transition to renewable energy is equitable for all.
The next part of the essay will look at ways to resolve this scenario. We will look at potential options, ranging from renegotiating existing PPAs and changing net metering policy to new billing structures, and analyse the benefits and drawbacks of each strategy.
(To be continued)
Copyright Business Recorder, 2024
The writer is a chartered management accountant working in the power sector for 23 years. He can be contacted at [email protected].
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