ISLAMABAD: The Commerce Ministry has approached the Prime Minister for reversal of federal government’s decision to disconnect gas to Captive Power Plants (CPPs) as per understanding with International Monetary Fund (IMF) as implementation on the plan to be effective from January 1, 2025 would have adverse implications for exporters and further lose confidence of global buyers due to highly uncertain situation in Pakistan, well-informed sources told Business Recorder.
According to background discussions, federal government had encouraged industries to install electricity production engines of naturalgas, furnace oil and diesel, to become internationally competitive.
Over the period of time, the sector gradually adapted to the shortfall of electricity in the country by installation of Captive Power Plants which helped to manage their energy demands quite effectively and also facilitated them to be competitive.
Commitment with IMF: CPPs: Gas disconnection process begins
However, in the last couple of years the supply of natural gas to the industry has been severely curtailed primarily due to imbalance between the supply and demand and particularly entertaining the demands of domestic and commercial consumers.
The federal government provided regionally competitive RLNG/Gas tariff of US$ 6.5 per MMBIU all-inclusive from September 2018 to June 2022 to five export-oriented sectors (including textiles, leather, carpets, sports goods and surgical goods) since September 2018 with an objective to keep them internationally competitive and boost exports.
However, keeping in view the internal market situation in the aftermath of Ukraine war, strict IMF conditionalities and pressure on foreign exchange reserves, the federal government: (i) initially increased blended Gas/RLNG tariff from US$ 6.5 to US$ 9 per Mmbtu all-inclusive in FY 2022-23; (ii) curtailed the gas supply to SSGCL industrial consumers twice a week; (iii) discontinued this blended tariff of US$ I per MMBTU in FY 2023-24; and (iv) doubled the prices of natural gas from Rs. 1,100 to Rs. 2,150 for General Industry and Rs. 2,7501or Captive Powers of export-oriented sectors and clubbed exports and non-exports in one category in FY 2023-24.
The Petroleum Division submitted a summary to the ECC of the Cabinet dated 29th June 2024 with a proposal to revise the indigenous gas tariff for industry (captive power) from Rs. 2,750 to Rs. 3,000 per MMBtu while highlighting the facts that “captive power sector contributes significant portion of gas and RLNG consumption at higher rates and thus not only provide additional revenues for cross subsidies in domestic sector in the absence of budgeted subsidy but also consumes LNG which often become surplus due to erratic off-take of power plants”.
The summary was approved by the ECC of the Cabinet on June 30, 2024. Further, Petroleum Division on September 27, 2024 notified the revision in gas priority order, as approved by the ECC of the Cabinet on September 11, 2024 and ratified by the Cabinet September 25, 2024 wherein industry (captive power) has been given the least priority.
Within the last two years, gas/RLNG blended tariff of industry (captive power) prices have increased approximately from US$ 9 to -US$13.2 on SNGPL network and from US$ 5.4 to -US$ 11.3 on SSGCL network.
Further, there is unpredictability of Gas/RLNG tariff in Pakistan due to the frequent changes in blend ratio by the SUI companies on regular basis and unreliable supplies. Abrupt changes in tariffs have therefore adversely impacted competitiveness of the industry.
Additionally, in a meeting of the ECC of the Cabinet held on September 11, 2024, the Petroleum Division indicated that: (i) both the Sui companies are going to serve notices to all the Captive connections, as per the agreement with the IMF to get them disconnected by January 01, 2025; (ii) CPPs are cross subsidizing (around Rs. 100 billion) to domestic consumers. To continue lower tariffs for domestic consumers, either budgetary allocation from the Government or increase in gas pricing for the other consumers would be required; (iii) even if complete gas is diverted to the power sector from CPPs, electricity tariff can only be reduced by Rs. 1 .8 per kwh.
The Commerce Ministry argued that the plan to disconnect the supplies of CPPs would have adverse implications for exporters as they would further lose confidence of global buyers due to highly uncertain situation in Pakistan, anticipating that exports of industrial manufactured sectors will decline resulting in the loss of foreign exchange, employment, services and revenue to the FBR.
There is also potential risk of significant production losses as a direct consequence of inconsistent unstable electricity supply from national grid subject to variations in respect of voltage, frequency or supply of electricity, resultantly halting the entire production process.
Ministry of Commerce has taken up the issue with the Prime Minister in a letter of October 18, 2024, with the proposals as follows:
(i) Petroleum Division to conduct third party audit of thermal efficiencies of co-generation captive power plants, in accordance with global benchmarks; accord priority of gas supply on the same level as that of industry (process) to the captive power plants declared as efficient through a third-party audit, and ensure reliable supplies; and remove burden of cross subsidies on the export sectors in blended Gas/RLNG tariffs, and fix blend ratio of RLNG and indigenous Gas for the predictability of tariff, instead of frequent changes by the gas companies; and
(ii) Power Division to entertain new and additional load requirements of inefficient captive power plants (mainly single cycle), and ensure uninterrupted supplies and reliability of grid electricity.
The sources said, Commerce Ministry has held consultations with the stakeholders but the feedback is not in favour of CPPs.
Copyright Business Recorder, 2024
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