EDITORIAL: Only a few weeks into the latest International Monetary Fund (IMF) programme, the Prime Minister has been approached by the Commerce Ministry for a possible reversal of the federal government’s decision to disconnect gas to captive power plants for generation usage.
According to a Business Recorder report, the Ministry of Commerce has warned of adverse economic consequences on industries in general, and the export sectors in particular, should Islamabad decide to implement its decision as agreed to with the IMF.
Recall that eliminating captive power usage in the gas sector with a listed rationale of pushing captive gas users on to the electricity grid and channeling gas to the most efficient generators is one of the three energy sector Structural Benchmarks (SBs) laid out in the IMF conditions, with the implementation deadline of January 2025.
As has often been witnessed in the past, this time around as well, like clockwork, the affected parties have started lobbying to influence the decision-making circles. It is understandable from their viewpoint, but the jury is out on whether or not it is a justifiable plea.
The argument against ending captive usage for power is largely built around the potential loss of competitiveness, as this will undoubtedly raise the energy costs for the industries. While there is no denying the feared outcome, the energy sector does not work in isolation, and the agreed upon elimination of captive power usage has been proposed after years of deliberations, and a comprehensive cost-benefit analysis.
The IMF, and earlier the World Bank, had included this as a key step in the energy sector structural reform. There is no basis for the criticism that it is being done too quickly without enough lead time, either. The seeds were sown in the previous IMF programme, and very clear timelines were laid out for the rollback of captive power gas usage.
It must be noted that the transitioning of captive power users to the grid is also in line with the Cabinet Committee on Energy’s January 2021 decision. There is nothing abrupt or overnight in the entire scheme of things, so to speak.
In the larger scheme of things, there are material benefits to be had on the collective national average power tariff by energizing industrial connections to the grid. Some estimates put the benefit to north of Rs2/unit, which is more than the one envisaged through the IPP negotiations and contract terminations.
A continuous fall in power demand has further deteriorated the equation, as fixed capacity component increases in case of reduced demand. Shifting industries back to the grid will help take care of the soaring power tariffs to a great extent.
The concerns over grid reliability may well be legitimate in certain cases, but this alone cannot be the basis for not undertaking a crucial structural reform.
The process of reform, by definition, is painful and there will always be complaints from one segment or the other. While the authorities are at it, it is pertinent to mention that any further delays in implementation of gas pricing on the basis of Weighted Average Cost of Gas (WACOG) are unwarranted. It has been a while since the WACOG legislation was in place, and the authorities have been found wanting in the implementation of the same.
The concern around the likely increase in tariffs for all other categories once the captive users are phased out may well be blown out of proportion. The previous tariff adjustment in February 2024 reduced cross subsidy to a great extend, and reflected full cost recovery, especially after the introduction of fixed charges on domestic consumption.
Be that as it may, the government appears to be fully aware of the fact that implementing this critical reform in the energy sector is its first option. But it must recognise the other grim reality that it is its last option as well in view of the criticality of the IMF’s 37-month $7 billion Extended Fund Facility (EFF) for the survival of country’s economy. The government must do it, and the sooner the better.
Copyright Business Recorder, 2024
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