The winter electricity package termed “Bijli Sahulat Package” has finally been approved with much fanfare. The IMF and other multilateral agencies are on board as well for what appears to be a pilot project to assess the efficacy over three months this winter season. The government initially intended to spread the additional consumption incentive over six months, but the Fund insisted on scaling it back to three months for starters.
First things first. The idea itself is worth exploring, given how far back Pakistan’s power sector demand curve has fallen in the past two years. With a lopsided tariff regime where the capacity charges component forms the bulk of consumer end tariff, it is rather beneficial to explore options to generate additional consumption at the marginal cost of Rs26/unit. Recall that the power demand dips significantly during the November-March period owing to lower temperatures. Pakistan’s electricity consumption mix is heavily tilted towards domestic consumption making up for 50 percent of national demand, whereas the shares of industrial and commercial consumption have stayed rather stagnant over a long time.
Given the sector’s capacity is built around peak summer demand, the situation leaves ample available capacity unutilized for nearly half the year – which partly explains the rather high incidence of capacity cost component built in the tariffs.
For domestic consumers, the package stands to yield limited upside, given the limited use case during December and February. While the government authorities are hoping the residential consumers will switch the gas-based geysers and stoves to electricity to take full advantage of the package, the gulf between prices remains massive even after a historic rationalization exercise in gas prices earlier this year. For instance, the domestic gas price for the highest consumption bracket still goes as far as Rs8/kwh, which is still three times less than the marginal price at which the additional electricity consumption incentive is being offered.
Mind you, the power consumption across all categories is significantly down from yesteryears, and the incentive package may well help restore some of it back – at least to the extent of what is envisaged in the reference pricing for FY25. With a visibly increased induction of rooftop solar in domestic settings, it remains to be seen if the package alone will be enough to entice consumers to consumer more power.
The onus then shifts to industrial and commercial consumers with a combined share of 34 percent in national domestic consumption. There is some hope on the industrial front, for increased consumption largely due to the low base and the fact that the LSM had tanked for two straight years. Unlike domestic consumers, industrial consumers can prepone some of the production activities, capacities permitting, to make full use of the package. The proposed formula gives 80 percent weightage to the last two-year consumption – which suggests that higher year-on-year consumption could happen organically to a great extent, even if the industrial activity stays shy of the highs of FY16-FY18 and FY22.
Here is hoping the authorities do not make this a be-all and end-all of the broader reform program, which needs to move beyond pricing measures. The winter incentive package does not have an apparent downside and is worth a shot to test the waters.
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