THURSDAY MAY 16: Power subsidy reaches Rs 315 billion: MoF irked by poor recoveries by Discos

ISLAMABAD: With power sector subsidy going up to Rs 315 billion, the Finance Ministry has reportedly expressed annoyance over poor recovery by the distribution companies and termed it unsustainable. Sources said that a meeting on circular debt was held on Wednesday at the Finance Ministry to review subsidy releases and recovery of billed amount by the power sector.
The meeting was informed that with the release of Rs 10 billion Tuesday, the total subsidy to the power sector has reached Rs 315 billion against the revised budgetary allocation of Rs 291 billion for the current fiscal year. Some participants of the meeting termed the situation unsustainable because subsidy to the power sector may reach Rs 400 billion by the end of the current fiscal year unless recovery by the distribution companies is improved.
An official said that the power sector subsidy is impacting heavily on the budget deficit. The Finance Ministry has proposed that subsidy policy for the power sector must be moved from general regime to targeted regime with the objective of gradually phasing out the overall subsidy to the power sector.
The way forward proposed by the Ministry in the 2013-14 budget is to move toward targeted subsidy and its gradual phasing out to move closer to full cost recovery. As a first step tariff rationalisation towards Minimum Determined Tariff (MDT) to be applied to commercial and industrial consumers is proposed. Further, the tariff structure may be simplified to restrict passing of only one slab benefit to consumers. Moving beyond MDT is not possible under the current uniform tariff regime. The government may deliberate with provinces and seek approval on national level as it alters the current uniform tariff mechanism in the country. In the next phase, government may consider applying differentiated tariff across the country, the budget proposes.
The Finance Ministry has suggested that the government applies differentiated tariff (Nepra determined tariff) to the more efficient Discos where tariff differential is minimal. This will result in upward revision in tariff by a substantial amount. For the less efficient Discos uniform tariff should be applied which would be the highest Nepra determined tariff from the more efficient Discos.
Additionally, in medium to long term, the emphasis should be towards achieving a less oil dependent power generation mix through development of indigenous energy resources particularly hydel, coal and renewable energy resources for sustainable and affordable energy supply in the country. Changing combined cycle plants to coal (in 24 months) needs to be pursued in both public and private power plants. In addition, development of support infrastructure to import energy resources such as LNG and natural gas needs to be expedited.
The government also admitted that a cumulative increase in average tariff of more than 100 percent has been done to keep moving towards full cost recovery. Tariff differential gap increased up to Rs 3.25/unit (45 percent) during fiscal year 2010 which was reduced to Rs 1.73/unit (22 percent) in fiscal year 2011 due to tariff rationalisation. There is need to maintain MDT and keep tariff differential at Rs 3.08/unit going forward in order to ward off any additional fiscal burden.