EDITORIAL: There is no respite from the increase in effective end-consumer electricity tariff. After 26 percent increase in the annual base tariff, there are heavy fuel cost adjustments (FCAs) and quarterly adjustments (QTAs) in the offing to make electricity more expensive. It’s going to add to the misery of consumers and cause further inflationary pressures.

The Power Division is said to have shared with the International Monetary Fund (IMF) and the World Bank the Circular Debt Management Plan (CDMP), including the impact of QTA. In July, when the base tariffs were revised upward and CDMP was shared, the assumption of PKR-USD parity was kept at 286 and prices were assumed for various fuels. Now, with changes in these assumptions and actual recoveries of Discos, adjustments are to be made.

The PKR is depreciating, and the prices of international oil and other fuel have moved up lately. These metrics are adversely affecting the actual cost of electricity production in PKR, and these have to be recovered from the consumer to keep the circular debt growth in check.

The FCA for the month is computed at Rs1.83 per unit as actual fuel cost worked out to Rs8.47 against the reference cost charged at Rs6.65/unit in August billing. Currency depreciation and higher international prices have contributed to this escalation even though three-fourths of power generation during this month was based on cheaper marginal cost sources such hydel, nuclear, local coal and gas, wind, solar and bagasse.

The QTA impact is even higher at Rs5.40, which works out to Rs146 billion to be recovered from consumers in three months. Under the revised plan it is envisaged to recover this in six months with a tariff increase of Rs3.55/unit. The situation is worsening and simply getting out of hand.

The power sector circular debt is currently over Rs2.3 trillion beside another Rs1.5 trillion as gas circular debt. These numbers are already too large and are straining the already crippling economy. The government cannot afford any further increase in these. That is why an increase in prices to recover costs is inevitable. However, consumers’ ability to pay such high tariffs is fast eroding.

Something more is needed. The gas prices must increase as gas circular debt, too, is growing. However, the government is delaying the increase. The pipeline gas is available to only one-third of households and that too largely in urban areas while the rest are using LPG at a much higher price. These prices should converge immediately.

But that would have very limited impact on the electricity tariff. More is required to be done. The fuel cost is a small fraction of the end tariff that the consumer pays. There are cross subsidies. There are losses of Discos, which are incorporated in it (especially in QTA). There are surcharges of circular debt legacy cost. There are taxes and duties in it.

While the government is hard pressed on the issue of the mounting circular debt and under severe pressure from the IMF to ensure that it does not rise any further, it is criminally oblivious of the need to recover approximately Rs 2 trillion that is owed to Discos by habitual defaulters who have not paid their bills and most of them still manage to receive electric power from the Discos as they are influential people or belong to the public/state entities.

These outstanding amounts must be recovered if the situation besetting the power sector is to have any hope of coming out of the trap. All these need to be rationalised. However, the elephant in the room is capacity charges - Rs16/unit in the tariff goes to this single head alone. And overall cost of power production is not going to decline by increase in consumption as long as the marginal cost of production is higher than the average.

Here the problem is cash flows. Numerous plants came online in the last 3 to 5 years and due to this, capacity payments ballooned for the next 5 to 7 years as debts of these plants (80%) are frontloaded, and majority of plants (barring those on RLNG) are foreign-funded projects.

These need to be revisited and renegotiated. And the privatisation process of Discos needs to be expedited. These steps are needed without any further loss of time in order to forestall the likely collapse of power sector, which can ultimately trigger a massive economic breakdown.

Copyright Business Recorder, 2023