EDITORIAL: The mismanagement and irrational decision-making in the energy sector is making the industrial sector unviable and dragging the economy fast into an abyss. Any economic recovery on a sustainable basis is, therefore, dependent upon the early resolution of the energy mess.
The finance minister in his recent interactions in the US capital claimed that Pakistan does not need any new policy prescription as the solutions are well known; and all we need is implementation. He is absolutely spot on, so to speak.
The issues in the energy sector are known to all, the missing element, however, has always been the willingness and capability to implement the requisite changes.
The policy should clearly be to deploy every energy molecule on merit and that too efficiently. For that to happen, gas pricing rationalisation is taking place where the prices have been revised in areas where low cost was creating an incentive to deploy inefficient usage – both in domestic and industrial sectors. Luckily, this has been partially corrected. However, there is still room, and for that implementation of WACOG (Weighted Average Cost of Gas) is necessary. However, here some provinces, particularly Sindh, are unhappy as the cheap price supply may come to an end. They argue that constitutionally they have the first right to use the gas produced in their respective provinces. That is correct, and no one is denying them their right.
However, WACOG demands rationalisation of pricing; it is not aimed at taking away the provincial first-use right. Both are well within the constitutional ambit. The problem, however, is that implementing WACOG would still not correct the element of cross-subsidy in determination of prices for different categories of consumers.
The bigger issue is in the power sector where successive increases in effective power tariffs resulted in falling demand and lower recovery.
And that has resulted in a further increase in tariffs, as the higher fixed cost must be recovered while lower recovery must be loaded somewhere else. In a recent media interaction, the interior minister revealed that last year LESCO (Lahore’s Disco) overbilled 835 million units to industrial, government offices, and domestic consumers to improve their recovery, i.e., passing the theft on to others. These overbillings are over and above the higher pricing.
The domestic consumers are finding it hard to afford electricity, while on the grid industries are becoming unviable. The industry is, in fact, facing a double whammy. With a sharp increase in gas prices, especially for the SSGC consumers, running of plants, especially captive ones, on gas is becoming unviable.
The approach is right to rationalise gas pricing to let these move towards grid-based electricity, but here successive increases in the power tariffs have made the cost of manufacturing based on power from the grid uneconomical and inefficient. The problem is the element of cross-subsidy in power tariffs.
According to a presentation on determination of Use of System Charges (UoSC), in FY24, domestic consumers (up to 400 units) are receiving subsidy of Rs13.7/unit which is partially being recovered by cross- subsidising others, and in this head Rs8.6/unit is being recovered from industrial consumers. In a country where the cost of power production is already high, passing the burden of subsidy on to productive sectors can kill them.
The industry, therefore, is justified in demanding that the element of cross-subsidy be removed from within the power tariff and has asked for direct wheeling. The government wants to recover cross-subsidy and stranded cost from wheeling bulk consumers and proposes Rs27-28/unit as UoSC.
There should be no cross-subsidy and the stranded costs should be rationalised to have only component of infrastructure and other necessary fixed costs. However, the Discos’ inefficiencies are being loaded onto it. That should not be the case. Not all Discos are equal – some perform significantly better than the others. However, uniformity in tariffs loads the inefficiencies of bad ones on the good Discos too.
Thus, the government should end the uniform tariff. That shall lower standard costs. And the subsidy for marginal consumers should be from the budget. Since there is no fiscal space in the federal domain, the responsibility of subsidy should be passed on to the provinces.
The other element should be to lower the overall fixed cost, which is determined at 72 percent for FY24 while the fixed charges in recovery are only 2 percent. The government should introduce fixed charges in billing – especially for domestic consumers.
Moreover, the capacity fixed charges need a revisit where the debt of many 2015 IPPs (Independent Power Producers) should be extended from 10-12 years to 20-25 years, as the project life ranges from 25-30 years, and its economic viability will bring debt repayment cycle close to project cycle.
All the above-mentioned steps are necessary to make the sector viable, and that cannot happen without deregulation and privatisation of the energy value chain with a focus on reducing the government footprint.
As the finance minister hinted that the recommendations are well known, the question is about implementation. The sooner it is done the better as exports are falling due to higher energy costs. The country simply cannot afford any further delays.
Copyright Business Recorder, 2024