Quite expectedly, the Central Power Purchasing Agency (CPPA) has made it official what was on the cards – a large base tariff adjustment for FY25. Recall that late in March 2024, distribution companies had submitted petitions to Nepra with complete revenue requirements for FY25. At that time, Nepra’s website had only six of the ten discos’ revenue requirements in public view – on the basis of which it was estimated for the revenue requirement to cross Rs4 trillion (read: Electricity (price) shock incoming, published March 28, 2024).
The Power Purchase Price (PPP) projection submitted by the CPPA in consultation with multiple agencies including the Power Division – sets the lowest PPP at Rs25.03/unit for FY25. For context, PPP allowed for FY24 was Rs22.95/unit at an absolute Rs2866 billion. The one projected for FY25 at Rs3476 billion is 21 percent higher. In unit terms, it is only a 9 percent increase from a year ago, which does not seem much, given the rather large rounds of increase in the past few years.
Only that the devil as always is in the detail. Of the seven projection scenarios, the best-case scenario is the one that returns the PPP of Rs25.03/unit. Now, who wouldn’t hope that remains true throughout FY25. But consider this. The Discos scenario, referred to as Scenario 3 in the CPPA projections, assumed the electricity sales going up from 125 billion units to nearly 139 billion in FY25 – an increase of 11 percent. How exactly will that translate when by most counts, Pakistan’s path to growth will be rather gradual. The other scenarios, termed ‘low’ and ‘high’ demand – envisage the power sales going up 3 and 5 percent, respectively – which sound much more believable, than the ‘discos’ scenarios on steroids.
There are distribution margin and prior year adjustments on top of the PPP, which are close to Rs660 billion for FY25 – translating into Rs660 billion or Rs4.75/unit in the best-case demand scenario. The overall revenue requirement under the scenario would still cross Rs4.1 trillion – an increase of Rs850 billion or 26 percent from last year.
Most scenarios, including the one under discussion, assume the exchange rate at 275 against the US dollar. Fingers crossed on this one. It has happened for a year; it could stretch to another. If Pakistan were to return to its historic yearly depreciation of 5 percent – that takes the PPP to Rs27/unit under normal demand growth scenario. A number of assumptions feed into the equation, and there will understandably be deviations, which is why periodic adjustments are there.
The source wise generation mix assumed for the PPP projections is yet to be out in public view – and one is hoping that the mistake of FY24 has not been repeated. Regular readers would recall how the reference pricing for FY24 assumed RLNG generation share at just under 6 percent – whereas in all reality, it is three times higher. And all of this is before the recovery and distribution losses are even brought to the equation. Then there is a plethora of taxes and commercial-based load shedding – both of which are detrimental to consumer welfare. But enough has been said and written on that already.
It has been said by the authorities that the power sector reforms would move to cost-reducing areas, a very welcome move, but one that is not likely to happen in the near future.