The base adjustment in Power Purchase Price (PPP) has been okayed by the regulator, and it is now a matter of days before the final revenue requirements and adjusted consumer end tariffs are notified for FY25. At Rs3.5 trillion, it is an increase of Rs500 billion in absolute terms or 17 percent from last year’s reference PPP. In unit terms, the increase is 20 percent at Rs26.99/unit, as power generation is assumed to stay lower at 130 billion units than the FY24 reference generation.

For the past two years, the reference PPP has increased at a pace of Rs500 billion annually. In a refreshing move, Nepra for FY25 base tariff referencing has opted for much more realistic assumptions than last year. It is critical because PPP referencing devoid of ground reality leads to more significant revisions in quarterly and monthly adjustments – as was the case throughout FY24.

To refresh the memories, the FY24 PPP was based on a 5 percent share of RLNG-based power plants in total generation versus an actual 19 percent share. Similarly, imported coal-based generation was assumed to have a 12 percent share, whereas the actual generation has a share of no more than 3 percent. Despite the commodity prices and currency staying well within the broader assumptions used for FY24 reference, the monthly fuel charges adjustments for 11MFY24 have totaled Rs278 billion – and are likely to surpass Rs300 billion. The biggest reason for the deviation is the lopsided fuel generation mix assumed for referencing.

The second key component for deviation from the reference tariff during FY24 was the departure from the assumed generation of 138 billion units. The actual generation is estimated at no more than 124 billion units and that, coupled with deviation from generation mix, led to a significant upward revision in variable operation and maintenance charges that feed into the quarterly adjustments. Combined, the quarterly and monthly adjustments –are expected to be around Rs500 billion – despite favorable currency and fuel price movements. This is also close to the amount of PPP tariff revision of Rs517 billion – taking the effective FY24 adjustment (excluding surcharges, distribution margin, and taxes) over Rs1 trillion.

There are early indications that the inflation considerations arising out of FY25 electricity price adjustments may well be much lower than earlier feared. Of course, fuel prices remain a big factor and can go either way, but the assumptions are very reasonable and if nothing untoward happens on this front, the generation mix used for FY25 PPP referencing is as close to ground realities as it possibly could be – and a marked improvement from last year. All else constant, this could pave the way for adjustments of Rs500 billion incurred in fY24 to be brought down considerably. That way the effective change in the PPP component of the tariffs would be limited to none. There is of course, always an ever-present risk of the government imposing new surcharges out of nowhere or deciding to alter the existing cross-subsidy mechanism to favor one user or another. But as things stand, the FY25 electricity price inflation should be under control, unlike last year.