In the energy sector, nothing seems to be working to increase consumption on the grid. The concept of full cost recovery from the consumer is fundamentally flawed and is exacerbating the situation. The government needs to collaborate with the IMF (International Monetary Fund) and WB (World Bank) officials to rethink the strategy, as under the current model, grid consumption will continue to decline.

Most industries operate on marginal or variable costs and contribution margins. The government must refrain from the practice of sunk cost recovery. Poor decisions in the past - such as adding too many plants in too short a time at exorbitant rates and terms to the system - have compounded the problem. The government must absorb this debt onto its books rather than dragging the entire grid down with it.

This issue is evident from the lackluster response of industrial players to the recently announced ‘winter package’. From large-scale industrial entities to small manufacturers, no one seems interested in purchasing incremental electricity (compared to their consumption during the same months over the past three years) at a tariff of Rs26.07 per Kwh. “It’s too little, too late,” argues one SME manufacturer, who could qualify as an energy analyst, given his dedication to optimizing energy efficiency.

The package applies to all consumers except domestic connections using below 200 units per month, with a cap on increments at 25 percent. The intent is to stimulate higher consumption during the low-demand winter season.

However, many industrial players have installed solar panels in the past year or two, which now cater to 10–20 percent of their energy needs. As a result, grid consumption has declined proportionately. Consumers must first meet their pre-solar grid demand before they can benefit from the package.

This diminishes the appeal of the package, if there was any to begin with. Even under the best-case scenario, the savings on 25 percent additional consumption would be Rs3.4 per unit, assuming no solar installation. These savings, when juxtaposed with current working capital costs, seem negligible for many. Thus, the industry is unlikely to derive significant benefit from the scheme.

In the commercial sector, where solar generation is mostly absent, the challenge lies in generating incremental demand. Businesses already optimize their use of lights and air conditioning, leaving extended working hours as the only way to increase consumption.

However, this contradicts energy conservation goals and the Punjab government’s policy of reducing retail operating hours during winter.

This leaves the success of the package reliant on domestic consumers. Among these, affluent households often have rooftop solar installations, rendering the package irrelevant for them. Marginal consumers are excluded from the scheme, leaving only those in the 200-700 units consumption bracket as potential beneficiaries.

However, their primary energy use in winter revolves around space and water heating, which predominantly rely on gas appliances. Boosting electricity consumption in this segment requires a shift to electric appliances - a transition that is capital-intensive and demands a shift in social behavior.

The issue of low winter electricity consumption is longstanding, as are discussions about converting domestic appliances to electric ones.

However, a mechanism to enable this change remains absent. Any social behavior shift requires awareness campaigns, economic incentives for upfront capital costs, and reduced marginal energy costs. Without this, a three-month package will not move the needle.

One silver lining exists for domestic consumers in Karachi, where apartment living often precludes solar installation. However, Karachi’s mild winters reduce the need for additional energy consumption.

A better approach would involve moving away from uniform pricing across the country. The south sees increasing capacity while demand remains higher in the north, yet transmission constraints limit the supply of low-cost power to the north. Investments in trans mission infrastructure, recovered from consumers, are essential. Lower pricing in the south could also attract more industries to relocate there.

The most critical factor is ensuring the efficient use of primary energy. Only then can energy pricing arbitrage end. Skewed economic rationales currently sustain inefficiencies in fertilizer production, captive power plants, and gas geysers. Additionally, the prevalence of must-run plants (like RLNG) creates further distortions.

Finally, rising energy prices have driven demand contraction in recent years, and passing inefficiencies onto consumers is no longer sustainable. Revisiting the full cost recovery model is crucial to reclaiming lost consumption. Simultaneously, reforms must ensure the efficient use of primary energy. Without these measures, neither the ‘winter package’ nor the elimination of captive generation will resolve the problem of shrinking grid consumption.

Copyright Business Recorder, 2024