The ongoing IMF programme negotiations are tough; and this is not because of any delays or mismanagement of affairs as proclaimed by a few. The truth behind the story is that the fiscal mess is at an unprecedented level, and within it, energy related subsidies and debts are fast approaching at unmanageable magnitude.
The energy issues are across the chain, and the situation has worsened in the past few years with the addition of new energy sources. Most of the debt is hidden in many energy related state owned companies, and time is not far that these would explode without being visible in the fiscal accounts.
The resolve to the energy issue requires an integrated energy management where all the energy sources - be it gas, power or transport fuel, all the grids - NTDC and KE, and distribution and transmission companies - DISCOs, KE and gas and oil marketing companies, are optimally managed. The unfortunate part is that, the decisions are taken in silos without giving any heed to the negative externalities on the other sub-sectors and companies within the energy chain.
No matter how much price the government may increase, at the behest of IMF, problems will keep on surfacing without proper modeling and implementing complex energy chain linkages. The previous government got the golden opportunity during 2015-17 when oil prices averaged around $50/barrel for three straight years to correct the price anomalies and to have one plan under the roof.
Then government solely focused on adding new energy sources, but did not pass on the impact of growing subsidies on to the consumers. Meanwhile, the benefit of low oil prices had been duly passed on to the consumers. Had the lower fuel cost been netted against growing capacity payment, the situation would have been less grave today.
On top, the leadership of previous government has the audacity of passing on the blame of losses to incumbents. The numbers do not lie. Three good distribution companies LESCO, FESCO and IESCO were profit making when the PMLN assumed the government, and when they left, all three were bleeding. The losses of rest of the discos worsened too in their reign.
In case of SNGPL, the company moved from a position when it had payables to government in 2012-13 to four time high receivables - differential margin, from the government in 2017-18. This implies that the net selling price of natural gas is less than the net cost of gas supply adjusted for UFG allowances. Now all the accumulated losses in the energy chain ought to be adjusted - IMF wants it at once while the government is trying to phase it in 2 to 3 years.
The mismanagement and decisions making in silos are not limited to the previous regime, as the incumbents are doing the same. In the power sector, the biggest problem is growing capacity payment of new plants coming online within the NTDC system, and to dilute the impact, the number of units consumed has to increase, at least in proportion to growth in the capacity payment. That is simple math, given the constraints we have due to guaranteed return mechanism of all the power plants installed since 1994 power policy, and those which are in the process of conception today are no different.
This simply implies that the grid power consumption should be encouraged. The problem is that demand is not growing in proportion to supply, and that is ballooning capacity charge per unit, and is adding to the circular debt. Without higher consumption, increase in tariff is the sub-optimal solution. Thus, the main thrust should be on to increase consumption on the grid. However, Asad Umar made a policy of lower gas rates for textile industry in Punjab to let them burn their captive power plants, leaving excess supply in the grid unmet.
Now Asad is no longer the finance minister, and today, KE is announcing two new IPPs of 700MW and 450MW each. Apart from that, two of its old plants have filed a review petition for extending their respective power purchase agreement. KE and NTDC are independent systems - there is surplus electricity coming in NTDC while KE will be short in supply. An integrated solution warrants shifting plants from NTDC to KE along with the capacity charge. But KE is going for its own plants and no one within power corridors is raising voice.
If things keep on rolling the way they are, the energy sector woes are not going to end by simply increasing tariff. Demand is a function of price - it will fall with increase in price. Consumers across the classes, will consume less power or will shift to alternate sources. The industry would prefer captive power generation while domestic and commercial consumer will slowly shift towards solar power. This will further lower the consumption on grid and would compel more increase in tariffs to compensate for growing capacity payment.
It's a vicious cycle. It's high time for policymakers to have an integrated energy plan and solution including transportation. Without doing so, it's a matter of a few years, before the energy mess takes fiscal house down.