The roaring and growling of protestors at the K-electric office to reduce the hike in the bills, which are unmanageable in the distressing economy with stagnant salaries meeting the household expenses, is worrisome. The price surge is linked to the economy failing to achieve its growth targets. With the recent IMF loan disbursement, it had strings attached and to get a $1.2 billion loan immediately the government has to increase the power tariff which has resulted in whopping electricity bills which are almost doubled.
The main factor explained by the government officials has been to increase the rate to tame the circular debt which has risen to Rs 2.6 trillion. Every government at the helm of affairs has promised and given numerous deadlines to reduce the circular debt but trimmed in the slogans only, and every deadline has been missed. During the previous government of PTI, it recorded an increase of Rs 1.3 trillion, while in the past 16 months of the PDM government, it rose by almost Rs 400 billion, but nothing was done to control the debt. This has been a burden on the national exchequer as well as on the consumers.
Recently, figures revealed that during the one unit charged to consumers, either residential, commercial and industrial ones, almost half has been capacity purchase agreement payment. Capacity purchase agreement means whether we are consuming electricity from a particular power plant or not, the consumer has to pay as per the agreement. In 2013, the amount under the head of capacity purchase agreement was around Rs 185 billion, which has now soared to Rs 1.3 trillion, which altogether has to be paid by the consumers, a burden on the pockets of the consumers.
Pakistan’s per capita annual electricity consumption
According to the data submitted by DISCOs and KE, Pakistan’s per capita annual electricity consumption of 644 kWh, is among the lowest in the world, which is only 18% of the world average, 7% of the developed countries average, and 12% of that of China. Per capita electricity consumption is considered one of the key indicators, reflecting the living standards of the people in a country. This indicates that there is a lot of room for improvement and running the wheel of the economy to ensure sustainable growth. Economies around the world are facing energy shortages, and in the struggle to reduce the demand and supply gap of energy, it needs to find the solution for alternative energy resources that can be utilized to their full potential. Many factors hinder the performance of the energy sector, like supply chain, prices, demand, policy, technology, infrastructure, regulations, environment, and geopolitics. Pakistan is not the only country that is impacted. Lessons should be adopted from neighbouring countries as to how they are tackling such issues.
The country’s total installed electricity capacity stands at 41,000 MW; the percentage share of hydel, thermal, nuclear, and renewable is 25.8 percent, 58.8 percent, 8.6 percent, and 6.8 percent, respectively. The share of thermal as a dominant source of electricity supply has declined over the past few years, showing the increased reliance on imported fuel to produce electricity. Power generation in Pakistan clocked in at 14,839 GWh (19,945MW) in July 2023, up 4.9% as compared to the same period last year. In July 2022, power generation stood at 14,151 GWh (19,020MW).
The year-on-year (YoY) increase in power generation was due to higher generation from Re-gasified Liquid Natural Gas (RLNG)(37.7%), coal (21%), and hydel (11%), according to government data.
Power sector of Pakistan needs war footing measures
The power sector of Pakistan needs tremendous and war footing measures to reduce its failures hampering the other sectors of the economy. It needs effective and structured policies with strict monitoring to reduce the massive circular debt of the country.
Power theft, distribution losses, and inefficiency in the transmission of electricity are the major reasons behind circular debt. Whether rich or poor, trying to skip paying bills is adding problems to the sector. The government arrested 698 persons involved in the theft of electricity; major steelers were from Punjab. An amount to the tune of Rs. 1742 million has been recovered from charged detection bills in this anti-theft campaign.
The burden of the loss is borne by the legal connection subscribers, which are not just annoying but mounting up the frustrations of consumers. The increased price in electricity rates makes it vulnerable for consumers as they lack affordability. Businesses and industries are impacted adversely as the consumption of electricity over the fiscal year has declined. The industries cannot produce competitive goods that can add value to the economy as the cost of electricity and other essential raw materials is increasing by a significant portion. Pakistan Hosiery Manufacturers and Exporters Association Senior Vice Chairman Amjad Saeed stated that costlier electricity makes the goods less competitive in international markets and the shutdown of electricity in the peak hours affects the industry adversely. Many manufacturing units were closed down, and there were significant layoffs as the industries were unable to perform due to the falling economy. Moreover, in the federal budget, the government announced subsidies to the power sector to relieve consumers from huge bills, but the allocated subsidy to the sector has not made any substantial difference.
The government released Rs180 billion in subsidies for the independent power plants (IPPs) during the current year while Rs48 billion was given under the Kisan Package, which was not part of the budget estimates earlier. The inefficiency in transmitting electricity creates a larger problem for society and the economy itself. Increased power outages are disturbing for individuals and industries. The government should take steps to upgrade the transmission lines, thus increasing efficiency in the power supply. We can take an example from the neighboring country, where TD losses declined significantly by 17% in FY22 from 22.32% in FY21 the result was derived through strict reforms and advancement in technology to improve efficiency in the transmission. On the other hand, Pakistan AT&C losses increased by 4.08% to 21.97%. Pakistan needs to streamline its strategies to tackle the deficiencies in the power sector. Investment in the power sector can enhance the economy’s profitability and stability.
Muhammed Awais Ashraf, head of research at Foundation Securities, said that circular debt could be reduced if we curtail our transmission and distribution charges along with improvement in recoveries.
He added in a period from July to May 2023, circular debt increased by Rs394bn. However, this accumulation in CD could be reduced to just Rs20bn if we have managed our DISCOs as per the benchmark laid down in the tariff and recover the billed amount.
Ali Nawaz, the CEO, Chase Securities said that the Increasing electricity tariffs in Pakistan could have mixed economic impacts.
On the one hand, it might help address the issue of circular debt by improving revenue for the power sector. However, it could also lead to higher costs for businesses and consumers, potentially affecting competitiveness and inflation.
“A balanced approach that combines tariff adjustments with efforts to improve efficiency, reduce power theft, and promote alternative energy sources could be more effective”, he said.
Circular debt
To reduce Pakistan’s circular debt, besides tariff adjustments, measures like improving governance and transparency in the energy sector, investing in energy infrastructure, reducing line losses, and promoting renewable energy sources could collectively contribute to a more sustainable solution, Ali said.
“Again, negotiate with IPPs regarding capacity payments. Reduce it and make sure that if IPPs reduce ROE, then the government will ensure timely payments to them and no circular debt will evolve, said Farhan Mehmood, head of research at Sherman Securities. They can reduce it since, despite the reduction; their rupee return will be much higher than what they agreed before finance closed.
Moreover, another step the government has to adopt by stop installing new plants even if they are cheaper like wind and solar since capacity payment in the short term is too high, he said.
Best time to privatize because the majority of the cost has been passed on to consumers and new investors bring in efficiency. Earlier, most of the investors were reluctant since cost of generation was very high and tariffs were lower. Now is the ideal time to privatize after a record increase in tariffs.
Abdul Azeem, head of research at Spectrum Securities said that “an escalation in electricity tariffs could potentially quicken the pace of inflation, as businesses might transmit the higher costs to consumers by raising prices on goods and services.”..
This, in turn, might trigger the possibility of higher interest rates. The economy, which is already fragile, could face more challenges as it scales back economic activities due to heightened production costs. As a consequence, pressure on the PKR might intensify due to a slowdown in exports, he said. Additionally, there’s an expectation of a widening fiscal deficit due to reduced tax collection and an expanding current account deficit. Considering the existing unemployment scenario, a further economic slowdown could exacerbate the issue of unemployment.
“To reduce circular debt, alternative energy sources can play a significant role”, said Abdul Azeem. Enhancing the efficiency of revenue collection by reducing theft and improving billing and payment systems can help increase the cash flow of energy companies. Implementing energy-efficient practices and technologies can lower the overall demand for energy, leading to reduced costs and potentially decreasing circular debt, the head of research of Spectrum Securities said.
